Dixons stakes its chips on bigger being better: The electricals group is building a chain of giant computer retail outlets. Patrick Hosking reports

THE SHOP is a no-frills shed the size of seven tennis courts. Row upon row of gondolas is stacked with merchandise. Shoppers lean on their trolleys, gazing at the products undecidedly. Middle-of-the-road music fills the air.

But there are no groceries to be had here. The customer heaping goodies into his trolley is wearing a pinstripe suit. A customer at the check-out is paying with a gold card. Just as well: his bill comes to more than pounds 5,500.

This is the Staples Corner branch of PC World, one of four superstores on the fringes of London selling computer hardware, software and related products. Since February they have been owned by Britain's biggest electricals retailer, Dixons Group.

Based on a windswept estate next to the start of the M1 and a stone's throw from last year's IRA bombing, the store's neighbours are Nevada Bob's Golf Centre, an unappetising MGM six-screen cinema, and a Rumbelow's superstore in the throes of a closing- down sale.

On this Monday morning, the estate is desolate and virtually empty. So is PC World. It is hard to believe that the store has so excited Stanley Kalms, chairman of Dixons, that he is planning to build another 25 of them over the next two to three years at a cost of pounds 1m each.

But there is little doubting the appeal of PC World. 'On an average Saturday we'll get 3,000 customers,' says John Clare, managing director of Dixons, who declines to reveal sales or profit figures.

Some spend as much as pounds 20,000 at a time after browsing through the products of top manufacturers like Apple, IBM, Toshiba and Dell.

Customers can choose from 5,000 lines seven days a week. The machines are not only displayed but are working with introductory software. Shoppers are encouraged to use the mice - the gadgets that control the cursor on the screen. The choice is huge. Thirty different printers are displayed - all of them whining and chattering away.

There is a separate games area, where fanatics can try out the latest from Sega or Nintendo. Customers can also bring in their PCs to the service area to have software loaded for them or memories upgraded. To one side is a carpeted seating area where customers fortify themselves from the drinks machines before making that big purchase.

The stores also sell some non-computer lines, including fax machines and telephones - one sign that the stores are being absorbed into the Dixons culture. But Mr Clare stresses that they will remain mostly devoted to computers, in contrast to Staples, the office supplies superstore launched last month by Dixons' arch- rival, Kingfisher.

The staff - easily identifiable in red polo shirts - are polite and plentiful, although seemingly no more able to get the hardware to work than the rest of us. One well-meaning assistant eventually gave up trying to get the multimedia display to function as it should.

According to one would-be customer: 'It's fantastic. There are so many different PCs on display. The kids loved the games area. It helped me decide what sort of PC I wanted. But I actually went and bought the thing a quarter of a mile away direct from the manufacturer, Elonex.'

The PC superstore is a retail formula that works in the US, where Comp USA and Computer City, part of Tandy, have built substantial chains. In the UK, independents like Kay Tech and Byte are growing fast. But backed by the deep pockets of Dixons, PC World has the biggest potential.

It will also suffer the greatest loss if things go wrong. Despite the success of other 'category killer' US retail formats like Toys R Us, the omens are not all favourable. Icon, a store of 20,000 square feet similar to PC World, based near the Merry Hill shopping centre in Birmingham, has just closed after six weeks of trading.

Customers are mainly computer enthusiasts and small business people. An enthusiast might bring in his PC for a memory upgrade, spend the morning in the games area and fork out pounds 1.09 plus VAT on a mouse-tidy. The small business owner might buy an entire system for his office, complete with terminals, printers and programs.

Mr Clare says the total PC market in the UK is worth about pounds 3bn. The bulk of it is supplied by mail-order firms or directly by the sales forces of the big manufacturers.

PC World grew out of a mail-order operation. Conventional retailers account for well under 10 per cent. Mr Clare believes that share can be lifted to more than 30 per cent, as it is in the US.

He cites three reasons why PC World can comfortably grow to 30 outlets, possibly more. First, computers have been demystifed. More and more people understand them and feel increasingly comfortable buying them. A generation has grown up using them from an early age at school.

Second, the hardware is much more robust. Five years ago Dixons had terrible problems with the hard disk drives of computers that were too delicate for the rough and tumble of its distribution arrangements.

Third, computer prices have plunged. Although the massive growth in PC demand of recent years may start to slow, Dixons believes it can continue to take market share from the mail-order sector.

One other key factor may be the number of mail-order houses that have gone bust recently. PC World should benefit from the growing fear that a mail-order house might go bust between banking the cheque and mailing out the goods.

Dixons' faith in the formula is reflected in the price it paid for the parent company, Vision Technology Group - pounds 8.5m, or roughly 25 times historic after-tax earnings - making a millionaire of Jan Murray, the founder and 20 per cent shareholder.

However, the company, with sales of pounds 49m, was growing so fast as to make the conventional valuation meaningless. The first superstore, in Croydon, has been open for 18 months; the Staples Corner store is only six months old.

Dixons is out of favour with the stock market because of continuing problems trying to turn round its Silo chain in the US.

Making a success of PC World would be just the job to rehabilitate it in the eyes of investors. But if British retailers have learnt anything over the past decade, it is that retail formulae do not always cross the Atlantic happily.

(Photographs omitted)