Gateway to shutter stores, cut staff

The company, based in Poway, Calif., will continue its direct-sales strategy but plans to shut its 188 stores on April 9. Gateway recently acquired eMachines, and following the closing of the stores, the combined company plans to lay off 2,500--38 percent--of its 6,500 employees. Employees will receive severance packages. The company said it will provide more details about the impact of the closings on its revenue and costs when it announces its first-quarter results April 29.

The store closings were not unexpected. Analysts, who had been theorizing that the retail outlets were on the chopping block for weeks, said the stores could have been a liability for Gateway's efforts to form relationships with third-party retailers, which could carry Gateway-brand PCs and consumer electronics gear.

"Speculation has been swirling around the closings, and looking at the revenue and number of employees at each company, it was clear what they had to do," said Sam Bhavnani, a senior analyst at research firm Current Analysis.

Bhavnani said that in 2003, Gateway had revenue of $450,000 per employee, totaling $3.4 billion with 7,500 employees. That's a far cry from eMachine's nearly $8 million in revenue per worker, with $1.1 billion in overall revenue and 138 employees.

Costs were dragging the company's revenues down, Gartner analyst Charles Smulders said.

Dell's sales and administrative expenses came to less than 10 percent of revenue in the fourth quarter, while Gateway's came to 21 percent. The stores can't be the cause of all of the additional cost, but it clearly added drag, Smulders said.

"It is absolutely the right thing for them to do," he said.

There was also a note of caution. Moving too quickly to close its stores without a method of replacing the revenue the outlets generated would prove disastrous for Gateway, the analysts said.

Smulders expects Gateway to lean more heavily on store distribution.

"What is clear is that the new CEO is looking at ways to use his retail background to find alternative distribution for Gateway," Smulders said.

Pursuing partners
The company is in discussions with major retail partners, as it works on a wider distribution plan in the United States and abroad for its consumer electronics products, such as plasma screen televisions and digital audio players.

Although neither company would comment on any such plans, some say a near-perfect marriage could be achieved between Gateway and retailer Best Buy.

"I think that's a reasonable expectation, given eMachines' relationships with Best Buy and given the fact that over the last year, Best Buy has emerged as the dominant player in retail PCs," said Steve Baker, an analyst at NPD Techworld, a firm that covers U.S. retail. "Best Buy is by far the biggest electronics retailer. Where else would you go?"

The companies already have strong ties, emanating from Gateway's new eMachines arm. Wayne Inouye, Gateway's new CEO and eMachines' former chief executive, was also once a Best Buy executive.

Gateway products are likely to end up in a lot of other stores as well, including electronics sellers such as CompUSA and Circuit City, Baker said.

"This is not only about consumer electronics. Gateway desktop(s) and notebooks are going to be out in full force in the (retail) channel as well," Baker said.

Best Buy has been willing to experiment with PC brands in the past. Aside from selling PCs from Hewlett-Packard, eMachines and Sony, it has offered PCs under the VPR Matrix brand and sells PCs from Germany's Medion.

Best Buy also carries a wide selection of televisions, digital cameras and other consumer electronics gear--an area Gateway has been working to break into. Thus, Gateway has something the retailer wants--its PCs--and Best Buy has something Gateway wants: a channel for selling consumer electronics gear.

Doing more with less?
Bhavnani says he expects Gateway to pare back on its number of consumer electronics products.

"They'll probably stay in TVs, but I'm not sure how much sense cameras make," Bhavnani said. "They're not a big-ticket, revenue-generating item."

The store closings mark the latest chapter in a series of unconventional moves that began when Gateway first started selling PCs directly.

Gateway opened its first retail stores in 1996, when it was experimenting with a number of ideas to expand market share. Gateway was the first large PC maker, for instance, to offer its own branded Internet service. It also created the YourWare program, designed to allow the company to get into services.

The driving force behind many of these concepts was to create tighter bonds--and recurring revenue streams--with its customers. The stores were initially successful in driving revenue, according to analysts at the time, and at one point, Gateway had more than 300 stores.

But they were also controversial.

Michael Dell, in a 1999 interview, said his company wasn't interested in its own retail outlets. After two years, revenue from retail outlets tends to hit a plateau, he said.

Having a physical presence across the United States also meant that Gateway had to apply sales tax to its online sales.

Analysts at IDC, though, have recently noted that direct sales may be hitting a plateau of their own. Direct sales now account for between 50 percent and 55 percent of PC sales in North America, but the figure is not climbing the way it used to. The push toward consumer electronics may be driving people to seek buying advice in stores, a recent IDC paper speculated.

Gateway is in the process of moving its headquarters from the San Diego area to southern Orange County, Calif.

CNET News.com's Michael Kanellos contributed to this report.