Gateway closes stores, future strong for Apple retail

Gateway Inc. plans to close its entire network of 188 retail stores next week and lay off about 2,500 staff, the PC maker announced Thursday. Despite the downturn for Gateway, analysts believe the problems are associated with the company and not the larger retail market. Through its branding efforts, store locations and unique products, analysts feel Apple is well positioned in the retail market.

"I don't see any correlation between Gateway's shutdown and Apple's retail expansion," Jupiter Research Senior Analyst, Joe Wilcox, told MacCentral. "For Apple, its stores are as much about expanding brand awareness, offering a good Mac buying experience and building a stronger Mac community as they are about making money. For a number of reasons, including the locations chosen, Gateway wasn't seeing the same benefits."

The importance of store location is not something that has been underestimated by Apple. In a speech last month at the Morgan Stanley Semiconductor & System Conference, Apple Chief Financial Officer, Fred Anderson told the crowd that Apple had a different strategy then Gateway in the retail space.

"We do not have a Gateway strategy," said Anderson. "We're only interested in profitable stores" -- Apple's goal is not to saturate the market, he said. Anderson also indicated that Apple wants each retail location to be profitable within the first year of operation.

The Gateway stores will be closed April 9, Gateway said in a statement. It will continue to sell products directly to customers over the Web and by phone, and will seek to expand its presence in other retail outlets, the company said.

The move comes less than a month after Gateway completed its acquisition of PC vendor eMachines Inc. and installed a new chief executive officer, Wayne Inouye, who was previously eMachines' CEO.

For Apple, being different helps to easily differentiate the computer-maker's products from anything else on the market -- a problem that many Windows-based manufacturers have a hard time doing. Despite the fact that Gateway and Apple may have had similar in-store retail strategies, Gateway may not have been able to sufficiently differentiate itself from the competition to make a difference.

"Gateway sold few products at the stores, which were more technology showcases than cash-and-carry operations," said Jupiter's Wilcox. "Interestingly, like Apple, Gateway organized its stores around functions, like music and movies. But, like many of its competitors, Gateway faced a differentiation problem. Commoditization of hardware and use of Windows make many PCs look pretty much the same. By contrast, Apple products are easily identifiably as being different, whether by computer design or the operating system."

A spokesman for Gateway acknowledged that the concerns of its channel partners were a factor in its decision. "It's indicative of where we're heading -- we'll be putting a greater reliance on the retail channel and working to reduce our operating costs," said Gateway spokesman Brad Williams.

The job cuts amount to a 38 percent reduction in Gateway's total headcount, leaving it with about 4,000 employees. The vast majority of those to be laid off worked in the stores themselves, with the rest involved in their operation, Williams said.

Gateway will offer more details about its branding and channel strategy, and discuss any cost implications of the closures, when it announces its first-quarter financial results on April 29, the Poway, California-based company said.

Ted Waitt, Gateway's outgoing CEO, remains its chairman and its largest stockholder.

Gateway's revenue took a dramatic dive in the fourth quarter, ended Dec. 31, 2003, as its PC business slowed and it worked to reinvent itself as a provider of more general electronics gear. Revenue for the period dropped to US$875 million, from $1.1 billion a year earlier, the company said in January.

When Apple reported its results for the first quarter of its fiscal year 2004, which ended Dec. 27, 2003, the company recorded a net profit of $63 million. Apple noted that revenue for the quarter jumped 36 percent year over year to $2.006 billion -- a four year high.

For that quarter, Apple reported $273 million in revenue from their retail efforts, up 33 percent on the quarter and up 39 percent year to year. Apple's retail stores were responsible for moving 73,000 of the 829,000 CPU units sold in the first quarter.

An Apple spokesperson told MacCentral today that, to-date, Apple has had over 30 million people in it's 77 retail locations.

"Apple seems to have found the magic touch with respect to retailing," said Wilcox. "The experience shopping at an Apple Store is remarkably different than all other computer stores and many operations selling other wares. Store design, employee training and experiential selling -- meaning let people try the stuff out as long as they need to mill about the store -- are all major differentiators. Apple's long-term challenge will be gauging the appropriate level of expansion. In some ways, Gateway over expanded and ended up more in the real estate business than retailing."

James Niccolai contributed to this story.

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