Gateway Shuts All Stores, Cuts 2,500 Jobs

Gateway has said it will close all of its remaining retail stores, putting some 2,500 people out of work and driving the final nail into the coffin of an ambitious but failed approach to selling computers.

The additional layoffs -- which amount to nearly 40 percent of Gateway's remaining workforce -- are expected to come quickly, with all stores shuttered by Friday, April 9th.

The moves are aimed at completing an almost total overhaul of the company, which was founded by former CEO Ted Waitt in 1985. After a sharp rise to the upper echelons of the PC market, Gateway was hurt by the recession and languished in its return to profitability. The company has posted losses in 12 of the past 13 quarters.

Personal Imprint

The store closings are one of the first acts of new CEO Wayne Inouye, the former chief of eMachines, who took the reins at Gateway after that company bought eMachines last month.

Although Gateway was at the forefront of the trend toward consumer electronics, making an early splash with its high-end plasma televisions, analysts have been calling for more to be done to bring the company's cost structure under control, enabling it to compete with Dell and Hewlett-Packard (NYSE: HPQ).

IDC analyst Roger Kay said Gateway's ability to find its strength and gain a foothold against the competition was severely hampered by its sprawling operations. Bringing those costs in line will pave the way for Gateway to plot a new strategy, Kay told the E-Commerce Times.

"Obviously, low-end PCs will be one part of that strategy, but what they decide to do within the enterprise space will determine whether they can continue to be a player there or not," Kay said.

Shedding Jobs

Gateway announced as recently as early March that it was slashing 1,000 workers as part of ongoing cost-reduction efforts, and the company did not rule out adding more layoffs to the tally when it maps out a strategy for integrating eMachines' operations and employees.

In the aftermath of its latest move, Gateway indicated it will rely more heavily on direct channels, including catalog and online sales, to reach consumers.

"It's something that a lot of people have been calling for -- a total severing of the old business model," Gartner (NYSE: IT) analyst Leslie Fiering told the E-Commerce Times.

At one time, Fiering noted, Gateway's costs for building and selling a computer were as much as three times higher than Dell's, making it virtually impossible for Gateway to compete head-to-head with the PC leader.

Investors reacted with glee to the news, sending Gateway shares up 16 percent to $6.25 in early trading Friday.

However, the move was not without its detractors. In a report, Prudential Securities said Gateway is giving up its lone unique attribute, hurting its ability to differentiate itself in the harsh PC marketplace.

The Big U-Turn

Faced with steep financial losses that started in late 2000, Gateway first tried to curtail its retail endeavors without ending them completely, strategically closing Gateway Country stores in batches over the past two-plus years.

However, investors and analysts repeatedly called for more action to streamline the company's cost structure so that it could compete on price with more aggressive competitors, such as Dell and Hewlett-Packard.

Changing Channels

Gateway is not giving up entirely on selling computers at retail outlets. In fact, through its purchase of eMachines, the computer maker gained a foothold in some retail stores. The company also has indicated it is working to find other stores willing to stock Gateway machines on their shelves.

Gateway said most of its walk-in service contracts with customers have expired -- the company stopped selling that option nearly two years ago -- and added that customers still can get live support and repair help via telephone.