Revenge of the Clone
The Globe and Mail

April 25, 2006

It was 1991 and Goran Varaklic, new to Canada and fresh out of a job, decided to put his knowledge of computers to work. He turned the den of his suburban Toronto apartment into his workshop and started assembling personal computer systems that he sold at cut-rate prices through the classifieds. Today, his company, MDG Computers Canada Inc., is the country's largest Canadian-owned PC manufacturer. With revenues estimated to be between $400 million and $600 million, MDG has not only become a strong Canadian brand, it changed the class system of the industry.

As recently as three years ago, MDG was known as a "white box" manufacturer a term Varaklic considers a slight. In industry lingo, "white box" simply means the system was locally assembled from off-the-shelf parts. This implied to consumers, however, that whatever was in that box was less than what such top manufacturers as Dell, IBM and Hewlett-Packard had underneath their jazzy logos. "The white-box label was being pushed by those market-research organizations paid by the big multinationals," says Varaklic, president of Oakville, Ontario-based MDG. "They wanted to draw a distinction, to say, 'We are a brand, and everybody else is just a white box.'"

The success of MDG and fellow travellers such as Eurocom Corp. and VoodooPC changed all that. These Canadian PC assemblers have evolved into brands of their own. As a result, an estimated 67% of Canadian-assembled PCs sold in 2005 carried a brand name, up 17% from 2004. To scale up the picture a bit: Of the 4,574,683 personal computers sold in Canada in 2005, 1,489,448 were Canadian-branded.

Thanks to stepped-up advertising and brand- awareness campaigns, MDG has pulled away from the pack. Evans Research Corp., a Toronto-based IT research company, estimates MDG's sales increased by 28% in 2005 over 2004more than doubling the industry's average increase of 13%. Of course, 2005 was the year of the notebook, and industry growth is expected to slow to just 1.5% in 2006 because of drooping demand. MDG, however, is on target for more double-digit gains.

How, exactly, do you do that? "By defying gravity," says Varaklic, smiling impishly. He speaks softly, with a pronounced Slavic burr, and has a serene, serious comportment at odds with his brawny build. Were he to offer a less metaphoric explanation for his success, he might say he has simply charted his own path. Industry giants like Hewlett-Packard move units mainly through independent retailers, with the consequent markup. Dell, on the other hand, flogs its systems by phone and through its website, excising the middle man. MDG's "direct-through-store" model is a marriage of the two styles. The company builds its own systems, and sells and services them exclusively through a network of 28 franchised stores from Quebec to British Columbia.

Here's how it works: MDG buys components in bulk. Franchisees purchase MDG parts, and complete or partial systems, from head office. MDG takes care of quality control, branding, marketing and customer support. The model has helped set MDG apart from its competitors and fuel its growth in the small-office and home-office category. "The success of our franchises is the biggest validation of our business model," says Dragoslav Minic, who works in advertising at MDG. "People like and appreciate what we do, and we want to continue to build on that appreciation."

MDG plans to open 50 more franchises, including, for the first time, locations in the Atlantic provinces. Thanks to a failed foray a few years ago, the company is cool on the U.S., but it is looking into expansion in Latin America and Eastern Europe.

The latter could involve a homecoming for Varaklic, 45, who was born in Prijepolje, a small town in Serbia. He graduated from the University of Belgrade in 1983 with a degree in mechanical engineering. With slim prospects in Serbia, he and his wife immigrated to Canada in 1988. Having dabbled in computers in school, Varaklic got a job writing human-resources programs for a company in Mississauga. When the business folded in the early '90s, Varaklic looked around for possibilities. Seeing potential in the market for PC "clones" (another putdown from the days of the industry class system), he started building his own systems and selling them through classified ads in the Toronto Star.

Respondents were pleasantly surprised: At Varaklic's prices, they assumed they'd be getting something used, not new. Varaklic turned a $100 profit on each machine, although he admits "there wasn't really much of a business model there." Still, "You get four, five calls a day, you get encouraged." He began renting office space and incorporated as MDG, a moniker derived from the names of Varaklic's first son (Milos), his wife (Dragana) and his own first name. (The couple now has five children, each of whom has a name beginning with M or D.) MDG opened its first store in the Toronto suburb of Etobicoke in 1995.

