Packard Bell Electronics, Inc.

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Packard Bell Electronics, Inc.

102 Canoga Ave.
Chatsworth, California 91311
U.S.A.
(818) 865-1555
Fax: (818) 865-0176

Private Company
Incorporated: 1986
Employees: 1,200
Sales: $1.25 billion
SICs: 3751 Electronic Computers

Packard Bell Electronics, Inc. was the largest vendor of personal computers (PCs) in the United States in 1995, and the leading seller of PCs through retail establishments. The company has grown explosively since its inception in 1986 through aggressive and innovative marketing strategies. By the mid-1990s, Packard Bell was also in the process of a rapid expansion in the European market.

Although Packard Bell Electronics was officially founded in 1986, the name Packard Bell had its origins in the early 20th century. In the 1920s the name emerged as a popular brand of console radios—then a chief form of electronic entertainment. The Packard Bell name was kept alive during the mid-1900s as a brand name in the television industry. Like most U.S. consumer electronics firms, however, Packard Bell deteriorated during the 1960s and 1970s in the wake of industry consolidation and foreign competition. The struggling Packard Bell Co. was purchased by Teledyne in 1968, but was effectively dead by the middle of the next decade, consisting only of some outdated facilities and trade names.

The company languished until 1985, when it caught the eye of Beny Alagem, a 32-year-old Israeli immigrant and naturalized U.S. citizen. Alagem was intrigued, not by the remnants of the Packard Bell company itself, but rather by the once-venerable Packard Bell brand name. Alagem approached Teledyne, which agreed to sell the rights to the name for less than $100,000. His idea was to use the name to market the latest breed of hot-selling consumer electronics, personal computers. “The company had a rich history and a good name for quality products,” Alagem recalled in Forbes. “Buying that name was a stroke of genius,” George Pursglove, a HQ Office Warehouse executive, stated in the same article. “Older customers think Packard Bell is the company that made radios and televisions. Younger ones think it’s the people who made cars, or telephones, or Hewlett-Packard.”

Joining Alagem in his latest business venture were two longtime business partners, 32-year-old Jason Barzilay and Alex Sandel, then 42. The three Israeli-born partners had moved to southern California in the 1970s because of its thriving Israeli business community and educational institutions. Alagem, then in his 20s, took business and finance courses at California Polytechnic Institute. He later joined with Sandel, an electronics engineer, to start a semiconductor distribution business. Barzilay entered the picture in 1983. He was also operating an electronics distribution business at the time, but had formerly worked at Burroughs and Rockwell International in engineering and sales positions. The three men combined their companies to form Cal Circuit Abco Inc., a Woodland Hills, California-based distributor of semiconductors and computer peripherals. By the mid-1980s the successful enterprise was generating more than $500 million in annual revenues.

When Alagem purchased the Packard Bell name in 1985 the PC industry was beginning to explode. While IBM had pioneered the industry, the number of industry participants offering inexpensive IBM clones was proliferating. Alagem and his partners believed that the PC business was moving away from a high-end retail environment and toward a commodity industry characterized by low margins and high volume. And they wanted to profit from the coming boom in computer sales. Alagem knew that Asian suppliers could produce customized computers and peripheral equipment inexpensively, and he and his partners already had experience in the distribution end of the industry. So, in 1986 the three men formed Packard Bell Electronics Inc., contracting both with their Asian suppliers to design a product line specifically for their company and with several Asian manufacturers, including Tatung Co. of Taiwan and Samsung of Korea, to build the machines.

The first Packard Bell personal computer hit store shelves in 1987. Unfortunately, the product was just one of several IBM clones entering an increasingly crowded market. Because Packard Bell couldn’t rely on technological advantages or patent protection, it had to depend primarily on merchandising savvy and low prices to separate its products from those offered by the competition. To that end, the three entrepreneurs developed and executed a cunning and successful stratagem. For starters, they began selling their products under the nostalgic Packard Bell marketing theme, “America grew up listening to us. It still does.” That established slogan, along with the recognized Packard Bell name, gave the company’s computers instant credibility—a rare asset in the burgeoning personal computer industry.

In addition, Packard Bell’s machines proffered numerous innovations that, at the time, represented notable breakthroughs in the personal computer industry. For example, Packard Bell computers were among the first to come equipped with both 3 1/2-inch and 5 14-inch diskette drives, which smoothed the transition to smaller drives for users replacing older computers. Furthermore, standard Packard Bell’s PCs were outfitted with a comparatively large 40-megabyte hard drive, yet were often offered at a lower price than competing brands with a smaller memory capacity. Importantly, Packard Bell became the first company to pre-install software with its computers. This pivotal innovation spared customers the tedious hassle of loading the operating system and application software, and it represented a giant leap toward the industry’s goal of delivering a computer that could be used by technologically inexperienced customers straight out of the box.

Even more important to Packard Bell’s success during the late 1980s than low cost and unique features was its distribution method. Prior to the late 1980s, almost all PCs were sold in computer stores or through sales representatives. Packard Bell bucked the industry standard when it became one of the first PC manufacturers to focus on mass retail sales channels. It sold its computers almost exclusively through giant retail stores like Sears, as well as discount chains, warehouse stores, and electronics and appliance centers. Major computer makers, clinging to the belief that consumers would continue to value service over price, scoffed at the mass market concept. Thus, as the percentage of PCs sold through mass-market channels increased from four percent in 1987 to 12 percent in 1992, Packard Bell rode at the top of the wave. By 1992, in fact, Packard Bell controlled a leading 26 percent of that distribution channel, and it would boost that share to more than 45 percent by the mid-1990s.

