The Cow Comes Home

Gateway cleans up operations in face of sagging business

Ted Waitt woke up one morning in his mansion in La Jolla, Calif., and decided he had seen enough. The folksy, ponytailed 38-year-old entrepreneur — who famously founded Gateway in 1985 in an Iowa farmhouse — returned as the companys chief executive and would-be savior two months ago to try to the halt its downhill slide.

Gateway, the second-largest direct seller of PCs after Dell Computer, was smacked hard by the nosedive in demand for personal computers last fall. Now, the company doesnt expect to recover until the second half of 2001, after breaking even for the first two quarters.

How did Gateway derail? The bad news culminated in mid-January when the company announced a net loss of $94.3 million for the fourth quarter of 2000 and said that for the first time ever its core PC business wasnt profitable. Gateway recently restated its earnings, and said it would actually post a $128.2 million loss for the quarter. In light of its poor financial health, Gateway announced it would cut 3,000 jobs. The company is also looking to relocate its San Diego headquarters to another town nearby as part of its restructuring.

So after about a year in semiretirement, pursuing philanthropic activities, Chairman Waitt came back as CEO, bumping out Jeff Weitzen, a former AT&T executive. Waitt has explained the reason behind his return by saying, "I love this company." Thats undoubtedly true, but Waitt also holds more than 100 million shares in the company, the value of which decreased 70 percent last year as Gateways stock price plummeted.

However, even Waitt — who is as loved and admired at Gateway as Steve Jobs is at Apple Computer — might not be able to fully remedy the PC makers ailments. Some analysts say the fundamental factors underlying the PC business have changed forever, and nothing Waitt or anyone else does will return Gateway to the high-flying company that regularly saw 20 percent annual growth in the 1990s.

"Selling PCs is about as sexy as selling washers and dryers now," says Brett Miller, an analyst at A.G. Edwards & Sons.

The entire PC industry has been bloodied by slackening sales in recent months. Dell says it will lay off 1,700 employees, and Intel says it will eliminate 5,000 jobs by the end of the year. In Gateways case, though, the PC slowdown starkly revealed what Waitt would come to see as flaws in some of the companys business operations and its strategic direction.

The day after Waitt officially replaced Weitzen, Waitt overhauled Gateways executive suites, a housecleaning in which seven of Gateways officers left the company.

Among the changes: Waitt replaced his chief financial officer, John J. Todd, with Joseph Burke, a six-year Gateway veteran. He also brought back longtime friend Bart Brown as senior vice president of Gateways consumer division.

"Ted called and said, Im thinking of putting the band back together," Brown recalls. He adds with a tired smile: "You might think Im crazy to rejoin the band."

After 30 days of grim strategy sessions, Gateways new management crew emerged with an attack plan and with what Waitt calls "a sense of urgency." At a meeting for financial analysts last month in San Diego — the normally sunny southern California skies were, fittingly, darkened by storm clouds — Waitt outlined a series of steps to reduce Gateways cost structure and boost unit sales by cutting prices. But mainly, the theme of Gateways turnaround plan is a return its roots and values.

Back to the Core Product

Gateway, Waitt says, will refocus on selling PCs and improving its customer satisfaction, rather than selling bundles of higher-margin products and services that Gateway refers to as its "beyond the box" strategy. The emphasis on sales of printers, training services and other non-PC items had eroded the companys core PC business, he says.

"We have to be successful in the box business if were going to go beyond the box," Waitt says.

To cut costs, in addition to laying off 12.5 percent of its work force, Gateway has simplified its product lineup. Previously, the options available to a consumer looking to buy a PC resulted in literally 23 million possible combinations, a number that has since been reduced to several hundred. In its business PCs and laptops, Gateway previously offered close to 70 million configurations; that number is now down to fewer than 600.

Waitt says the cost benefits of simplicity will trickle throughout the business: Fewer components mean Gateway can deal with fewer suppliers. Fewer PC configurations mean sales reps can focus on selling a smaller set of products — and so on up and down the line.

In addition, Gateway plans to close some retail outlets. The company currently operates 330 stores in the U.S., as well as another 1,000 or so "stores-within-stores" in OfficeMax locations — an arrangement Gateway is also re-evaluating. The Gateway Country stores dont stock any actual inventory; rather, they act as showrooms for new products and allow customers to order PCs directly from Gateway. But some of the stores, the company says now, have not been worth the investment.

"We think 300 stores is about the right number," Brown says.

Gateway is also retrenching internationally. Last month it hired Martin Coles — who most recently was CEO of, a London group buying site that filed for bankruptcy — as senior vice president at Gateway International. Coles says Gateway will more selectively pick the overseas markets in which it will compete, starting with Japan and the U.K.

To boost sales, Gateway plans to counter Dells recent aggressive price cuts with its own across-the-board price reductions. While Gateway wont try to be the low-cost leader in the industry, it will stay within 5 percent of its competitors prices.

"In a lot of cases, we were just out of the game," Waitt says.

Gateway also wants to restore customer satisfaction levels, which have fallen below those of some of its competitors in the past year. First, Gateway revised some of its support policies.

For example, the companys support representatives had been telling customers who called with problems relating to third-party software that their warranties were void. Why? The purpose was to shorten tech-support calls, but Brown says that policy had the effect of defeating Gateways core mission to drive repeat and referral sales from its existing customer base. Gateways repeat and referral sales dropped from 50 percent of total sales in 1999 to 30 percent in 2000.

"We didnt treat our customers as friends in the past two years," Brown says. "Weve done some stupid things."

By midyear, Gateway will also roll out a new e-support service called Gateway Co-Pilot that will let technicians remotely view customers desktops over the Internet, using technology from On this front, Gateway is well behind: Dell has provided similar e-support capabilities for more than a year and a half.

The changes are all part of Waitts attempts to make Gateway the most trusted technology brand in the world. In a move emblematic of his leadership, Gateway is taking its advertising back in-house. Waitt showed rough cuts of a new advertising campaign, launched last week, that restores its longtime tagline, "Youve got a friend in the business." The ads feature Joe Cockers version of With a Little Help From My Friends and unscripted interviews with Gateway employees to re-emphasize the commitment to helping people.

"Youve got a friend in the business is a symbol of not losing sight of where weve come from," Waitt says. "We feel that line really, truly captures what Gateway is all about."

Ultimately, though, Gateways success rests on the assumption that the PC market at large will bounce back. If it doesnt — and analysts are uncertain that PC sales will continue to grow — Waitt may have more unpleasant decisions to make in the year ahead.