By Mike Freeman
UNION-TRIBUNE STAFF WRITER

July 18, 2003

LAURA EMBRY / Union-Tribune In revamping its retail stores, Gateway has changed its product mix and its corporate image, eliminating the once-familiar cow-spotted boxes from its signs.

At Gateway's revamped Mission Valley retail store, there's little doubt that the money-losing computer maker sees its future in living rooms, not on computer desks.

Television screens dominate the store, which officially opens today and is the first of the company's 192 outlets nationwide to receive an image make-over.

While Wall Street analysts have questioned the high cost of operating retail outlets, the Poway company has made the stores a key element of its turnaround strategy.

Gateway aims to transform itself from being strictly a direct-to-consumer computer maker to a "branded integrator," selling not only computers but also consumer electronics products ranging from TVs to digital cameras.

It also plans to plug into the emerging digital trend of linking computers to other devices in the home so that, for example, digital pictures stored on a computer upstairs can be displayed on the television screen in the living room via wireless connections.

It's a bold move that has Gateway straddling two hyper-competitive industries.

"Only a computer maker would go into consumer electronics thinking it was a better market," said Doug Fleener, a retail consultant and former director of retail operations for speaker maker Bose. "Best Buy has just been on a tear. Gateway definitely has a great challenge ahead of it."

But the company, which has lost money in nine of the past 10 quarters, probably has little choice.

Profit margins for computers have plummeted in the wake of cutthroat price competition. Gateway has been losing market share to larger rivals such as Dell and Hewlett-Packard.

Last year, Gateway slipped from the nation's third largest computer maker to fourth. It lost $298 million on sales of $4.17 billion, and expects to lose money again this year.

To stabilize its business, Gateway has turned to consumer electronics, including many products it will sell under its own brand name.

Profit margins on consumer electronics range from 25 percent to as much as 40 percent, according to analysts, while profit margins on computers are generally less than 10 percent.

Gateway hopes to boost its noncomputer revenue to 25 percent of total sales this year, 32 percent in 2004 and 40 percent by 2005.

Under Gateway's new store format, its folksy cow theme is history. Faux silos, the centerpiece of many Gateway stores, have disappeared. In their place are flat-screen TVs, speakers and DVD players surrounded by sofas to mimic the typical living room.

In the remodeled stores, 60 percent of the merchandise is consumer electronics. The company expects to have all its stores renovated by the Christmas season.

"We are making the transition from a PC showroom to an overall retail business," said William Parker, a former Banana Republic executive who is president of Gateway's retail operations. "It's something that most folks cannot do – take the PC and use it with all these other products to make technology easy and friendly for our customers."

Last winter, Gateway began its foray into consumer electronics market with a big-screen plasma television priced at $2,999. It was the first plasma priced at less than $3,000 and managed to gain the market share lead in plasma TVs.

Yesterday, Gateway unveiled an expanded lineup of digital TVs. It will sell two liquid crystal display models, an 18-inch for $799 and a 20-inch for $899.

It also extended its line of plasma TVs with a $6,999, 50-inch high-definition version and a $3,799, 46-inch enhanced-definition model.

While those prices are low, analysts doubt that Gateway can compete head to head on price with the likes of Best Buy and Fry's on all products.

"They introduced the plasma TV and had great success with that single product, but that doesn't make you a consumer electronics retailer by doing well in one category that happens to be hot," said George Whalin of Retail Management Consultants in San Marcos.

Whalin thinks that Best Buy, Fry's and Circuit City buy merchandise in such bulk that they can sell at lower prices than Gateway. In addition, the company is not well-known among consumer electronics buyers.

"Gateway has brand recognition in the PC industry," said Alan Promisel of IDC, an industry research firm. "Their turnaround strategy is to sell more consumer electronics devices. That market is saturated with a bunch of companies. And Gateway is going in with a lack of brand recognition in a market that it's not really familiar with."

But Robert Tracy, senior financial analyst with Apogee Research in New York, thinks Gateway's strategy is intriguing. He said the company isn't trying to compete with Best Buy or Fry's.

"They're going after a different demographic," he said. "They're looking for somebody who is a little more affluent, somebody who is willing to pay a little more for a knowledgeable salesperson rather than a teen-ager to guide them through the merchandise."

Tracy said technology-savvy buyers probably will go to Best Buy for lower prices.

"But what about the great mass of non-tech-savvy consumers who still can't figure out how to program their VCR, much less how to link a digital camera to a PC," he said. "For them, a trip to a Gateway store could provide not just the equipment, but also the training and any other peripheral gear they might need."

Fleener, the former Bose executive who now works for Dynamic Experiences Group in Lexington, Mass., said the key for Gateway is execution.

"I think there is an opportunity for them if they really execute it well on the floor," Fleener said. "I think the challenge will be that they've given themselves a pretty short time line. You really have to execute through the salespeople. And that's going to be a big transition for those employees."