Gateway to go global again with eMachines merger

The Poway, Calif.-based PC maker, which left the overseas market in 2001, said in its annual report that its acquisition of eMachines will provide new product distribution channels, including third-party retail stores in the United Kingdom and Japan, as well as in the United States.

The acquisition, announced Jan. 30, is expected to close as soon as this week and will result in combined shipments of about 4 million PCs, making Gateway the third-largest PC manufacturer in the United States.

"With this multichannel approach, increased points of distribution and expanded product line, there is potential for enhanced growth across both our PC and consumer electronics businesses in the U.S. and overseas, although restructuring actions could curtail this growth in 2004," Gateway said in the report, released late Friday. "If we complete the planned acquisition of eMachines, we will add (international) sales primarily in the United Kingdom and Japan. We are also evaluating additional international markets."

Although Gateway exited the overseas market three years ago, it has since dabbled in selling its PCs in Canada and Mexico. It has also been selling some PCs outside its own stores, at retailers including Office Depot and Costco. It's likely the eMachines merger will intensify those expansion efforts, including Gateway's focus on its relatively new line of consumer electronics.

"Upon closing the eMachines transaction, we plan to leverage eMachines' existing relationships in the retail channel to explore expanded distribution of Gateway's consumer electronics products beyond our own channels," the company said in its Securities and Exchange Commission filing for 2003.

If Gateway can use eMachines to tap third-party retailers, does it need its own chain of stores? The report didn't answer that question, but it's one Gateway will likely grapple with as part of the merger.

"It's too early to comment on stores right now, but as we work through the details of our channel and brand strategy, we'll continue to evaluate (Gateway) stores both individually and as a channel to ensure that they're contributing to our growth, cost reduction and profit goals," said Brad Shaw, a spokesman for Gateway.

Many analysts believe Gateway will abandon its namesake stores over time. The company closed 82 of the stores during 2003, as part of its efforts to reduce costs. But it remodeled the remaining 190 outlets to help showcase its consumer electronics line.

"The most likely outcome," Bear Stearns analyst Andrew Neff wrote in a Feb. 5 report, "is for Gateway to withdraw from its network of retail stores in light of the relatively low PC unit volumes driven through the stores versus the fixed cost base, but retain its consumer direct focus over the phone...and online.

"The end result in our view," Neff continued, "is that eMachines will keep its brand name in traditional retail points of distribution with a focus on credible value offerings, while Gateway--when it phases out its stores--will focus on phone and Web sales, likely more geared to the needs of the second-time purchaser in the PC market."

Others agree but caution that eliminating all the Gateway stores could also have a downside.

"If I was going to bet, I'd say they're probably going to (eliminate the stores). The problem is that it's very tricky to retain your revenue and do that. I don't think they can go in and just shut it off. I don't think they could make that work," said NPD Techworld analyst Steve Baker.

Although Gateway will probably ink several deals with retailers, it's unlikely that any one store will agree to carry Gateway or eMachine's entire product line. Thus Baker believes it would be wise to keep at least a few stores.

"I think (Gateway) has to have a distinct model...that gives it a distinctive way to market its products and shows the vision of...how you make all these things work together," Baker said.