SIC 5734

This industry consists of establishments primarily engaged in the retail sale of computers, computer peripheral equipment, computer printers, and computer software. The wholesale distribution of these products for business or professional use is classified in SIC 5045: Computers and Computer Peripheral Equipment and Software.

NAICS Code(s)

443120 (Computer and Software Stores)

Industry Snapshot

This retail industry underwent tremendous growth in the 1990s, culminating with sales nearing $400 billion in 2000, a 12 percent increase over 1999. However, by 2001, a weakening economy, stiff competition, and price deflation hit the industry hard. Sales declined by 7.7 percent in 2001 and another 8.5 percent in 2002. Although the industry rebounded slightly in 2003, the computer industry is positioned for restructuring. Business customers, who account for 70 percent of all computer sales, have slashed information technology (IT) budgets, and consumers have become saturated with megasystems and have little need for more processing speed or storage capacities. Unit sales remained flat in the first two years of the 2000s, with 128 million PCs shipped in 2001 and 125 million PCs shipped in 2002.

Computer stores are finding stiff competition from online sales and manufacturers-turned-retailers, especially Dell, whose sales operations have been a bright spot in the sagging market. Big-box computer stores grew so rapidly during the 1990s that customer service was compromised. Referring to this image of poor service, James Mathewson noted in Computer Use, "Friends don't let friends buy from superstores." Now those stores are trying to overcome their poor reputation for servicing their customers.

Trends that will shape the twenty-first century include the increased importance of mobility and wireless connectivity. Laptops are pegged to take over lagging desktop sales, and desktops are expected to be smaller in order to appeal to consumers who no longer want big boxy units. Cords and wires are also seen as negative components so new wireless, integrated functionality is expected to draw customers into stores.

Organization and Structure

The Office of Computers and Business Equipment (OCBE) stated that in the late 1990s, computers were "sold through most marketing channels, including corporate account resellers (22 percent), direct response telemarketers (15 percent), consumer electronics stores (12 percent), value added resellers (VARs) (11 percent), computer superstores (10 percent), computer specialty dealers (7 percent), and mail order firms (6 percent). Other outlets include direct sales forces, mass merchants, office product retailers, and systems integrators." Little market shift was expected, except of course, in terms of Internet retailing.

According to an August 1999 Chain Store Age article, "many changes took place in the computer retailer landscape." Large office superstores and computer superstores continued to drive down prices and strengthen their position in the market, forcing traditional stores to diversify product lines in order to keep up with competition. That segment of the market was expected to see continued growth into 2000, as was direct response and mail order sales. Small computer specialty stores and VARs were expected to decline, as many manufacturers opted to ship product to the larger store versus an independent dealer, resulting in product shortages for the smaller dealer. The increase of "e-tailing" also put a strain on traditional store sales.

Background and Development

The first computers were developed in America during World War II, but it was not until 1953 that computers were sold commercially by companies such as IBM, General Electric, Honeywell, and RCA. These companies were involved in the manufacturing of computers for scientists, mostly at universities. The early commercial market was geared mainly towards large industry, which could afford the new and expensive technology. Eventually, these industry pioneers also started to market smaller and slower computers at a wider market.

By the 1960s, more than 5,000 computers were in use in the United States. During the 1960s, the number of computers doubled every two or three years to more than 40,000 by 1970. As computers grew in number, they became more reliable and faster; however, their cost was still high.

Until the 1970s, the United States and Canada led the world in computer use and sales. Since then, technologies overseas have met those of North America, and computers worldwide were estimated to have grown at a rate of 20 percent per year.

The commercial sale of personal computers and easy-to-use software, developed in the 1980s, boosted the retail industry. Retail sales of computers were no longer directed only at large businesses; the target market for computer and software dealers extended to small businesses, schools, and individuals for at-home use.

Personal Computer Sales. In 1990 an estimated 9.5 million personal computers (PCs) valued at nearly $28 billion were sold through retail outlets in America. Personal computers are general application computers with local programming abilities. PCs are grouped into two types, stationary and portable. Stationary systems are mostly desktop, deskside, or "tower" systems, which made up about 80 percent of PCs sold in the United States in 1993. The remaining 20 percent were portable systems such as laptops, notebooks, and handheld or pen-based systems.

The availability of PCs in a variety of retail outlets increased dramatically in the late 1980s. The furious competition spurred reduced prices for consumers. According to Link Resources, by 1993, 67 percent of small businesses (those employing fewer than 100 workers) had PCs. Another large market for PCs has been home worker households; in 1993, home worker households purchased more than two-thirds of the PCs sold to the home market.

