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Gateway Gains Market Share; Seeking Profits Next



BY ANDREW SIMONS

Irvine-based Gateway Inc. is showing signs of progress on a key plank in its turnaround strategy: selling more computers through big retailers.

Thanks to sales at Best Buy, CompUSA and other big chains, Gateway’s share of the PC market is up 13 percent in the past year, according to market tracker International Data Corp.

The company counted 6 percent of the PC market in the second quarter, up from 5.3 percent a year earlier.

Gateway’s computer sales still are small compared with those of Dell Inc. and Hewlett-Packard Co. But the company is gaining at the expense of HP, its biggest rival in stores.

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Palo Alto-based HP went from 19.5 percent of the market to 18.7 percent in the past year.

A Gateway spokesman said the PC maker is “clearly taking share from (HP) at retail and our notebook growth is particularly strong.”

The gains are a payoff for Chief Executive Wayne Inouye, who came to power after Gateway bought his Irvine-based eMachines Inc. last year.

Inouye turned around eMachines by pushing sales through big retailers, such as Best Buy Co., where he worked earlier in his career.


New Strategy

Within weeks of taking over Gateway, Inouye shut the company’s own 188 stores and went after big retailers.

Gateway’s market share gains are “evidence that the eMachines acquisition is bearing fruit,” according to IDC.

“The company has really leveraged its acquisition of eMachines with the retailers,” said David Daoud, an IDC analyst. “They’re gaining momentum against HP.”

Inouye’s retail push and other moves , including thousands of layoffs , are aimed at stemming four years of losses and declining sales at Gateway.

In the first quarter, Gateway lost $5 million, down from $172 million in the year-ago quarter, right after it bought eMachines for nearly $270 million.

If Gateway does turn a profit in the second quarter, Inouye could have the makings of another turnaround on his hands. Analysts expected sales to come in 7 percent higher in the second quarter than a year earlier at $895 million. They also expected the company to break even or post a profit of up to $7 million, vs. a $340 million loss a year ago.

When Inouye took over eMachines in 2000, the discount PC maker had an abysmal reputation for customer service.

Eighteen months after taking over, Inouye reversed the company’s reputation with a free yearlong warranty, technical support and newly designed computers with quality parts.

Analysts say Inouye is gaining at Gateway on two fronts: with cheaper eMachines desktops and Gateway portable computers.

Gateway portables had as much as 28 percent of store sales in May, according to market tracker NPD Group Inc. Gateway desktops made up about 15 percent of retail sales for the month.

Last month, the company unveiled a new line of portable computers.

Desktops from eMachines, on the other hand, grabbed 27 percent of May store sales, but just a measly 0.4 percent of portables.


HP’s Problems

Gateway’s gains come as HP is wrestling with issues of its own.

Last month, the company said it is cutting about 14,500 jobs, or 10 percent of its workers, in the next year and a half.

The effort is aimed at cutting costs and staying competitive with Dell, which had 35 percent of the market in the second quarter.

Gateway could face the same problem.

Gaining on HP is one thing, but competing with Dell, which sells directly to consumers and businesses, is the company’s long-term challenge, according to analysts.

“But I would put aside Dell for now,” IDC’s Daoud said. “The focus right now for the Gateway team is the consumer space.”

Gateway is quick to point out some large deals it has signed recently, like one with the state of California detailed last month.

The company won three contracts to supply desktops, notebooks and monitors under the California Strategic Sourcing Initiative, an effort to consolidate buying among state agencies. HP and China’s Lenovo Group Ltd., which bought IBM Corp.’s PC business this year, also got pieces of the deal, estimated at $250 million.


Andrew Simons writes for the

Orange County Business Journal.

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