Gateway closes all 188 stores

DSN Retailing Today, April 19, 2004 by Laura Heller

POWAY, CALIF. -- Gateway stores are now just another footnote in retail history. The company shuttered all 188 units on April 9, barely more than a week after announcing its exit from the retail realm.

The move was hardly surprising. The stores struggled almost from the minute they opened, switching formats and adding new merchandise and services. At its peak, the company operated more than 280 units, but closed nearly 100 of those in 2003 to focus on remaining units before entering the consumer electronics category last year.

"Doomed from the start might be the best description," said Stephen Baker, director of industry analysis, NPD Group. "The stores were always hobbled by the fact that Gateway never really put the requisite thought or planning into it to make the leap from being a seller to a retailer."

Initially, there were no products for sale in the actual stores. Rather, Gateway used the locations as showcases for their direct-sales model, offering customized units in the same way Dell operated. "They traded a low-cost transaction channel--the Internet--for a high-cost transaction channel-retail--without getting the benefit of that retail channel," said Baker. By the time Gateway had remerchandised the stores with product, Internet penetration had increased and more customers were willing to buy online.

Gateway's line of CE products has been well received, with its plasma TVs and digital cameras among the best sellers in these categories in 2003. But the diversification did more to cloud the company's business model than anything else, according to Baker.

"The fourth quarter [2003] numbers in CE were not particularly huge," he said. "They gave up the PC business to go there, [but] it's tough to build a business based on selling flat panel TVs. Everybody is selling them."

The acquisition of Emachines in January for $266 million was Gateway's bid to get back into the PC market and reach more consumers. The two companies combined now form the third-largest PC manufacturer in the nation. And with that, it was just a matter of time before the stores' existence was put to the test.

Emachines ceo Wayne Inouye took over as the top executive for the combined companies and Gateway's founder Ted Waitt stepped aside, remaining as chairman. Inouye was vocal from the start about his reticence to continue operating Gateway-owned stores. But perhaps more importantly, existing CE retailers were vocal about their reluctance to sell products made by a company they viewed as a rival retailer.

Best Buy vice chairman and ceo Brad Anderson diplomatically said during a conference in New York in March that the Gateway/Emachines connection was "troubling."

"If you're going to make a decision to sell through third parties in the CE business, there are a couple of parties you don't want to anger, Best Buy is one of them," said Baker. "The fact that Best Buy was willing to go out there and say that, that says something."

Regardless of the catalyst, Gateway, now unencumbered by retail operations, is free to pursue these much needed distribution channels. Although of press time, the company had yet to make any announcements or even comment publicly on its decision to close stores, Baker was willing to speculate. "Very soon, I think, we'll hear about some distribution deals to replace that business."