Workstation Sales. Businesses in this industry also sold low-end workstations. Workstations are single and multi-user microprocessors, with the low end of the market very similar to PCs. Since their introduction in the early 1980s, workstations have been sold mainly for scientific and engineering use. In the 1990s, they became more popular with businesses, which use them for electronic publishing, financial services, and office automation.

Software Sales. Software products sold by retailers in this industry included word processing programs, computer games, accounting packages, and software components for on-line services. In 1993, the leading software packages sold through retailers in America were: MS-DOS 6.2 Upgrade, Adobe Type Manager Font, TurboTax for Windows, Quicken 3 for Windows, and MS Works 3.0 for Windows. According to the Software Publishers Association, sales of PC applications software alone reached over $3 billion in the United States and Canada in 1993.

Software dealers rely strongly on product trends set by technological developments and software producers. Software products available on the market increasingly are concerned with meeting the needs of children, families, and small businesses. In 1993, the consumer software market was considered the fastest growing segment of this industry.

Marketing. Compared to other retailers, companies in this industry have spent relatively small amounts on advertising. This trend is in part due to the fact that the major computers and software manufacturers, as opposed to the retailers, carry out product advertising. Low advertising has also been a result of this industry, as a specialty retailer, advertising mainly in computer magazines and on-line services, as opposed to the more costly mediums of television and radio.

Price Wars. In the early 1990s, this industry was characterized by competitive price wars. Intense price reductions began in 1991 and set industry records the following year, with reductions for computers averaging 33 percent. In general, retail computer sales shifted from small computer dealers to the large chain computer retailers, in particular the mass merchandisers who could sell computers at discount prices. In 1992, 30 percent of personal computers sold in America were through traditional computer dealers, a 50 percent drop from only five years before.

Another channel of distribution has emerged from the price wars in this industry. Computer sales have also been made through computer flea markets, which cater to small dealers. In 1992 Business Week reported that computer sales at these flea markets, generally held at large convention halls, were made at discounts of up to 80 percent off of the average retail prices.

Sales through mail-order systems were the fastest growing sector of the computer retail industry in the early 1990s. According to International Data Corp., shipments in mail-order computer sales increased by an average of 75 percent among the industry leaders in 1993. The potential for profit, though, made the mail-order market an increasingly competitive one. In 1993, a previous industry leader in mail-order computer sales, CompuAdd Corp., filed for bankruptcy. According to the Wall Street Journal, the company had been "stung by falling prices and an aggressive marketing war among leading vendors."

Specialty store reaction to this shift in distribution channels was most evident in the actions of industry leaders. In the early 1990s, CompuAdd Corp., a PC manufacturer and retailer, converted several of its store-front retail operations into computer superstores. Dell Computer Corp., a PC manufacturer and mail-order retailer, began selling its computers through Soft Warehouse, Inc. a superstore operator. ComputerLand, one of the industry's top three retailers, responded to these changes in the market by converting 50 of its boutiques into larger mass-market outlets and converted most of their remaining 380 small stores into direct sales offices.

In 1993, there were 132 companies in this industry in America. These companies' total sales for that year were $4.3 billion. However, according to the International Data Corp., there were at least another 3,000 small companies, often one-person operations, dealing in computers in the United States; these companies were more difficult for industry analysts to track because entry into the business had become relatively easy with standardized technologies and such dealers constantly entered and left the business.

Unlike computers, software continued to sell mostly through specialist software retailers. However, this trend was changing as more office supply outlets and department stores carried these products, and the number of computer superstores that sold software increased. In addition, software products became easier to use and therefore did not require the specialty expertise offered at most software retailers.

Specialty software retailers were also affected by the sales of computers with software packages pre-installed by computer manufacturers, a trend which increased with the competition among suppliers. This arrangement shifted purchasing habits of consumers from the more expensive software previously necessary to operate their computers to less expensive complimentary software that adds specialized features, such as tax accounting and computer game packages.

This was a fast changing, highly competitive, and technology driven industry during the mid-1990s. Retailers were profiting a little from PC sales, and the market was becoming over-saturated. A fierce battle for market share forced prices down. The rate of returns for PCs was higher than the vendors and retailers desired. Some retailers were even treating PCs as loss leaders.

