Gateway returns to profit on CEO's stabilizing strategy

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It took five advertising agencies, three CEOs and a $290 million merger with eMachines, but Gateway has finally returned to its computing roots. Since 2000, the No. 3 computer seller in the U.S. has been accused of lost identity and flip-flop business strategies.

But 2004 saw steadying measures enforced by CEO Wayne Inouye, including the closing of its 188 retail stores, reduction of the employee roll by 40%, a scale back of its push into consumer electronics and the hiring of a raft of new talent including Senior VP-Marketing Cathy Stauffer from West Coast retailer The Good Guys.

confusing

The changes resulted in Mr. Inouye, the former CEO of eMachines, being able to announce at least pro forma gains in the third quarter, after almost three years of reports in the red.

"They changed their business strategy so many times that it just got confusing," said Roger Kay, IDC. "Now under Mr. Inouye, they've finally hit a period of steady strategy. ... What they need to do next is put out whatever message they've got and stick to it. It doesn't have to be dramatic, but they have to stick to it."

That message seems to be fairly simple: Gateway is a PC company with a wide range of PC products, from low-cost, standard eMachines models at retail to highly configurable and personalized business computers sold direct by the Web or phone. "We're a PC company first. Not a consumer-electronics company and not just a consumer PC company," said a Gateway spokesman.

And after more agencies than years since 2000, Gateway has also settled on Crispin Porter & Bogusky, Miami, to relay its personal computing message. Aegis Group's Carat will handle media buying, the Gateway spokesman said. New advertising is not expected until early 2005, although a few smaller campaigns will bow before then.

Crispin, backed by MDC Partners, faces a tough challenge. Gateway has not only struggled financially, its marketing strategy suffered while executives wrestled with the business issues connected to the acquisition of eMachines.

While Gateway is not yet ready to comment on its new advertising, it will likely move away from the folksiness of the old Gateway advertising. (Remember the talking cows in 2001 that gave founder and now chairman Ted Waitt ideas on running the company?)

"Personal computing is a very low-margin environment, but what it really comes down to is good execution," said Gartner analyst Charles Smulders. "This is a big change for them, making consumers first as a priority."

Gateway's strategy revolves around the two brands: Gateway as the premium product line, and eMachines as the value line with both sold at retail, but only Gateway sold direct. The Gateway line also forms the core of Gateway's professional line of business that sells machines to government, educational, and corporate entities. The company hasn't completely forsaken consumer electronics, but has scaled its efforts back to products such as plasma screens and MP3 players that are "converged products." Retail channels, initially forged by eMachines, were expanded to include deals with big box retailers like Best Buy, CompUSA and Office Depot to resell its wares.

`amazing they've lasted'

Before Crispin won the business officially last week following contract negotiations, Publicis Groupe's Leo Burnett held the account, but only since March 2003. And a succession of agencies preceded it: Arnell Group, New York, which had it for about six months; Siltanen/Keenan in El Segundo, Calif, had it before Arnell for about a year; and Gateway itself had handled the account in-house before Siltanen, after parting with Fallon Worldwide, Minneapolis, in early 2001.

"In one sense, it's amazing they've lasted this long with all the management changes, constant re-focusing and incredible competition in the space," said Tim Bajarin, president of Creative Strategies. "What Wayne has done is look at the entire spectrum of what Gateway was and said `We need to get back to its roots in, that the most important thing is what we do best and that is make low cost, quality PCs.' The challenge is the communication."

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