Competitive Intelligence

Gateway Closes Retail Operations, Reflecting Influence of Acquired eMachine’s Management

By the end of April, Gateway will close down its 188 retail stores and lay off 2,500 employees as the shakeout of the acquisition of eMachines continues, even while the company hopes to expand its retail distribution options both in the United States and around the world as their own stores are shuttered.

I expected such a move to occur sooner than later, as the $290 million merger was consummated by last week's executive reshuffle that saw most of the management team taken over by former eMachines staff. Here's an excerpt from eWEEK.com:

As part of the acquisition, Gateway founder and CEO Ted Waitt stepped aside and let eMachines CEO Wayne Inouye assume the post. Waitt will remain as chairman.

Last week, Gateway announced a new management team populated primarily by eMachines executives. At the same time, the company announced that several of the executives brought in by Waitt over the past year would leave Gateway.

Earlier this week, the company announced it was moving its headquarters from Poway, in suburban San Diego, to Orange Country, near eMachines' former Irvine, Calif., base.

Industry observers had said even before the acquisition that Gateway's stores were a double-edged sword for the company. While they offered a place for Gateway to demonstrate its wares, they also represented an expense that many competitors, such as Dell Inc. didn't have to carry.

Gateway had closed about 90 stores over the past couple of years as it struggled to return to profitability, but last fall it unveiled the first of its refurbished stores.

Gateway executives at the time said the stores played a critical role in the company's push to move beyond its PC making routes and into the role of a systems integrator, offering a wide array of consumer electronics, from digital cameras and personal digital assistants to plasma TVs. The stores also represented a way of displaying its growing list of enterprise products, such as servers and storage devices.

In December 2002, Gateway started a program in which the combined computing resources of the thousands of PCs displayed in the stores—most of which sat on shelves unused—were pooled together to create a grid. Customers could access the compute power to run data-intensive applications.

At the time of Gateway's purchase of eMachines, both Waitt and Inouye touted the synergies that would be realized by combining Gateway's direct sales model with the indirect model of eMachines, which sells its products though such retail outlets as Best Buy and Circuit City. Following the announcement, many retailers that sold eMachines products reacted negatively, complaining that they would have to compete against the Gateway stores.

However, at the January briefing with reporters and analysts on the deal, Waitt was questioned repeatedly on that indirect model's impact on Gateway's own retail stores. There were no plans to start selling eMachines products in Gateway's stores, he said. "We're going to try to minimize any conflict between those two" sales channels, Waitt said at the time.

In the words of analyst Rob Enderle: "This remains a textbook approach to a leadership problem; bring in a new team, intact, so that they can hit the ground running. The announcement of the closure, the layoffs, and the executive office move is consistent with a team that doesn’t need to figure out the landscape before making critical decisions." In that respect, Gateway is set now to pull away from its troubled recent past. Hard decisions are made all the more important when the management team has the intestinal fortitude to acknowledge past problems and fix them. Ted Waitt couldn't do that; let's hope Wayne Inouye can.

- Arik