Why did Dell have a problem with the retail entry?

Question

What will be an ideal response?

Answer 1

First, Dell’s entry into retail forced it to move away from its “Direct Model.” To serve the retail channel, Dell had to manufacture product to stock the trade shelves. This took away the biggest competitive advantage that Dell had, which was being able to customize products to the needs of each customer.
Second, going through the retail trade meant that Dell had to invent the trade. (Dell retail price index = 88 percent as compared to 100 percent for Dell direct.1)
Third, Dell and other PC manufacturers incurred major expenses to support the channel, including training costs, replacement costs,2 and costs of obsolescence. The net effect was that Dell’s operating expense went down from 14 percent to 10 percent going through the retail channel. Thus, the reduction in costs was not in line with the reduction in prices.
Overall, not only did Dell get lower gross margins going through the retail channel, but its operating expenses remained high. (A sharp student will point out that the way Dell has done its costing is faulty and that the retail market might not be as bad in margins as Dell makes it out to be).