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Gateway country, Part II
The company relaunches its retail operations in an attempt to reverse its fortunes. Will it work?
November 12, 2003: 11:09 AM EST
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - Gateway Computer, the company that rose to prominence playing up its homespun, dairy farm roots, now finds itself in the fight of its life and has pinned its hopes, in part, on retail outlets.

Just yesterday, CEO Ted Waitt launched a refurbished pilot Gateway retail store in New York City, the opening salvo in Gateway's battle to return to profitability and continue as an independent company.

Having watched its piece of the increasingly commoditized PC market get eaten up by Dell, Gateway spent the last few months reinventing itself as a consumer electronics maker. Since May, the Poway, Calif., company has introduced digital cameras, plasma screen televisions, MP3 players, and 69 other new products.

Now, with its sights set firmly on the living room, Gateway is transforming its 190 existing stores -- which used to sell PCs in a barn-themed Gateway Country setting -- into slick consumer electronics showrooms.

Back to retail

This isn't the first time Gateway has gunned for retail. The company launched 270 brick-and-mortar stores in late 1997, but quickly realized that Gateway PCs alone couldn't compete with big box stores like Best Buy and Circuit City, which allow customers to comparison shop.

As a result, the company closed 80 of the black-and-white cow-spotted shops in March and quickly began diversifying the product lines offered in the 190 remaining outlets.

The company's decision to diversify from the commoditized PC industry is seen by industry observers as a smart and necessary move. The company's share of the PC market is a measly 3.8 percent, placing it fourth overall, barely above Apple and well below the market leader Dell (which claims 31 percent), according to IDC.

When the company reports its fourth-quarter results early next year, investors will get their first glimpse of how well its carefully crafted transition from solid, Midwest-values PC maker to fast-moving consumer electronics firm is taking hold.

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The most recent results for the company, however, were pretty bleak. On Oct. 23, the company reported that its net loss almost doubled from the second quarter, and its loss per share nearly tripled since the third quarter of 2002. Not surprisingly, the company took a beating in the market, with its stock price tumbling nearly 25 percent the day the results were announced. It hasn't recovered much since.

The new Gateway

Now, with the holiday season upon us, the company is relying on its new retail strategy to help reverse its recent fortunes. After the bleak third quarter, when many of Gateway's competitors reported strong sales, the fourth quarter and the redesigned retail stores represent a make or break effort for the company.

"This is the emergence of the new Gateway," says Rob Enderle, principal analyst with the Enderle Group. "It's critical for them that the market see them as a new and vibrant company, as opposed to the perception that followed them at the beginning of the year, that this is a company that's going out of business."

Gateway is focusing its efforts on two fronts. First, it's offering its consumer electronics products at very low costs. Even though Dell largely drives pricing in the PC market, its influence in consumer electronics is far less profound. Gateway's digital cameras and plasma screen TVs have created a new floor for pricing in the market.

"I don't know anyone else offering [those products] at Gateway's prices," says Michael Gartenberg, an analyst with Jupiter Media.

According to a Gateway spokesperson, the company is confident that it can attain profitability at the low prices in part because of the savings it realizes through its direct sales model.

This might be the right season for Gateway's approach. "Holiday time is when consumers get out and are price sensitive and want quality," says Chris Chute, an analyst with IDC. "They don't necessarily want a high level of sophistication. [Gateway has] had some success with their plasma screen products."

Gateway's second front is in pushing interconnectivity among its diverse product line. The new stores will highlight the "connected home" concept, showcasing Gateway-branded entertainment and computer products and -- more important -- demonstrating how they can all interact.

The stores are centered around a "hearth," complete with couches and ottomans, letting consumers experiment with various networked products. Gateway hopes this interaction/upsell opportunity will resonate with consumers.

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"[Our retail stores were] PC showrooms before, with workstation displays," says Bill Parker, president and general manager of the retail channel at Gateway. "Now we've gone to a full retail store designed for the way people shop. We built the stores around the concepts of create, manage, knowledge, play, and relax."

With the general economy improving and a strong holiday season forecast, investors will likely ratchet up their expectations for Gateway's fourth quarter. The company has stated publicly that with the official unveiling of its new retail stores, its transition plan is complete.

If sales do not materialize and consumers fail to glom on to Gateway's version of a connected home -- and pronto -- 2004 will likely be a rough year for the company and its investors. Further clouding up the horizon for Gateway is the continued push by Dell and Hewlett-Packard into the consumer electronics space.

It remains to be seen just how far the company's new retail strategy will take it when it competes SKU-to-SKU against these computing monoliths. Unless Gateway executes its plan at or near perfection, 2004 might be the year the company loses its big city dreams and is put out to pasture.


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.