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Gateway Putting Itself Back On Its PC Course

New York — After enduring months of internal and external turmoil, strategy shifts and merchandise alterations, Gateway has settled down and is steadily putting its house back in order.

But the company has endured what can only be described as one heck of a roller-coaster ride during the past year.

Starting in November 2004, Gateway embarked on a whirlwind business trip that saw the company transform itself more times than pop star Madonna typically does during a comparable length of time. In the fall of 2003, the company’s long-standing game plan of selling computer products direct and through retail was in the process of being shelved by Gateway CEO Ted Waitt, in favor of a consumer electronics-centric operation. Bill Parker, president and GM of the now defunct Gateway retail stores, and Scott Edwards, VP/consumer, were hired and they kicked off a massive revamp of the chain’s 190 stores to go along with shifting Gateway’s merchandise mix away from computers to CE products like plasma TVs, networked DVD players and digital cameras.

One year later Parker was gone, Scott was gone, the stores were gone, the CE products were gone and Waitt had stepped aside as CEO in favor of newcomer Wayne Inouye, eMachines former CEO. The entire corporate strategy of Fall 2003 has now been flipped with the company getting back to its direct roots, but also selling through retail like Hewlett-Packard.

Ed Fisher, Gateway’s senior VP/product planning, said after bouncing around for months on end the company is laser focused on its desktop, notebook and server product lines. So much so that the company would have turned a profit last quarter if not for the write-offs associated with closing the stores and changing directions.

He gave credit for this turnaround to the adjustments in strategy, the addition of Inouye and the adoption of many of eMachine’s in-house corporate practices.

In reality these changes took place within just a few months of Gateway proudly unveiling its new retail store concept last November. If one were to view a timeline of the events all the excitement was pretty much over by early April 2004.

Last fall the company held a large media event in Manhattan to unveil the prototype of the new Gateway store and the new product categories they would carry. The new stores were dazzling and fully focused on showcasing Gateway’s CE line up to the point where its traditional desktop and notebook computers were relegated to the far rear of the facility.

The CE products were not exactly new, as the company had jumped into the plasma TV market the prior year, but for the 2003 holiday season Gateway had expanded the category to 100 SKUs. Waitt expected CE to make up 40 percent of Gateway’s bottom line by end of 2003. Sales figures were not available, but it is understood that Waitt was happy with CE sales that quarter.

The success of the new CE business led Gateway to consider alternate retail channels for their products, which Waitt and his executives tied into their desire to gobble up entry-level PC maker eMachines.

With a year to reflect upon what took place, Fisher said the course for the company’s present strategy was developed by Waitt and Inouye during the merger talks last December, although the total impact of what the two men decided would not be seen for several months.

Whether the financial numbers were ever achieved is not known, but from the company’s next move it was clear that the CE category was not the panacea it expected and a change of direction was in order.

On Jan. 30, Waitt announced that his firm was buying eMachines. Waitt, at first, intended to use eMachines’ healthy retail relationships to push Gateway-branded CE products into chains like Best Buy. Waitt was adamant that Gateway would not sell its branded PCs through retail nor place eMachines models into the Gateway direct sales system. However, this desire was merely another idea destined for the scrap heap.

At the time eMachines’ addition was seen as supportive and complimentary of the company’s CE and PC strategy, but it also started a process that would force Gateway to once again alter its market focus, less then three months after its last change of direction.

By early February 2004, Waitt began to admit in public that the stores were possibly more of a hindrance then a help. He admitted his stores were financially draining, but would not commit to closing them. His mind began to change during March. The company shed another 1,500 jobs on March 3, but what forced Waitt to realize the stores were doomed was when the eMachines deal was finalized on March 12.

Gateway quickly integrated eMachines’ executives into its own structure and on March 30 it unveiled a new management team along with the news that many senior Gateway people were being ushered out, including Edwards. At this time Waitt gave his CEO slot to Inouye, a former exec with Best Buy, while retaining his spot as chairman.

Waitt and his advisors were now confronted with a problem they did not expect, a retailer backlash against their plan. Inouye said he believed retailers would see the advantage of selling Gateway CE products and not worry about conflicts. He did not envision eMachines retailers, like Best Buy, being unhappy with the situation.

“The Country stores conflicted with this new retail model. We had to take a hard look and saw we could either keep them [the stores] or separate from them and broaden our distribution through CompUSA, Best Buy and other retailers,” Fisher said, adding that most of the problem centered on the PC side of the business.

Inouye and Waitt got the message and three days after the acquisition Gateway shuttered all its newly renovated stores and eliminated the 2,500 person work force. Bill Parker was retained for several weeks to help close down the operation, but by the end of April he was out at Gateway.

At the time this sudden move was not explained by Gateway’s head honchos, who started plowing ahead with the company’s newest goal, which was placing Gateway branded PCs and notebooks in major retail chains.

Eight months later Fisher pointed to several factors, in addition to the third-party retailer conflict, that forced Gateway to get out of the brick-and-mortar retail business.

“The cost associated with that infrastructure was too much to sustain. It was a tough decision, we went to great effort to redo the stores, plus letting all those people go,” he said.

Selling the CE products through other retailers also proved financially impossible. The extra layer of its retail operation and the consumer ate up the razor-thin profit margin that Gateway had learned to live with while selling this merchandise on its own.

“The economics of the CE strategy just were not there,” Fisher said. “Our CE products were not differentiated that much, outside of price, from others on the market.”

The latest strategy was brought to the forefront by late June when Fisher said he began shopping Gateway products to major retailers. The retail waters were tested a bit earlier. Office Depot had begun selling a few notebook computer SKUs earlier in 2003, but this was not well publicized, in addition Costco helped blow out Gateway’s excess inventory from the closing of its chain.

By late June, Best Buy had signed and a month later, CompUSA was added and Office Depot expanded its partnership. July also saw the official abandonment of the Gateway CE lineup by announcing it would refocus all its efforts on computer products.

Fisher said any Gateway CE plans for its future would be a far cry from what it presented to the world last year. Right now the CE list consists of an MP3 Jukebox portable music player, Media Center PCs, which depending upon who is doing the defining may be considered more computer then CE device.

Getting the company profitable and developing the core computer product categories will remain Gateway’s single-minded task for the time being.

But the lure of the CE category is still lurking in the minds of Gateway execs. Fisher would not rule out a return to the category on some level, but said it would have to be in the context of convergence products, not stand-alone CE devices.