CompUSA, Inc.

views updated

CompUSA, Inc.

14951 North Dallas Parkway
Dallas, Texas 75240
U.S.A.
(214) 383-4000
Fax: (214) 484-4276

Public Company
Incorporated: 1984 as Soft Warehouse
Employees: 2,492
Sales: $1.34 billion
Stock Exchanges: New York
SICs: 5734 Computer & Software Stores

CompUSA, Inc. is the largest operator of computer superstores in the United States, with 77 stores in more than 38 metropolitan markets. CompUSA stores offer more than 5,000 products, including microcomputer hardware, software, accessories, and related items, to retail, corporate, governmental, and institutional customers at deep-discount prices. Striving to offer its customers the lowest prices in the market, the company competes successfully with other large computer or electronics stores such as Circuit City and ComputerCity. CompUSA’s sophisticated computerized merchandising and control systems connect each superstore to its suppliers; without intervening levels of distribution, the company is able to offer low prices and maintain a high inventory turnover rate. CompUSA superstores, each of which have approximately 25,000 square feet of retail space, offer technical support to their customers, repairing and servicing merchandise and providing training centers, where customers can learn how to use popular software. The company also operates a government sales division headquartered in Washington, D.C., that supplies computer products to federal, state, and local government agencies and government contractors. Corporate customers are serviced by the Direct Sales group, which also handles mail order and telephone sales. Among the many major brands of computers and equipment sold at CompUSA superstores is the company’s own private label computer, Compudyne.

CompUSA began in Dallas in 1984 under the name Soft Warehouse, a company that initially sold software and hardware directly to corporate customers and within a year had opened its first retail store. During its early years, management explored the idea of opening a superstore, a large facility offering complete lines of low-cost merchandise. While the concept had proved successful for such retailers as Toys ’R’ Us, Circuit City, and Office Depot, computer retail was generally thought to require a smaller sales staff expert in the technical nuances of the product. Soft Warehouse, however, speculated that as the public became more familiar with computers, the computer retail operation would broaden in scope, and with a staff and management more skilled in marketing than in computers, the company opened its first superstore in 1988. While retail chains such as ComputerCity and BusinessLand emerged during the early 1980s, Soft Warehouse developed the first chain of superstores in the computer market.

In January 1989, Soft Warehouse was acquired by a group of investors led by Ronald N. Dubin. Late that year, the company hired as its president and chief executive officer Nathan Morton, a former top executive of a leading retail chain called Home Depot. Morton had no background in computers, and he later recalled for a 1993 New York Times article that his friends and family were shocked that he took the leadership position at Soft Warehouse, some attributing the move to a mid-life crisis.

Morton, however, had a unique vision for the development of Soft Warehouse, which led to a period of explosive expansion for the company. Along with other new executives, who came to Soft Warehouse from Kmart, Hechingers, and Wickes Lumber, Morton planned the construction of a series of superstores that would provide the lowest prices in the industry and the largest selection available on a national scale. Eighteen superstores were in operation by the end of the 1980s, and sales increased dramatically from $66 million in fiscal 1988 to $600 million in 1990. The company became the largest chain of computer superstores in the country, changing its name to CompUSA in 1991.

The success of CompUSA was due in part to its finely honed system of merchandise flow. Rather than maintaining an expensive network of warehouses and trucking lines, CompUSA management used computer software to help track inventory and anticipate consumer demand, allowing them to stock the right amount of merchandise in the stores.

Through 1990, product lines at the CompUSA superstores consisted largely of IBM clone personal computers, including a private brand line known as Compudyne. In 1991, the company persuaded manufacturer Apple Computer, Inc. to allow the distribution of the Apple Macintosh personal computer through CompUSA. As Apple had never before allowed distribution through discounters, the company regarded this agreement as reflecting its reputation as a national marketing force. Soon thereafter, CompUSA gained the right to sell another major personal computer brand, Compaq.

While 35 percent of CompUSA’s sales were to corporate buyers in 1991, a growing market of home computer users also fueled the company’s expansion. In the early 1990s, an estimated 75 million Americans were using personal computers, and users were increasingly willing and able to install and maintain their own equipment without deferring to a computer expert. Moreover, dramatic increases occurred in the number of Americans either working from computers in the home or running home-based businesses as their primary occupation. Catering to this new market, CompUSA provided free information pamphlets throughout its stores to help consumers better understand product capabilities, and the stores featured low prices that were particularly appreciated by small business and home users.

In December 1991, CompUSA completed an initial public offering of its shares. Trading began at $15 and within a few months reached a high of $40 as investors leaped at the chance to buy into the burgeoning company. Losses reported in the prior year were attributable to control issues, and CompUSA’s sales continued to increase. By the end of 1992, CompUSA operated 36 superstores across the country and had plans to add 12 more over the next six months. The company also introduced training centers in most of its stores, offering computer courses to its customers that generated nearly $700,000 a month, most of which was profit, helping offset low profit margins caused by heightened competition in the industry. The company’s sales for 1992 reached $820 million.

In 1993, CompUSA decentralized its corporate structure in preparation for future growth. Nathan Morton was promoted from president to chairperson and CEO, replacing Ronald Dubin. Morton divided the company into three operating units responsible for the eastern, western, and central areas of the United States. An international unit was also formed to research expansion into Canada, Mexico, and Europe.

In spite of the company’s expanding sales territories, however, profits lagged. Typical quarterly sales increases of 60 percent failed to generate similar increases in net income, and during the first quarter of 1993, CompUSA reported a 65.8 percent increase in sales and overall losses totaling $986,000. Operating expenses associated with opening new stores as well as high interest expenses contributed to the loss. At a board meeting in December 1993, Morton resigned.

Morton’s replacement was CompUSA’s president and chief operating officer James Halpin, who had come to the company six months earlier from the Home Base home improvement retail chain. Halpin oversaw the last weeks of the fiscal second quarter in which sales surged 65 percent and the company posted a loss of $5.5 million. He agreed that expenses had gotten out of hand. Rather than trimming expenses by slowing the company’s growth, Halpin’s plan included out-sourcing assembly of Compudyne computers, centralizing inventory management, and consolidating the management structure by eliminating several executive positions. With these measures, Halpin hoped to restore CompUSA to profitability, facilitating his plan to open 30 new stores by June 1995, which would bring the total number of CompUSA superstores to nearly 80.

The precedent set by CompUSA, pioneer of the computer superstore concept, has prompted a wealth of competition. In 1991, Tandy Corporation opened a retail chain subsidiary called Computer City, and such discounters as Sears, Roebuck, & Co. and Wal-Mart also began selling computers and related equipment. Moreover, mail order services and warehouse clubs began catering to the computer shopper. Although CompUSA was no longer unique in the industry, it remained a market leader. The company’s next challenge may lie in maintaining its place in a market it helped bring to its present maturity.