2HRS2GO: Gateway goes back to basics

COMMENTARY--You may question--or at least I question--CEO Ted Waitt's recent decision to essentially undo Gateway's entire strategy of the past year, but recent reports from OfficeMax (NYSE: OMX) gives him ammunition.

When Waitt returned to the throne of the Gateway (NYSE: GTW) kingdom he founded, I wondered then and wonder now if he's the right man to turn around the large, floundering box-maker. He built Gateway into a powerhouse during his original CEO tenure by being a good commodity vendor. Under Waitt, Gateway was a model of low cost and efficiency, going so far as to spend nothing on research & development.

That strategy vaulted Gateway into the top tier of PC vendors, but it's also the attitude that helped lead to the current slump. There is nothing distinguishable about the PC vendor, and nothing particularly compelling about its latest offerings. Jeff Weitzen, the man Waitt originally hired to lead Gateway as a mature company, realized where the trend was going and tried to move Gateway into other venues: Web appliances, "Beyond the Box" services and physical retail sales.

Weitzen is out, a victim of the PC industry slump, and Waitt is basically backing from all those new initiatives and focusing on Gateway's original business. I think that's bad for the long-term--basic box selling just isn't an attractive business anymore--but Waitt has a point about some of those initiatives, retail sales being one of them.

The Once and Current CEO plans to close the laggards in Gateway's Country Store chain. And he's backing away from Gateway's OfficeMax presence.

It's a mutual feeling. OfficeMax on Friday said it is taking a second look at those Gateway "store-within-a-store" locations.

"The full-sized, staffed Gateway computer departments in approximately half of OfficeMax's almost 1,000 stores are, to varying degrees, no longer producing the customer traffic and interest in proportion to the space occupied," OfficeMax said in a statement.

OfficeMax released year-end results today. Although losses were slightly narrower than predicted, the company met low expectations, for the most part. OfficeMax had the kind of year that corporate executives describe as "challenging" and shareholders characterize as "(expletive deleted)".

Given OfficeMax's poor performance, it's no wonder that Waitt wants to unwind their current partnership. OfficeMax, probably rightfully so, blames the general PC slump for the Gateway store-within-a-store disappointment.

It was basically a losing situation for everyone involved. Gateway wasn't getting its money's worth. And OfficeMax notes that its overall sales of computer peripherals actually increased after Gateway cut back on its kiosks earlier this year, probably because people who might have bought a part from Gateway instead shopped at the regular OfficeMax store shelves.

OfficeMax locations without a separate Gateway store have small kiosks that connect shoppers online to someone in a Gateway customer service office. The companies are talking about ways to improve it.

But OfficeMax has never been the strongest of the office supply retailers, and its relative weakness makes it an easy target for Waitt and his new team.

The real danger is that Waitt could go too far in undoing the company's non-core businesses. Yes, you have to sell boxes. Yes, you have to improve basic unit profitability and cut operating costs. Yes, you have to straighten out your bottom line to keep Wall Street happy, and keep them off your back in the short term.

Yet the long-term future of Gateway has to be beyond PCs. The standardization of the Windows-based industry is complete, and there is no almost no way to distinguish one 1.5 GHz-machine from another.

Companies can try to compete on price, but the only way that would work for Gateway is if Dell (Nasdaq: DELL) management suddenly forgets how to run their extremely efficient operations. The best Gateway can hope to do is match Dell; to beat it on price would require sacrificing margins completely.

Gateway, along with every PC maker, needs to distinguish itself somehow, and added services and other offerings are the best ways to do it, short of going into an entirely new market, such as enterprise business (something at which Gateway has already failed).

Analyst fault lines are easy to delineate. Financial analysts, such as Merrill Lynch's Steve Fortuna, believe Gateway should come back to its core business. Market research analysts, such as Technology Business Research's Brooks Gray, worry about losing focus of Beyond the Box.

It's a classic example of short-term vs. long-term thinking. Wall Street wants the immediate problems fixed, and the market researchers can't see anything closer than the horizon.

I don't see why Gateway can't do both. A company with more than $9 billion in annual sales ought to be able to protect its bottom line while playing toward the future. That's what all successful companies do. 22GO>