Gateway Seeks to Revive Sales, Reinvent Itself
Ray Stanton is a perfect customer for Gateway Inc.
When he started looking last week for a computer for his 81-year-old mother, he didn’t expect to buy one. But after visiting the Gateway store here, he walked out with his mom’s first PC -- a $1,500 system complete with a flat-panel screen and a combination printer and scanner.
“The staff was very courteous and extremely knowledgeable -- more than at the fast-moving, off-the-shelf retailers,” Stanton said.
Gateway, based in the San Diego suburb of Poway, needs a lot more customers like Stanton. And it needs them fast.
The company’s revenue has plummeted from $9.6 billion in 2000 to an estimated $4.4 billion this year. Chief Executive Ted Waitt has acknowledged that Gateway must rack up strong sales during the holiday shopping season if it is to have any hope of keeping its full-year loss under $250 million. Those dismal results would come on top of a staggering $1.03-billion deficit for 2001.
“We really need a strong couple of weeks as we exit this quarter,” said Waitt, who founded Gateway 17 years ago out of an Iowa farmhouse.
But there are no guarantees that the company can pull it off. Price pressure from rivals Dell Computer Corp. and Hewlett-Packard Co. are slicing PC profit margins paper-thin.
And with its share of the cutthroat PC market slipping uncontrollably, some analysts are predicting Gateway’s eventual demise, despite the $1 billion to $1.2 billion in cash that the company currently has on hand. “Gateway is probably more valuable dead than alive,” said Los Angeles technology consultant Martin Pichinson.
Hoping to generate more business, Gateway has been selling a no-frills computer for as little as $399. Last week, the company went one step further: It began offering this low-end model for free to anyone who purchased a high-end $3,500 desktop or a $2,400 laptop. To some, such a promotion seems more appropriate for a fast-food chain -- buy one burger, get another at no charge -- than a purveyor of technology.
“It sounds like you have a very desperate company,” said Pichinson, founder of Sherwood Partners, a tech-sector crisis management and debt-restructuring firm.
Still, Gateway’s strategy involves more than giveaways and price cuts. The company is trying to reinvent itself by branching out beyond computers and such traditional peripherals as printers. Its foray into higher-margin digital equipment and “beyond-the-box” home entertainment could breathe new life into the firm.
Gateway’s 272 stores and Web site now carry consumer electronics items such as digital cameras, MP3 music players, video cameras and an enormous 42-inch plasma television that can hang on a wall. At the Toledo store, an employee unwrapped and quickly assembled a tablet computer, a brand-new product that had just arrived for sale.
Indeed, Gateway’s problem isn’t its merchandise, analysts say. People like the products and rave about the customer service. The company’s brand value is on a par with industry leader Dell, according to independent research studies.
Stanton dropped by the Gateway store last week because he trusts the name, even though he uses a Dell PC. Once inside the store, it took him all of about 20 minutes to make his purchase. “It was nice to get in and out quickly,” Stanton said.
Yet, despite this kind of consumer satisfaction, Gateway is taking a beating in a world of slowing consumer demand for PCs and relentless price competition.
Its U.S. market share dropped to 6.1% in the third quarter from 7.5% during the same period last year, according to market researcher Gartner Dataquest. Over the same period, Dell’s share grew robustly, to 28.9% from 25%.
Gateway’s battered shares have fallen from about $80 in late 1999 to close Friday at $2.79 on the New York Stock Exchange.
“Gateway is not a stock that I would own at any price at this point,” said Joseph Beaulieu, an analyst with equity research firm Morningstar Inc. and an owner of a Gateway computer. “They’re losing money, and they have no viable business plan to turn things around.”
This kind of talk is tough for Gateway -- the kind of company that many people are inclined to root for. Waitt, 39, started the firm with a rented computer and a $10,000 loan guaranteed by his grandmother. Like Michael Dell, Waitt was an entrepreneur with a vision of low-cost supply emphasizing value and customer loyalty. Sales quickly ballooned.
Gateway has maintained a down-home, folksy feel. Until recently, its shipping boxes were white with large black spots reminiscent of a cow. Ads stressed customer service and its knowledgeable, friendly staff who are available to demystify the often intimidating beige box that houses a PC.
But costs soared, especially with regard to its stores, as the competition became more ruthless.
Last year Waitt returned to the company he had left in 1999, and moved its headquarters to Southern California from South Dakota. He also cut Gateway’s workforce by 10%, shut down its Internet service and began closing more than 50 stores nationwide.
Still, that hasn’t been enough.
“It appears Gateway’s aggressive pricing strategy is not working,” said technology analyst Joel Wagonfeld of Banc of America Securities. “Either Gateway’s expectations for the quarter were far too optimistic, or the company is losing share, both of which do not augur well for the stock.”
Gateway declined to make executives available for this story, citing its “quiet period” ahead of its fourth-quarter and full-year earnings announcement Jan. 29.
Waitt’s comments at a recent technology conference were infused with excitement over the new directions Gateway is undertaking and products it is carrying. But they also revealed a sense of dread about the competition. Whereas Dell and HP crowed about strong Thanksgiving weekend sales, Gateway’s take was muted.
“It’s a pretty brutal pricing environment,” Waitt said. Regarding Thanksgiving sales, he added: “What we saw was good but not great.”
Some analysts fault Gateway for uneven store quality. Though certain outlets are picture-perfect, others are dingy places that display broken computers and peripherals that aren’t properly connected.
Critics also have hammered Gateway for building its stores away from destination shopping centers. Rival Apple Computer Inc. has benefited from putting its locations inside malls and high-traffic retailers such as CompUSA.
Waitt said Gateway is reassessing the sites of its remaining stores. High overhead and a fixed cost structure for its stores is hurting, but next year about 120 leases come up, and more may be closed or relocated.
With growth in the PC market next year estimated in the single digits -- compared with more than 20% in some years during the 1990s -- shedding more stores could buy Gateway some time to rebuild market share and await the next cycle of consumers upgrading their computers.
But if Waitt can’t turn the company around soon, the consequences could be dire, warned Pichinson, the technology consultant.
“We believe there’s just no room for them,” he said. “Dell is beating the you-know-what out of everybody. There’s just no margins anymore. You’ve got to know when to hold them and when to fold them.”
Pichinson is convinced that Gateway should liquidate and shut down, or find a foreign partner such as China’s biggest computer maker, Legend Holdings Ltd., which could use access to the U.S. market.
Meanwhile, Waitt is contemplating a Christmas that doesn’t look so cheery. “A lot of people are out talking about successes this holiday season,” he said at the conference, but “I don’t see anybody pointing to desktop PCs as being a hot Christmas item.”
