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Consignment stock – ticking time bomb for Acer/HP?

As the world comes to terms with the channel choke saga, additional far-reaching effects are also coming to light. The potential time bomb here concerns the way that larger stores do business. KitGuru heads to the shop floor to try and understand the cash flow battle between DSG and multi-nationals like Acer and HP.

First up, a little clarification. When we refer to HP and Acer, the buck does not stop with those two badges. These mountains of (largely) low-end PCs come with a number of names on the front.

Acer also includes Gateway and Packard Bell – so expect bargains everywhere on these 3 brands. Right now, we can see that even with the previous generation Core i5 Intel processors, prices have tumbled in many cases by around £200.

HP also includes Compaq – and the £200 off Compaq laptops you see on UK TV right now is a direct result of the channel choking on chips (remember that with these bargains, you will have to live with a CPU from a bygone era).

The underlying problem is that HP and Acer have been taking far too long to sell through on Intel processors. That results in dated stock, which the tech-savvy audience is not so keen to purchase.

If you’re not sure about the age of the CPU, here is a comparison of the past and present logos.

Chips with the logo on the left arrived Summer 2009. On the right, 2011. The new ones are much, much better.

That brings us to consignment stock. What does this mean and why could it be so dangerous for HP and Acer?

For most stores, you need to buy in products in order to stack the shelves. However, the major retailers like DSG will work on consignment stock. Massive amounts of product are dropped into warehouses and stores, all of which still belongs to the manufacturer until it is purchased by the customer, i.e. you.

Once you buy that Acer or HP system, that unit goes onto the purchase order for that month. With a company like DSG, massive and with cash flow issues of its own, the payment terms could easily be 120 days.

With the most recent reports that half of HP and Acer’s stock is now over 6 months old, you can see the problem – right?

HP PC is built, packed and shipped from China around last Christmas. The cost to Hewlett Packard was £350 and DSG optimistically puts it on sale at £599.

This poor HP PC arrives in PC World stores just as the worst drop in consumer desktop spending ever hits town. Comparing Q1 2010 with Q1 2011, research experts like IDC have reported a drop of almost 44% in the sale of certain Tower PCs. Not good news.

Imagine how jealous your mates will be when you tell them that you've landed an Acer Predator, complete with i7-930, for just £1,399 - if you have time on your hands, you could head to PC World and try to see how many of the old Intel badges you recognise!

So that PC lands in PC World Birmingham at the start of January, filled with last year’s technology, and it begins to gather dust. Remember, DSG has NOT bought the PC if it is on consignment. It’s just sitting there, ageing.

Going into Q2, stimulation is needed, so HP agrees to reduce the price. Remember, they still have not been paid and the PC was made 4 months ago.

It carries on sitting there from April and May, to June and July. It now becomes part of a ‘Back To School’ discount programme and more money comes off the price.

As the leaves turn brown, conkers fall to the ground, the nights get shorter and everyone is feeling a little bit more wary of the world economy.  HP tries a last ditch effort and gives yet another discount to DSG.

Finally, the PC is reluctantly purchased with a £250 off sticker.

Being the smart retail animals they are, DSG also gets the customer to buy the ‘mobile kit’, which includes high margin bag, memory stick and anti-virus.

The sale of this ancient HP desktop PC goes onto the sell-out report for August, which creates a September invoice from HP, which – guess what – DSG has no intention of paying for 120 days (HP has, after all, agreed to those terms in writing).

This might be an extreme example, but it gives you an idea of why you are seeing such huge bargains in the sale of low end systems right now.

HP ships a PC in December 2010, with a cost price of £350. By the time all of the discounts have been factored in, HP will almost certainly have sold this particular system at ‘below cost’. Not only that, the payment for the machine might not land in HP’s bank account until January 2011.

Is there a real world consequence to this kind of trading pattern?  Not certain ourselves, we did a quick screen grab on Yahoo’s Finance pages.

If you were a skier, then HP's share price graph may well represent the black run. Downhill, with plenty of bumps.

KitGuru says: While the value of a share might go up and down, we can tell you for nothing that old PCs on the shelf only go one direction. Local, specialist builders who blend the latest components – to an exact customer order – and then ship as soon as it has completed testing, will almost certainly enjoy a renaissance over the next 6 months. You really would not want to be at the bargain end of the PC league table right now.

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