As Packard Bell’s market share surged, so did sales and profits. By 1989, only two years after starting up, Packard Bell generated an estimated $600 million in annual sales. That figure jumped to $700 million in 1991, despite a U.S. economic downturn in 1990 and 1991. Meanwhile, Packard Bell continued to penetrate markets with new products, low prices, and unconventional distribution channels. In 1992, for example, the company unveiled a local area network (LAN) system that, in contrast to the competition, was ready to hook up and use straight out of the box. Simultaneously, Packard Bell introduced a new version of its top-of-the-line PC that could be upgraded by simply plugging it into a new central processing unit, which meant that the system owner could get the equivalent of a new computer for about $300.

Such consumer-oriented features helped to earn Packard Bell the highest marks in the industry in consumer satisfaction, according to a 1990-91 survey by Verity Group, a market research company. Augmenting Packard Bell’s reputation was its comprehensive customer support system. The company offered round-the-clock, toll-free telephone support for buyers of all of its computers. The system, called Infinitech, offered the option of recorded answers to users’ technical questions. Furthermore, all Packard Bell systems were backed by a one-year warranty complete with on-site service. Customers could also obtain help through Packard Bell bulletin board services on Prodigy and CompuServe.

Reflecting the wisdom of Packard Bell’s overall strategy during the early 1990s, sales rose to more than $900 million in 1992, and then to an estimated $1.25 billion in 1993. Likewise, the company’s work force leapt to more than 700. Packard Bell’s ace in the hole continued to be its dominance of mass market retail channels. Success in that arena had pushed its overall U.S. market share to 5.3 percent by 1992, followed by an impressive 6.7 percent in 1993, making Packard Bell the fourth-leading personal computer supplier in the United States behind IBM, Apple, and Compaq. Market share gains were becoming increasingly difficult for Packard Bell, though, in light of the fact that its competitors were borrowing heavily from its play book. Indeed, during the early 1990s several of the industry leaders followed Packard Bell’s lead by expanding into mass retail channels, offering easy-to-use bundled products, and slashing prices. In turn, Packard Bell began pressuring industry leaders by diversify from its narrow low-cost PC market and using its proven merchandising tactics to penetrate the market’s high end.

In addition to broadening the scope of its product line in the early 1990s, Packard Bell began pursuing sales overseas. The company started selling in Europe late in 1991; by 1992 it had found that the strategy that had worked in the United States was also applicable in much of Europe. In fact, in 1992 Packard Bell garnered roughly $100 million—ten percent of sales—from its European operations and expected to double that figure the following year. To that end, in 1993 the company completed a 75,000-square-foot facility in the Netherlands that employed 250 people, including a customer support group providing technical assistance in 12 languages. As it had in the United States, Packard Bell took an early lead in the European mass market computer retail industry. In 1993 it had established 1,500 retail outlets throughout 13 countries.

Although Packard Bell shipped almost two million units per year going into 1994, some analysts doubted the long-term potential of the company’s marketing strategy. Because Packard Bell focused on retail sales, its price advantage was increasingly challenged by low-overhead PC makers that sold exclusively through direct mail and catalogs. A corollary of this retail strategy was that Packard Bell suffered relatively higher product-return rates by industry standards due to the liberal product return and exchange policies adhered to by most retail establishments. In 1991, for instance, Packard Bell recorded gross revenue of $819 million, but that was before accounting for $143 million in returns by customers. Despite critics’ concerns, Packard Bell continued to outpace analyst projections through 1994 and was constantly adjusting to new market trends.

Evidencing Packard Bell’s sensitivity to shifting consumer demands going into the mid-1990s were a number of new products. Most notable was the company’s introduction of the first mass-produced, fully configured multimedia system offered through mass marketing channels. The system was offered under different names and with slightly different configurations as part of an effort to appeal to a variety of customer groups. The company also began selling software under the brand name Active Imagination. Offerings included six titles for children that were designed to help build computer skills. In 1994, Packard Bell began selling its Spectria computer line, which Alagem referred to as the “centerpiece of every home.” The Spectria included a full-function multimedia PC, CD player, stereo, FM radio, TV and video player, telephone answering system, and fax/modem.

In 1994 Packard Bell more than doubled its 1993 production, shipping 2.1 million units. Gross revenues increased nearly three-fold, to a record $3 billion. Those figures pushed Packard Bell to number three in domestic PC sales, behind Compaq and IBM. Then, after an incredible 37 percent rate of growth in late 1994 and early 1995, Packard Bell scooped up nearly 13 percent of the U.S. personal computer market and surged to the lead of the industry. In addition, Packard Bell was far and away the leading distributor of PCs through mass retail channels with roughly 50 percent of that market by one estimate. And it was among the leading PC distributors in Europe, where sales were skyrocketing. In 1995 Packard Bell continued to serve as the “industry bellwether,” as the Wall Street Journal described the company. Early that year, for example, it introduced the first PC with dual CD-ROM drives, one among several new features. Alagem and his partners expected to sustain such impressive growth into the decade, barring an industry downturn.