Dell's New Guise Could Be Gateway's Demise

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While the rest of the PC industry prepares to sludge through another tumultuous year, Dell Computer is making a stand — at Sears .

Best known for its direct sales approach, the Round Rock, Texas-based computer maker Thursday said it is branching out even more through a new contract with the retail giant. The trial relationship initially targets 10 Sears stores around Austin, Texas, where Dell will set up a store-within-a-store with its merchandise and have to pay for space.

“We see it as another marketing vehicle to extend the direct [sales] model,” Dell senior vice president John Hamlin told the Wall Street Journal.

Dell is also reportedly recommitting to its kiosks in other locations such as Jusco-brand supermarkets in Japan.

“Clearly what Dell wants to do is explore the market to see how they can best exploit it,” Deutsche Bank Securities analyst George Elling told internetnews.com. “If the experiments with Sears the kiosks are successful, I don’t know that they would open up their own stores but certainly this is a toe in the water.”

The strategy seems to be working, at least in the short term. Since they began the kiosk strategy, Dell has gained world-wide share of home-PC shipments over rivals like Hewlett-Packard . Research firm International Data Corp. reports Dell’s slice of the pie increased 11 percent in the third quarter of 2002.

Other PC-makers trying the brick-and-mortar approach have not had as much success. Cupertino, Calif.-based computer maker Apple Computer , which sells its wares in various retail stores has had a slow but steady build of its stores despite its 5 percent industry market share.

And then there is Gateway .

The Poway, Calif.-based computer maker, which supports Gateway Country Stores, has been expanding into selling other products besides computers including digital cameras, video recorders, and MP3 players.

Wednesday, the company issued its fourth quarter earnings for 2002 to the chagrin of investors who saw Gateway post a loss per share of $0.22. Gateway execs said the loss was tied into a previously announced partner dispute with AOL , but the outlook for the company has not been good.

Gateway was particularly hard hit this year saying its average PC unit price fell to $1,467 in the fourth quarter from $1,533 in the third quarter spurred by price wars from competition like Dell as well as seasonal promotions.

For 2003, Gateway is keeping relatively quiet except to say it is preparing for a “no growth environment,” unfortunately, management did not articulate a strategy as to how they plan to accomplish this. During the conference call Gateway CFO Rod Sherwood said the company plans to evaluate more than 120 store leases.

The recommendation from analysts — “close a significant number of its Country Stores.”

“One of our chief concerns with the Gateway story has been our belief that the company is limited by its lack of scale and high fixed cost base (think Country Stores) to compete solely on price with its Wintel competitors,” said Elling.

While Deutsche Bank would not begin to speculate how many stores would need to be closed to keep Gateway from getting into more financial hot water, Elling said “the outlook and visibility remains relatively cloudy for the PC space in general, and Gateway in particular.”

And if Dell continues to see success in more retail outlets, companies like Gateway are certainly going to have their work cut out for them.