Gateway Will Refocus Energy On PC Business

POWAY, CALIF.— While Gateway vociferously announced the expansion of its computer retail presence last month with the addition of Best Buy, the company quietly said it will gut its nascent CE business in the coming months.

A Gateway spokesperson said the company is in the process of simplifying its product assortment, meaning the company will sell through its remaining stores of digital cameras, home theater systems, DVD player/recorders and possibly even plasma televisions then exit the CE category. The company will then concentrate on its high volume computer product lines in order to bring itself back to profitability, she said.

The spokesperson said Gateway may refresh its plasma television line as this is a high volume seller, but a final decision has not been made. Gateway entered the flat-panel TV market last fall with a 42-inch plasma model priced at $2,999 and quickly gained a large chunk of market share. Earlier this year the company quickly expanded its CE assortment to include the previously mentioned categories and stated its intention to gobble up share through a strategy of "disruptive pricing." This tactic also worked well in the digital camera segment where Gateway introduced a 5-megapixel model at $199.

Gateway's CEO Wayne Inouye said during a conference call on July 22 that the CE business had proven tougher and more costly than originally anticipated.

Best Buy began carrying new Gateway-branded notebooks in late July and a rollout of desktop models will follow in August. Gateway will not limit itself to Best Buy and is pursuing deals with other retail chains, Inouye said, adding an agreement could be struck in the next few weeks with another chain. Best Buy is not Gateway's first customer. The company has been selling a few notebook SKUs through Office Depot, and recently some CE products left over from the closing of its retail stores have been spotted at Best Buy.

Best Buy will offer the Gateway notebooks and desktops in each of its 622 stores. The number of SKUs, their specifications and pricing were not disclosed, pending the rollout.

Industry analysts Stephen Baker, NPD senior hardware analyst, and Charles Smulders, Gartner's senior analyst for PC worldwide program, said Gateway needed a retail presence to stay competitive.

"Having shelf space in retail is critical to Gateway's future. They must make a success of their Best Buy relationship in the third and fourth quarters. It will provide greater customer choice and help Best Buy negotiate better terms with the PC vendors," Smulders said.

"HP's dual brand strategy has worked well and I think Gateway sees an opportunity to differentiate between its entry-level eMachines brand Gateway products," Baker said, adding that the Pavilion and Presario lines are pretty similar.

Baker said Gateway's move was smart on several levels, "They don't have to give up their direct business, it will drive brand recognition and gives them another profit ladder."

The Best Buy move ends months of speculation over Gateway's distribution plans for its flagship PCs after shutting its 188-store retail chain in April. The Gateway stores had reportedly been a sticking point in negotiations with Best Buy, which viewed them as direct competitors. Best Buy is the vendor's largest customer for its value-priced eMachines line, which was acquired by Gateway in March but not sold through the company's retail outlets nor directly.