Personal computer sales dropped to 10 to 15 percent from 25 to 30 percent during 1995. Weak sales led to the bankruptcy and closure of many stores. Tandy Corporation was one of the victims, with the 1997 sale its Incredible Universe and Computer City outlets, due to falling sales. Nester Retail Group was another victim. This chain also reported its failure to keep up with competition from Circuit City and Best Buy.

Unable to keep up with the increasing competition and continually declining profit margins, Best Buy was scaling back its expansion plans. According to The Wall Street Journal, Best Buy attempted to compensate for its diminishing gross profits by offering an assortment of non-computer items that carried larger margins. This move indicated the financial difficulty that large computer retailers were facing.

One trend the industry adopted was to concentrate its marketing efforts on higher margin computer peripheral equipment, such as printer supplies and cables, as well as providing technical support. Add-on and accessories, such as tape-drives, computer cases, cabling, and joysticks, were also used to make up for the low PC profit margins. Innovative means of selling these accessories were being adopted.

Software sales were also targets of innovative marketing strategies. CompUSA introduced the software sampler program in 1996 to allow customers to sample software before purchasing it. Companies like Microsoft were jumping on the innovative software marketing bandwagon and creating in-store boutiques for consumer electronics stores and computer superstores in 1996.

Retail information systems executives revealed, in an industry survey to Computerworld, their beliefs that the key to their success would be a stronger focus on the consumer, but the average computer shopper would be skeptical of their understanding of this concept. They felt superstores could help customers find products by installing video kiosks throughout the store to give directions.

With the focus on consumers, computer retailers were also becoming increasingly aware that female consumers were purchasing a larger amount of the computer hardware and software that was entering homes. In 1995, women purchased 49.6 percent of the hardware and 32 percent of the software. Women were also influencing the design and looks of computers.

Toward the late 1990s, the computer retail industry was growing in leaps and bounds. In 1998, sales were up 13.8 percent—PC software sales increased 15.6 percent to $4.6 billion and accessories and supplies increased by 15 percent to $5.3 billion. From a manufacturer?s standpoint, U.S. shipments of PCs were expected to be more than 40 million in 1999 and nearly 55 million in 2001.

While the demand for computers increased, profits and revenue were under pressure at retail outlets. With the onset of low cost home computers, bottom lines at stores such as CompUSA did not reflect the increased demand for computers and software. IBM lost $1 billion in 1998 on its PC operations. Some stores shifted gears towards higher margin goods like digital cameras and home theater equipment.

As pressure increased, stores looked to marketing and advertising campaigns to attract consumers. Circuit City, for example, offered a "Free PC" program in June 1999. By teaming up with CompuServe, the store offered the eMachine for free with mail-in rebates with the stipulation that the customer had to sign a three-year contract for CompuServe Internet Service. These rebate programs became more popular in the late 1990s, and large superstores used them to entice consumers away from smaller stores.

Computer stores also faced competition from the Internet and brand name manufacturers. Companies such as Hewlett Packard, Dell and IBM offered their products online, leaving consumers the choice in avoiding the retailer all together. There were also an increasing number of online sites offering computer goods. According to a 1999 PC Magazine poll, 46 percent of Internet sales were computer related and Dell Computer Corp. was a favorite among computer shoppers. Software was also a top sales generator in terms of online sales. Software accounted for 6.7 percent of online sales in 1997.

The proliferation of manufacturers into the retail sector was driven by the saturation of the business-to-business market. As corporations and government agencies began to be looked upon as replacement markets, the individual consumer and small business became a target for manufacturers like Dell, Hewlett-Packard, Apple, and Compaq. In the late 1990s, these companies focused on marketing campaigns and strategies that would increase customer awareness of the products they offered.

From the consumer point of view, the increase in technology and decrease in price, was beneficial. Price dropped by 10 percent in 1998—shoppers could purchase a complete system for under $1000—and price was expected to keep falling into 2000.

Current Conditions

Slumping desktops sales can be blamed on several factors. In the recessionary economy of the early 2000s, businesses cut IT budgets dramatically. According to a survey of 100 chief information officers, conducted by Merrill Lynch & Co. as reported in Business Week in January 2003, 63 percent of those surveyed said that their companies were reducing their IT budgets below 5 percent of revenues, the current average for IT spending.

