Best Buys Value Formula

By eweek  |  Posted 2004-04-18 Print this article Print

How did eMachines react to that tough love? Well fortunately, when we first went in there, HP had a huge premium on their systems, so way below the value formula, and that was why Best Buy was the first ones to pick up eMachines. And I think in the first month we sold 50,000 systems.
But you had to go back and rethink things when Wayne turned you down at first.
Well, fortunately I did [other business with Best Buy] so we knew of their value formula. So we did everything based on their value formula. So when we submitted the machines we passed the value formula. And this was public knowledge. It was not hidden from anyone. If you want to be a vendor of Best Buy, you have to fit into the value formula. And they continued this tradition all the way until the merger. Why would Best Buy have an issue with having two similar products at the same price? The reason is shelf space. They need the shelf space to have the quickest turnover. So if they knew the products werent going to sell, why bring them in? Why have them taking up space on the shelf when they know theyre not going to sell. Actually Wayne developed this formula because he had a hard time selecting what products to sell. He said, "I have 50 vendors approaching me, they all wanted to sell me 10 different SKUs." Well he has 500 to choose [from]. He [needed to] come up with a formula that was very objective, unbiased and helped him make his decisions. So he came up with this formula, and if you dont meet the number, you dont get in, period. And if you meet the number, even if he did not like you, he would carry you. Wayne is very business-oriented. So it came down to price and value. It all comes down to value. But price, too. Well, price is only a subset of the value. You have to consider the features, the product itself. So you cannot just say its $399, $499 or $599. At $599, we offer the best value. Ill give you another example. We consistently analyzed the market for something like DIY [do it yourself]. We can at any point in time tell you what it would cost you to build, lets say, a $399 system yourself. Normally, it would cost you $50 more to build it yourself. The higher end it goes the more premium is added. The more value it gets. So when you had your early dealings with Wayne, it made more and more sense to have him come in and run eMachines with those same philosophies. Yes, because we realized that the market had shifted to the point where we had to deal with people at Best Buy and Wal-Mart. They represent the consumer and tell you what the consumer wants. And Wayne keeps on saying this: "The consumer is very smart. You cannot fool them." So the value. You cannot overcharge them in the long run. We realized this situation, so when we looked for a CEO for eMachines, we never looked at people from the technology side. A lot of small businesses buy through places like Best Buy. Was there ever interest on your part or Waynes part down the road to get more involved with business customers? Well, that part, well leave that up to Wayne to answer for the Gateway side. But on the eMachines side, we were so small in the whole scheme of things. We had very little capital. And we had no equity, a very small bankline. We managed to do $1 million. So we knew that we needed to focus. So we were never interested in the corporate market because it was too costly to get into the market. Wayne is a very conservative, one step at a time CEO. So he was not going international for the sake of going international. Every step he takes, he plans, he gets ready, and then he does it. So eMachines wasnt as interested in the value proposition for the SMB as much as it was focused on the consumer? I need to clarify a little bit. We knew a lot of small businesses, actually, purchase their machines at retail. A lot of them would actually go to Best Buy and buy their machines. And so at one time eMachines even eliminated the rebate to accommodate those small businesses. Because the rebate only worked for the single purchase. So you go in there as a small business and want to buy five, but you dont get the rebate for five. Thats why Wayne eliminated the rebate for a short period of time—purely for the sake of those offices. Its not that we werent interested in them per se. It was just that we didnt have the capital to go after them. So, if we couldve, we wouldve done more for small businesses. Going back to the commodity issue, these days were seeing the computers next to the refrigerators at Sears, what do the next 10 years have in store for the computer? I call this the billion-dollar question. We know that one day the PC and consumer electronics will merge. Whether the TV will take over the PC or the PC will take over the TV, honestly, I dont know. And if you talk to different people, they will give you different opinions. But we all know that one day the TV in front of you will be a PC. Or the PC will attach to a big monitor to watch TV. I dont know myself, I only know it will happen. … The consumer has not clearly expressed an opinion on which it should go. So as long as the consumer has not expressed an opinion, we just sit and wait. Given that, where do you see Gateway down the road? This is a question I cant answer. You cant answer it, but you were one of the two principals driving the acquisition. Let me put it this way. I have 100 percent confidence in Wayne. Because he is really one of the best CEOs Ive ever seen. And Ted is also one of the smartest guys Ive ever met. With this combination, thats why I was willing to take a lot of share instead of cash. I told Ted at the time, Id rather take stock instead of cash because this way the company can reserve more cash for the operations, and at the same time Im betting together with them on the future. Check out eWEEKs Desktop & Notebook Center at for the latest news in desktop and notebook computing.


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