Gateway: Cost-Cutting, Refocusing Will Lead to Profitability

CEO Wayne Inouye shares with financial analysts his plans for bringing the PC maker back to health.

NEW YORK—Almost six months into his new stint as president and CEO of Gateway Inc., Wayne Inouye came here on Monday to outline for financial analysts his plans for bringing the PC maker back to health.

Those plans include a mix of aggressive cost cutting—the company is still on track to reduce headcount to fewer than 1,900 people by the end of the year—growing the markets for Gateway-branded products and refocusing its product road maps around its core PC business. If all goes well, that will result in Gateway—which has suffered through multiple losing quarters over the past few years—reaching profitability by the fourth quarter.

In a morning-long meeting with analysts, Inouye and other Gateway executives rolled out a plan that includes leveraging the synergies between Gateway and eMachines products, particularly in the retail space. Gateway bought eMachines Inc. in March for about $290 million. However, with Inouye taking over from Gateway founder Ted Waitt as CEO, it has been eMachines corporate culture having the greatest impact on Gateway. Inouye was eMachines CEO at the time of the acquisition.

Key among the moves since the merger has been Inouye shutting down Gateways 188 retail stores and reaching agreements with several major retail outlets—from BestBuy Co. Inc. and CompUSA Inc. to Office Depot Inc.—to carry Gateway-branded products on their shelves. Also, more than half of the executives—including Inouye himself—on Gateways new management team have retail experience on their resumes.

/zimages/4/28571.gifRead also "Gateway Expands Retail Presence."

The electronic retail stores enable Gateway to greatly expand the number of outlets where consumers can buy Gateway products and to leverage the marketing money that retailers put behind their products. It also means working closely with the retailers to ensure those products remain in the stores.

"You have to earn your place on the retail shelves every day," Inouye said. "Its hard to do, and retailers have all the power in the relationship because they have alternatives."

Still, it appears to have worked, he said. In the first week of Gateway products being sold through retailers, the company garnered 8 percent unit share. "We have a lot of retail experience, so we have a sense of what we need to do in retail," he said.

In addition, Gateway will continue with its dual-product strategy of marketing eMachines desktops and notebooks to the value market, while Gateway products will remain the higher-end premium choice. This distinction of the brands will be a differentiator for Gateway against such competitors as Hewlett-Packard Co., which Inouye said has been hobbled in its ability to give customers a clear idea of the difference between HP and Compaq products.

"They have two brands sitting right on top of each other," Inouye said. "Whats the difference [between HP- and Compaq-branded products]? As a consumer, why should I buy one brand rather than another? Our plan is to keep it distinct."

Other areas in which the company will integrate Gateway and eMachines products will be through common support services for both brands and through utilizing common components where possible.

The company also is getting out the business of manufacturing the products, Inouye said.

Before the acquisition, Gateway manufactured about a third of its products, said Greg Memo, senior vice president of platform development and operations. By the end of the year, Gateway products will be manufactured by ODMs, a move that should reduce Gateway costs by 14 percent. Gateway will continue to design and support the products, he said, but there will be "no more internal manufacturing."

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