Another reason for stagnated desktop sales is that computer manufacturers focused most of their efforts during the 1990s on increasing processing speed and storage capacity. By the early 2000s, many computer owners had all the speed, memory, and storage needed to operate existing software programs. Online Reporter noted in the fall of 2002: "This is 2002, not 1992. As far as the home market is concerned, people just aren't going to put boxy, noisy, cable-ugly boxes in their living room. And the software is going to have to do a better job of integrating and implementing the consumer's desired digital media technology and networking." It is likely that both business and retail customers will wait to purchase another computer until software applications demand that they trade up.

During a period when the IT industry as a whole is experiencing its first period of decline in the past two decades, the notebook computer remains a bright spot. Price decline and an increasingly mobile workforce have spurred sales. Bucking the industry downward trend, sales were predicted to grow by nearly 9 percent in 2003.

Because computer processing speed has surpassed software requirements, the short-term future of the industry will likely revolve around the demand for wireless networking so that all computer and electronic equipment will be seamlessly connected within an in-home or in-office integrated system. As prices decline on handhelds, multi-purpose digital phones, and cutting-edge mini-computers, consumers can expect the market also to surge in these areas.

Industry Leaders

CompUSA, headquartered in Dallas, Texas, was the largest computer retailer with revenue of $6.3 billion, 19,700 employees and 225 stores across the United States before falling on hard times in the early 2000s. CompUSA, Inc. was founded in 1984 as a provider of software to deep discounters and corporate customers. By any measure the company has been tremendously successful, parlaying a discount sensibility and vast product holdings into a position as an industry leader. In 1988, the company opened its first superstore; by 1993, it owned 45 outlets in 28 metropolitan areas and claimed half of the superstore computer market in the United States.

Once nearly bankrupt, CompUSA was a thriving retail chain in the mid-1990s. According to Business Week part of the company's success rests in its decision to bolster services such as training and support to deal with falling margins in the retail end of the business. CompUSA recorded a $16.8 million loss on $2.1 billion of revenue in 1994. CompUSA announced record earnings of $1.2 billion for the second quarter of the 1997 fiscal year.

CompUSA bought the Computer City chain from competitor Tandy Corporation in late 1997, but CompUSA was unable to make a profit on its Computer City stores, which continued to lose money. Increased competition in the industry led the company to weak sales in 1998, and it closed 14 stores in 1999. In March 2000 the company became a private company after being purchased by Mexico-based retailer Grupo Sanborns, which is working to revamp the computer giant's bottom line.

Consumer electronics stores like Best Buy and Circuit City, were considered some of the biggest competitors of CompUSA. As Best Buy's home office category averaged roughly 35 percent of total sales each month, its leadership in the computer market was growing as was Circuit City's. Department stores like Wal-Mart also had competitive computer retail departments focusing on software.


More than 20 million workers were employed in the retail sector in the late 1990s. According to the National Retail Federation, in 1999, a large percentage of this industry's work force was made up of sales staff, including managers, with the remainder of the work force in technical support, marketing, and administration. Retail buyers and merchandise managers in this industry negotiate prices with suppliers and wholesale distributors. Technical support staff handle customers' problems with both computer hardware and software; as computer backgrounds are required for these positions, salaries ranged from $30,000 to $60,000 per year, depending on the type of products sold. Sales workers, who directly service customers, often work on a part-time basis, with a starting salary at minimum wage, plus commissions on sales, depending on the store. For retail sales workers at the managerial level, salaries averaged $450.00 per week. Stores that did not offer commissions with salaries frequently featured bonus plans as sales incentives.

The job outlook for retail sales and marketing staff was expected to increase at a healthy clip for several years. Technical support staff was expected to be the fastest-growing sector of this industry, as well as IT professionals. Part-time positions for non-technical sales staff have often been available due to a high turnover rate; in addition, sales staff is often hired on a temporary basis during peak selling periods, such as Christmas.

America and the World

The United States and Japan continued to be the top producers of computers and related equipment throughout the late 1990s. This dominance has been reflected in retail sales, but retail stores have not been a primary factor. Direct and mail-order sales dominate the international market for the retail sales of computers.

According to the OCBE, "reacting to a saturating U.S. market and increasing foreign competition, U.S. suppliers continue to look abroad for sales and expanded market share, with some companies selling as much product overseas as they do domestically. Foreign vendors also seek to become global players, as reflected in the efforts of major Asian suppliers to enlarge their presence in the huge U.S. market." American computer exports were expected to increase to $70 billion in 2003, an increase of nearly 10 percent. Demand was expected to remain strong in Canada and Europe, with the largest PC markets being Germany, Great Britain, France, and Italy, and Latin America. Exports were expected to increase to Asia, as the economy recovered from a recession due to the Asian economic crisis. While Japan has been one of the major exporters of PCs, computers became more popular there in the late 1990s. Skepticism about the benefits of PCs, limited office space, and the relatively higher prices when compared to the West, made it difficult for American dealers to penetrate this market, but nevertheless, the United States has boosted its presence in that area.

