Gateway closes its doors

Gateway announced late Thursday that it will close its retail stores next week and lay off about 2,500 employees associated with the shops, or nearly 40 per cent of its work force.

The company will continue its direct-sales strategy but plans to shut its 188 stores on 9 April. Gateway recently acquired eMachines, and following the closing of the stores, the combined company plans to lay off 2,500 - 38 per cent - of its 6,500 employees. Employees will receive severance packages. The company said it will provide more details about the impact of the closings on its revenue and costs when it announces its first-quarter results 29 April.

The store closings were not unexpected. Analysts, who had been theorising that the retail outlets were on the chopping block for weeks, said the stores could have been a liability for Gateway's efforts to form relationships with third-party retailers, which could carry Gateway-brand PCs and consumer electronics gear.

"Speculation has been swirling around the closings, and looking at the revenue and number of employees at each company, it was clear what they had to do," said Sam Bhavnani, a senior analyst at research firm Current Analysis.

Bhavnani said that in 2003, Gateway had revenue of $450,000 per employee, totaling $3.4bn with 7,500 employees. That's a far cry from eMachine's nearly $8m in revenue per worker, with $1.1bn in overall revenue and 138 employees.

Costs were dragging the company's revenues down, Gartner analyst Charles Smulders said.

Dell's sales and administrative expenses came to less than 10 per cent of revenue in the fourth quarter, while Gateway's came to 21 per cent. The stores can't be the cause of all of the additional cost, but it clearly added drag, Smulders said.

"It is absolutely the right thing for them to do," he said.

There was also a note of caution. Moving too quickly to close its stores without a method of replacing the revenue the outlets generated would prove disastrous for Gateway, the analysts said.

Smulders expects Gateway to lean more heavily on store distribution.

"What is clear is that the new CEO is looking at ways to use his retail background to find alternative distribution for Gateway," Smulders said.

The store closings mark the latest chapter in a series of unconventional moves that began when Gateway first started selling PCs directly.

Gateway opened its first retail stores in 1996, when it was experimenting with a number of ideas to expand market share. Gateway was the first large PC maker, for instance, to offer its own branded internet service. It also created the YourWare program, designed to allow the company to get into services.

The driving force behind many of these concepts was to create tighter bonds - and recurring revenue streams - with its customers. The stores were initially successful in driving revenue, according to analysts at the time, and at one point, Gateway had more than 300 stores.

But they were also controversial.

Michael Dell, in a 1999 interview, said his company wasn't interested in its own retail outlets. After two years, revenue from retail outlets tends to hit a plateau, he said.

Having a physical presence across the United States also meant that Gateway had to apply sales tax to its online sales.

Analysts at IDC, though, have recently noted that direct sales may be hitting a plateau of their own. Direct sales now account for between 50 per cent and 55 per cent of PC sales in North America, but the figure is not climbing the way it used to. The push toward consumer electronics may be driving people to seek buying advice in stores, a recent IDC paper speculated.

Gateway is in the process of moving its headquarters from the San Diego area to southern Orange County, California.

CNET News.com's Michael Kanellos contributed to this report.

Richard Shim and John G. Spooner write for CNET News.com