Gateway Bombs During Holidays, Plans Restructuring

With another disappointing holiday season behind it, PC maker Gateway announced this week that the company will implement its second major corporate restructuring in 2 years and continue its attempts to return to profitability. Gateway cofounder Ted Waitt, who reassumed the CEO title again when the company began floundering 2 years ago, originally scheduled this past holiday season as the turnaround point. But even though sales did improve somewhat compared with the previous year, net income took a nosedive yet again.

Gateway's problems aren't unique. In a struggling market that Dell dominates, most PC makers continue to lose money. Gateway's market share--once more than 9 percent--now hovers at about 6 percent. And Gateway's revenues during the past 3 years have fallen by more than half to $4.2 billion in 2002. One saving grace for the company, however, is its on-hand cash--about $1 billion, which might help Gateway weather the downturn and absorb the cost of another restructuring.

Gateway's mimicry of Dell's successful low-cost, high-volume sales strategy hasn't helped. Waitt will likely now take a different approach and use the company's 272 retail stores to drive complete-solution PC sales, which include digital devices such as cameras and scanners. Gateway's costly plasma-display screen products--massive flat panels with an average price of $4000--sold out during the holidays, leaving the company with a 2-month backlog but also with a small ray of hope for its new strategy. "We took a huge percentage of \[the plasma TV\] market," Waitt said. "It says the Gateway brand is very strong, and can scale to other \[non-PC\] products. We're going to leverage the assets of our brand, our channel and business model."

So how far in the future is Gateway's turnaround? Even Waitt won't hazard a guess. Like many PC makers, Gateway can only hope that the murmurs of an economic turnaround prove real. In the meantime, market-leader Dell continues to mop up the competition and the market share.

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