In the late 1990s, American superstores selling computers and software entered the European market, which was dominated by a few European retailers, such as Vobis Microcomputer AG of Germany. CompUSA and other major chain outlets saw Europe as a potential market for the discount computer store concept. While at first successful, Advertising Age noted in 1992 that "industry observers are skeptical that the superstore concept can survive long term in Europe—at least outside the U.K." As many as 50 to 80 American superstores were planned to operate in Europe by the end of the century.

The implementation of The Information Technology Agreement (ITA) was also expected to have a great impact on this industry. The agreement, which would eliminate tariffs on certain products, went into effect in July 1997 and the United States should benefit in terms of exports and as a global player. Nearly 95 percent of information technology products in world trade fall under ITA. Some countries involved in the agreement include the United States, Canada, the European Union, Japan, and Switzerland.

Research and Technology

Like other retailing businesses, establishments in this industry have continued to increase their reliance on computers at a physical store level, which have simplified many routine buying functions of retail buyers and have improved efficiency of in-store sales staff. Many computer and software retailers rely less on sales staff for inventory counts and increasingly on point-of-sale computer terminals, which provide up-to-date inventory and sales information. Point-of-sales data that are fed into a computer system are taken from the item's bar code and includes information such as price, model number, color, and size.

These stores continued to also look for ways to make shopping easier for the consumer through advanced technology. For example, Circuit City began using Wyse Winterm Windows-based terminals in the summer of 1999. Offered by Wyse Technology, these terminals allowed for consumers to customize computer options by accessing vendor information. Chief information officer of Circuit City commented that the company, "searched for a cost-effective and high-performance solution that would allow us to offer our customers high levels of customer service through our build-to-order kiosk stations and service center applications."

Advances in Internet retailing have also changed the face of the typical computer retailer. The National Retail Federation predicts that by 2003, some 40 million households will be online. In an effort to satisfy that trend, computer retailers scrambled to get their products available online in the late 1990s. Stores like CompUSA offered store branded computers in 1999.

Research and development of new products greatly affects this industry. Technological developments in the late 1990s in computers, communications, and electronics spurred the growth of information and entertainment services. Alliances among different technologies produced inexpensive video, sound, and graphics and text services in digital form and in interactive settings. Products in this combined information and entertainment market are designed for personal, educational, and business purposes, and have included asynchronous transfer mode equipment and communications and systems software. Industry analysts expect enormous growth opportunities for this segment of the retail market upon entering the twenty-first century.

Further Reading

Bartholomew, Doug. "PC Industry Stuck in Neutral." Industry Week, October 2002, 30.

Captain, Sean. "2003 and Beyond: What's Next?" PC World, March 2003, 24-28

"Circuit City Enters Second Stage of Nationwide Deployment of Wyse." Business Wire, 11 June 1999.

"Circuit City Launches Free PC Program." PR Newswire, 30 June 1999.

Delano, Daryl. "The Economic Recovery—Shaky But Still Moving Slowly Ahead." Electronic Business, October 2002, 17-18.

"Flourishing Economy Boosts Hard Lines Spending." Chain Store Age, August 1999.

Furber, Rob. "Notebooks: The New Desktops?" MicroScope, 4 March 2003, 31-33.

Gottseman, Ben. "Shopping." PC Week, 1 November 1999.

Hardy, Quentin. "Room at the Bottom." Forbes, 17 March 2003, 148.

Kerstetter, Jim. "The Linus Uprising." Business Week, 3 March 2003, 78.

"Like Generals Preparing to Fight the Last War." The Online Reporter, 21 October 2002.

Marcial, Gene. "CompUSA: Set for Sweeping Change." Businessweek Investor, 21 June 1999.

Mathewson, James. "Superstores Figure It Out." Computer Use, February 2003, 8.

Park, Andrew. "Computers: The Numbers Aren't Quite Adding Up." Business Week, 13 January 2003, 118.

"PC Sales Outlook Brighter in Second Half." Information Week, 19 February 2003.

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