Gateway Stores Put Out to Pasture

The third-largest computer maker is shuttering its stores on April 9th and looking to the newly acquired eMachines to provide channel contacts.

Poway, Calif.-based Gateway said all 188
company-operated stores will shut down and approximately 2,500 retail jobs will go with them. Just a year ago, the company finalized plans to close 76
of its retail stores in the face of sluggish PC sales and increasing
competition from Dell Computer and HP . The
move, Gateway’s third restructuring in as many years, eliminated 29 percent
of its stores and 17 percent of its staff.

On its Web site, customers are advised to look to the Web and call centers
for support and customer service. The company said that it stopped selling support options for walk-in service and loaner computers
in June 2002, and most of them have expired. Customers with remaining time
on service agreements may be eligible for a pro-rated refund.

A company spokesperson said customers will be able to get
machines serviced by shipping them back to the company. He said the in-store
service departments will finish repairs on all machines at hand, but he did
not know whether they had stopped accepting new repair jobs.

“It’s a positive move for Gateway,” said Gartner analyst Charles
Smulders. “The stores were very expensive to run, and margins are very thin
in the consumer PC business.” He said that in 2003, Dell had a 27.7 percent
share of the U.S. PC market; HP had 18.6; Gateway held a 3.5 percent market
share; and eMachines had 2.8 percent. “Gateway has been losing share for
some time,” he said.

During the fourth quarter of 2003, Gateway reported a net loss of $114
million, or 35 cents per share, on revenues of $875 million. For 2003, its
net loss was $526 million ($1.62 per share) on revenue of $3.4 billion.
Total PC sales for the year were 2.1 million, a 24 percent decline over the
prior year.

The announcement follows the completion of Gateway’s acquisition of low-cost PC maker eMachines. EMachines came with twelve strong retail relationships, including BestBuy, Office Depot and Wal-Mart, as well as a
lean operations model that produced $1.1 billion in revenue last year and a string of nine consecutive profitable quarters.

Former Gateway CEO Ted Waitt stepped aside to let eMachines CEO Wayne Inouye, a former senior VP for BestBuy, take the helm of the combined company, with Waitt remaining as chairman.

“The new CEO as very strong ties with retail,” said Smulders, “and they can use that third-party channel to drive their consumer business.”

Gateway said it would provide more detail on its brand and channel
strategies, as well as the revenue and cost implications of closing the stores, when it announces its first quarter financial results on April 29.

Retail stores are nice, Smulders said, because they let shoppers touch and try computers while providing a live person to answer questions. “But Gateway was unable to drive enough store traffic to justify the cost of operating the stores,” he said. “The margins they were able to make and the volumes they were able to drive just didn’t match the store investment.”

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