February 28, 2001 11:30 AM PST

Gateway to drastically slim down its product line

Gateway executives told financial analysts Wednesday that the company's costs are too high and that it will drastically cut the number of computer configurations it sells.

"We feel we can make dramatic cost changes to our business," said Gateway CEO Ted Waitt, addressing the company's annual meeting for financial analysts in San Diego. "We've dramatically simplified our product line in the last 30 days."

The direct computer seller is in the process of reducing the 23 million combinations of computers it sells to hundreds of configurations, senior vice president Bart Brown told analysts.

"Product simplification is not something that's intended to limit," said Brown, who heads Gateway's consumer business. "The idea is we're going to do a better job of taking customers where they want to go."

Gateway also appears to be shifting back to primarily selling computers, after pursuing a strategy aimed at selling services and peripherals, so-called "beyond-the-box" revenue. Executives said Gateway will focus on selling computers first, instead of pushing a combination of products from the outset.

"There will be less of a bundling mentality and more of a selling mentality," Brown said.

The shift in strategy comes about a month after Waitt reclaimed the helm at Gateway and revamped the company's management team. Gateway has also said it will cut roughly 3,000 jobs as it restructures the business.

Under its new model, Gateway will focus its line on about 10 main configurations for desktops, while still offering the ability to add extras such as a larger hard drive or a bigger monitor. Gateway will also offer so-called trim packages, something similar to the options packages carmakers offer.

Using probability analysis, Gateway plans to determine which upgrades customers are likely to make in tandem, such as a rewriteable CD drive along with a flat-screen monitor. Those options will then be sold together.

Brown said it was very expensive to purchase so many components, test all the possible combinations and then try to help market all those options to consumers. In addition, Brown said, Gateway has been offering too many accessories. For example, it is currently selling more than a dozen digital cameras.

"That's not necessary," Brown said. "Our clients don't want to choose from 14 different cameras."

The company also plans to shift its focus away from its Gateway Country stores, although it will continue to use the retail outlets as a place for customers to get training and view the home of the future in action.

"We do believe that we should focus on our direct routes," Brown said. "We probably have enough stores."

Technology Business Research analyst Brooks Gray said the move should simplify things for Gateway and consumers, but runs the risk of alienating those who want the full ability to configure their machines.

"The most relevant aspect of this strategy is that they will be able to improve their cost structure, which is essential for Gateway to rebound its financial capabilities," Gray said. "With the competitive pricing environment, this is one action they needed to take to improve profitability."

Gateway executives also vowed to woo back customers.

Although Gateway used to derive half its business from repeat customers and referrals, Waitt said business has declined, forcing the company to spend more on marketing to attract new customers.

"We have to build our growth organically," Waitt said. "It doesn't happen overnight. It is going to take time."

The key, Waitt said, is establishing the lowest cost model and providing the best customer service.

"We feel we can win in this marketplace," Waitt said. "We feel we can win in the consumer market...There are some state and local governments and education markets we can win if we focus on one customer at a time."

Gateway is also looking for new ways to provide service, including a test program in which Gateway technicians go to customers' homes to help them set up their PCs.

"We haven't done a good job of taking care of our customers," Brown said. "We didn't treat our customers like friends."

Brown also said the company will shift from an effort to cut the time of each support call to a focus on solving problems on the first call.

"We've done some stupid things in the past two years," Brown said. He referred specifically to a practice of telling customers that if they had loaded third-party software, their warranty had been voided--a practice designed to shorten call times.

News.com's Joe Wilcox contributed to this report.

 

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