Gateway looks to pump up direct sales

The PC maker, which made its name selling computers direct to consumers and businesses, has seen those sales wither during what has been a turbulent 2004. Gateway's March acquisition of eMachines and its subsequent cost-cutting efforts, including store closings, have started it down the road to a profit. Its third-quarter financial results showed a narrower-than-expected loss and, after factoring out charges, its first operational profit in almost three years.

But direct sales, once a major source of revenue, slumped to only $182 million of its total $936 million take for the quarter. The direct-sales revenue declined 15 percent sequentially, and PC units sold direct dropped 9 percent sequentially, to 84,000. Gateway executives attribute the lost revenue and units to the closing of the company's 188-store retail chain, and they say they've begun an aggressive effort to reverse the tide.

Enter the rebates and special offers. By launching a slew of new desktop and notebook models and once again allowing customers to customize the machines they buy--for a while, during 2003 and much of 2004, customers could choose only from a list of set configuration models from Gateway--the company feels it has the products to interest direct customers. Now it's turning the spigot on rebates and special offers to help get buyers in the door.

"Clearly, in a (business) model where the things that are uniquely new are relationships with big retailers, they have certainly gotten a lot of the PR," said Scott Bauhofer, senior vice president for Gateway's direct-sales segment. "But the direct business for Gateway has been in existence from the beginning. We are very focused on (it). It's one of the four key pillars of the (company) strategy."

Indeed, Bauhofer's direct arm has stepped up with offers such as pitching a server to small businesses for a starting price of $269, after a $230 rebate. Another offer woos consumers with a desktop PC fitted with an Intel Pentium 4 processor and a 17-inch CRT (cathode-ray tube) monitor for $499, after a $100 rebate. The company is also offering instant, $200 rebates on some notebooks.

It could go even farther in an effort to compete with Hewlett-Packard or Dell. Gateway has been having internal discussions about answering competitors by offering desktops in the $300 price range.

"We're debating that," said Rick Schwartz, senior product manager for desktops at Gateway. "We haven't finalized it, but (the offer) will be a very aggressive price point."

For its part, HP has been advertising a desktop that starts at $309, after rebates, on its HPshopping.com Web site. The machine, based on an AMD Sempron processor, comes with 256MB of RAM, a 40GB hard drive and a CD-ROM. It does not come with speakers or a floppy disk drive. A similarly configured Intel Celeron-based Pavilion model starts at $319, after rebates.

"When you take the monitor and the speakers out, it's not too hard to hit those prices," Schwartz said. "The thing we're trying to avoid is de-configuring the model to where it's not usable. We're trying to avoid hitting a price just for the sake of the price."

Instead, Gateway finds that promotions involving "free" component upgrades can often be more effective than advertising a low price. The company contends that most low-price buyers want more than the 256MB of memory a bare-bones PC offers and would rather have a CD burner, which can write files to a CD, than a CD-ROM, which can only read them.

Aside from considering desktops in the $300 price range for consumers and for small and medium businesses, Gateway is eyeing a Media Center desktop for $799, sans a television tuner, and offers to swap 15-inch LCD (liquid crystal display) monitors for 17-inch CRTs.

Still, Gateway needs to avoid some of its past patterns. Over the last few years, the company has gone back and forth from offering higher-price PCs to attempting to compete on price and thus sell more units. Gateway is aiming to shed its past, following its acquisition of eMachines and the appointment of Wayne Inouye as its CEO (in the wake of a lackluster performance in the fourth quarter of 2003). With about 1,900 employees, and outsourced manufacturing, it's now much leaner. PC sales have already been boosted by the eMachines brand and early successes with Gateway-brand desktops at retail.

Gateway-brand desktops have garnered 6 percent to 8 percent of unit sales at retail since their September introduction in stores, said Steve Baker, analyst with the NPD Group. Although the Gateway desktops aren't nearly as widespread as HP's, the early results show that Gateway is headed in the right direction so far, Baker said.

Following its four-pillar approach--which aims to accelerate retail PC sales, boost sales to large businesses and institutions, and expand international sales--Gateway-brand PCs will soon begin arriving in Japan. Increasing direct sales will complete the picture for Gateway, which hopes to turn a slight profit during the fourth quarter.