Gateway to stock its stores with PCs for first time

In an unprecedented move, Gateway announced Friday that it will stock and sell three PC models at all 320 Gateway Country store outlets--though only through the holidays.

Gateway previously used the retail stores only to showcase its products and offer services such as computer training. Customers have been able to order computers at the stores, but the decision to sell some PCs on a cash-and-carry basis is a new marketing move for the company, which opened its first retail outlet four years ago.

Gateway now joins its competitors in trying to boost sagging sales. Rivals such as Apple Computer, Compaq Computer and Hewlett-Packard have been hit hard because of slow holiday buying. These other companies are offering rebates and other incentives to clear inventory before Santa's sleigh ride. At the same time, Dell Computer is struggling to gets its top consumer models to customers.

"I think this is such a desperate move on Gateway's part in order to move last-minute volume out the door," ARS analyst Matt Sargent said. "They've obviously overbuilt product for a quarter that has not met expectations. They really have nowhere to go but out to the (stores) to get rid of product."

Gateway has inventory problems even though the company builds systems to order, said IDC analyst Roger Kay.

"Gateway is going to deck the stores with excess inventory," he said.

A Gateway spokesman disagreed.

"This is really more about utilizing our competitive points of difference to spur demand, more than it is inventory related," spokesman Brad Williams said.

Late last month, the San Diego-based company led the way for a string of profit warnings after Thanksgiving sales fell 30 percent from the same period last year.

Gateway was soon joined by the likes of Apple, Compaq, Intel and Microsoft in issuing profit warnings.

At the time of its warning, Gateway warned of inventory buildup and problems combating a potential price war.

On the surface, direct manufacturers such as Gateway don't appear to have inventory issues--after all, they build systems to order. But that is an illusion, Kay said.

"On the books, they may not have inventory. But their suppliers have parts," he said. "There's this issue that has been shifted around in the way direct guys can shift things around. It's somebody's problem, so this is Gateway's way to boost sales at the last minute before the Christmas goose."

PC makers have watched inventory build in part because of slowing sales going into the holidays. Market researcher PC Data on Friday reported that retail PC sales were down 17.5 percent in November compared with the same period last year. That's much worse than the preliminary estimate of 12 percent.

The industry average for PCs sitting on dealers' shelves now is about 7.6 weeks--almost double normal levels--according to market researcher ARS. Compaq is grappling with as much as 10.5 weeks of stock on dealers' shelves and Apple with about 11 weeks.

"What Gateway is doing stresses just how dire a situation this holiday season is for PC manufacturers," Sargent said. "This indicates this holiday season is the biggest missed expectation-wise we've ever seen."

While he believes Gateway's action is "an inventory play," Gartner analyst Kevin Knox said he "fundamentally agrees with Gateway stocking stores during the Christmas season."

Knox said that offering some systems in stores is smart, particularly given how unreliable shipping can be during the holidays. But he emphasized, "If this becomes a permanent thing, that becomes a major concern."

PC Data analyst Stephen Baker concurred. "It makes sense to get the product closer to the customer," particularly during the holidays, he said.

Gateway was ranked No. 3 in U.S. consumer PC sales during the third quarter, according to IDC. The PC maker captured 14.6 percent market share behind HP and Compaq, which were virtually tied with about 19.7 percent share each.

Three PC models will be available at Gateway Country stores. The $799 Essential 700 features a 700-MHz Celeron processor, 64MB of RAM, 10GB hard drive, CD-ROM drive and 15-inch monitor; consumers can also get a free color printer or upgrade to a DVD drive.

The second model, the Essential 866 Digital Photo PC, comes with an 866-MHz Pentium III processor, 64MB of memory, 10GB hard drive, CD-RW drive and 17-inch monitor for $1,299.

The high-end model is the Select 1000 Digital Music PC, selling for $1,599. It features a 1-GHz Athlon processor, 64MB of RAM, 40GB hard drive, 32GB Nvidia GeForce2 MX graphics card and 17-inch monitor.