With Dell in Wal-Mart stores, watch for falling margins

May 24, 2007, 9:18 AM UTC

Dell (DELL) took the first clear step in its journey to repair its reputation and regain market share today, with Wal-Mart’s (WMT) announcement that it will begin selling mid-range Dell PCs on June 10. Wal-Mart told Reuters that it will sell two desktop multimedia bundles for less than $700; it appears that both bundles include the mid-range Dimension E521, and one will include a 19-inch LCD monitor.

The Wal-Mart deal is almost certain to have a positive impact on Dell’s market share. The PCs will appear at about 3,500 Wal-Mart and Sam’s Club stores in the U.S. and Canada, and you can’t add that sort of massive distribution without getting a volume boost.

But the deal is also likely to sting Dell in the profit margin. Over the years, the computer maker has turned the online shopping up-sell into a science; the Dell website goads shoppers into adding on just a little more memory, or another software bundle, or a wireless router. (The effect is similar to a waiter tempting you into ordering that extra glass of wine, or that dessert with coffee.) In the past, those add-ons added up to more profit in Dell’s pocket. Now more benefit will go to Wal-Mart. (On Dell’s website the E521 starts at $359 with no monitor, a woefully insufficient 512 megabytes of memory, and a 160-gigabyte hard drive.)

Dell rival Hewlett-Packard (HPQ) is likely to feel a margin squeeze too, since Dell seems to be abandoning some of its ill-advised old tactics. The desktop Dell will deliver to Wal-Mart, for instance, uses low-cost processors from AMD (AMD); until recently, Dell used only Intel (INTC) processors. Dell’s Dimension E521 will also compete directly with a Compaq sr5023wm desktop that HP has been selling through Wal-Mart stories; if Wal-Mart continues carrying the HP desktop at all, it will have to share shelf space with Dell.

In all likelihood, this Dell/Wal-Mart move merely sets the stage for a holiday season battle royal in which Dell will try to push its laptops out into retail, and fight with HP for shelf space. If Dell can pair that with a branding campaign that tells a new story of why consumers should buy its computers now that the direct-selling strategy isn’t the main selling point, it might have a shot at retaking the lead from HP.