June 11, 2004 5:20 AM PDT

Best Buy to peddle Gateway gear

Gateway will establish what could become its retail beachhead later this month, when Best Buy begins selling a limited amount of Gateway-brand consumer electronics gear.

Best Buy will sell Gateway-brand MP3 players, LCD (liquid crystal display) TVs and home theater equipment left over from the PC maker's retail stores, which closed in April. Some of the goods will appear online only, while others will also be sold in Best Buy stores, a Gateway spokesman said.

"This initiative is a first step, but only a first step in exploring our relationship with many retailers," said Bob Sherbin, a Gateway spokesman. The products are at their end of life, which means Gateway will replace or retire them when the inventory is gone, he added.

But it's possible the deal will open other doors for Gateway, which acquired eMachines in March and closed its chain of retail stores in April. Gateway has since been working to forge agreements to place its PCs on retail shelves in time for the back-to-school season. The PC maker, whose retail presence had been limited to its own chain of stores, earlier this year acquired eMachines, whose low-price PCs are sold only via retailers, in order to boost its PC sales.

Gateway is still discussing sales of its other products with Best Buy and other retailers, Sherbin said. But Gateway CEO Wayne Inouye has said retail will become a pillar in the company's consumer PC business strategy.

Despite being expensive to run, the Gateway stores generated about $300 million in quarterly revenue, the company has said. Thus Inouye, who took the helm at Gateway with the completion of the eMachines merger, aims to use relationships with retailers to help replace and ultimately surpass the revenue generated by Gateway stores.

When it comes to PCs, Best Buy or any other retailer would likely start off with a limited number of Gateway-brand desktops and notebooks. Most likely, Gateway desktops would start at around $700 or $800, allowing those machines to augment Gateway's eMachines line, which includes several desktop models that range from $400 to $600, and at the same time offer an alternative to PCs from retail giant Hewlett-Packard.

Gateway has said that, going forward, it will market Gateway-brand PCs as its premium machines and pitch eMachines models as its low-price offerings.

This dual-brand strategy is not unlike HP's. HP markets its HP Pavilion desktops as premium, multimedia computers, while its Compaq Presarios are aimed at customers who are more interested in basic productivity, such as word processing, e-mail and Web surfing. Although the two computer lines are similar and sometimes overlap on features, Presarios tend to sell for lower prices than Pavilions, which come with more extras, such as photo-editing software.

For its part, Best Buy--the dominant PC retailer in the United States right now, according to analysts--is a natural partner for Gateway. The companies already have strong ties, emanating in part from Gateway's eMachines arm. Additionally, Inouye once served as a Best Buy executive.

Gateway, however, still needs to place its products in a number of other stores as well. Inouye has singled out Circuit City as another retailer the PC maker is pursuing. Analysts have said that Wal-Mart, CompUSA and others are also likely to be on his short list.

Gateway's surplus consumer electronics devices may also show up at other retailers as well, Sherbin said.

Still, it may not be that easy for the PC maker to break into retail. One executive at a large electronics retail company said recently that it was unlikely to immediately make room for Gateway PCs.

One of the challenges, the executive said, is that even though eMachines already has won a place on many stores' shelves, many retailers have already allocated space to other brands' higher-priced machines, making it hard for Gateway to edge in.

CNET News.com's Ina Fried contributed to this report.

 

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