The firm's rapid growth owes something both to Varaklic's skill on the sales floor. "He's always been the best salesman here," says a colleague and his adroitness in supplier negotiations. MDG is now the biggest Canadian account for both Intel and Microsoft. These affiliations are a point of pride for MDG, and the brands under the hood are hammered home in its ads.

Still, walking into a company outlet can be underwhelming. There's none of the arcade atmosphere of the standard electronics emporium. Few units are on display; instead, each salesperson has a desk to meet with customers about tailoring systems to their needs. The idea, Varaklic says, is to foster personal contact.

The emphasis isn't surprising, given that local assemblers' biggest impact on the computer industry was in allowing consumers to choose their components. Dell adopted this approach when it started selling on-line. Retailers such as Future Shop and Staples eventually offered custom configuring too.

But the nature of the game has changed. "Initially, Canadian-assembled PCs were sold solely on price," says Michelle Warren, an analyst at Evans Research. "Ten years ago, you could buy a locally assembled system for substantial savings. Now, all the prices are in line, so it's really the service and availability the more operational issues that are advantageous."

It's in the realm of service "post-sales support" in industry parlance that MDG shines: For the past seven years, the company has come first in a "Consumers' Choice" survey conducted by the research firm Market Facts Canada. Varaklic says most of his competitors back away from customer support, even though it's proved itself to Varaklic as "a way of building loyalty." He says that sales to repeat MDG customers outnumber referrals by 2 to 1.

Recognizing that many people do like to touch and physically appraise a computer before deciding whether to buy, Dell opened seven kiosks in Canada and dozens across the U.S., but it's still shying away from opening actual stores. Were it to go head-to-head with MDG on that front, some patriotic marketing would likely emerge from the Canadian side. Even the full-page ads MDG ran in major newspapers a few years ago featured sell lines like "Buy computers your neighbours build" and "Our country is Canada/Our home is Toronto." Says Varaklic: "We are Canadian-owned, we are the biggest Canadian brand, and we let people know that."

MDG got an instant hit of Canadian cool when it teamed up with Victoria-raised NBA star Steve Nash last summer. The Phoenix Suns' all-star point guard is featured in a series of print, radio and television ads a coup for MDG, since Nash does little promotional work.

"We pointed out [to Nash's agent] the similarities between Steve Nash as a brand and MDG," says Minic. "We are both Canadian, no-nonsense, and all about quality and substance. Steve Nash is considered an overachiever. He is 6 foot 3 and a star player in the NBA. He surprises people each and every day with his talent, and we hope that's what he sees in us."

Given the relatively flat growth in the PC market, dropping prices and increased competition, MDG isn't resting courtside. It has made a push into the education, government and, above all, corporate markets the latter, after all, accounts for 65% of computer sales. "MDG is expected to continue its transition into the corporate markets, especially now that it has the advantage of a strong brand name, coupled with on-line shopping, direct TV sales and multiple retail locations," says Michelle Warren.

A good thing, since the computer market will likely never relive the boom years of the '80s and '90s. The pace of upgrading is no longer as frenetic. "For home office workers, those working on spreadsheets, word processing, e-mails and general internet surfing, computers that are two, three or more years old are more than up to the task," says Robert Franner, editor of Marketnews, a publication for the consumer electronics and computer industry. "That's what most people used to use PCs for, office work, and there's little reason for them to upgrade."

On the other hand, computers are increasingly used for entertainment, where power demands are prodigious. That's why in January, MDG launched a powerful desktop series dedicated to giving customers "more power to play."

Whether the growth comes from work or play, Varaklic is sanguine about his company's prospects: "How many people are using computers today? More than ever. And how many are going to be using them in the future? Again, it's going to be more than ever," he says, without a hint of doubt. "The bar is going to be pushed up all the time."