The rise of eMachines

System builder channel under threat as Gateway sniffs at the UK market through eMachines brand

PC manufacturer Gateway has sent a shiver through the system builder channel with news that it could soon return to the UK market to exploit the strong retail channel links of eMachines.

Gateway bought the budget eMachines brand in January in a deal worth $235m, instantly making it the third largest PC supplier in the US and number eight in the world.

To maximise the strength of eMachines' links with leading PC retailers, including Dixons in the UK, Gateway announced that its own 188 retail stores were all closed by 9 April.

The move, which will cut 2,500 jobs, is expected to reduce drastically Gateway's overheads. The decision to close its retail operations is also designed to placate eMachines' big retail partners in the US.

With no retail outlets of its own, Gateway will continue to sell via its website, but its PCs and newer consumer electronics items are expected to start appearing in large retail chains throughout the US and in growing eMachines markets such as the UK, elsewhere in Europe and Japan.

Matthew Wilkins, senior analyst at iSuppli, said: "It wouldn't surprise me to see Gateway cropping up in Dixons as it is still a well-known brand.

"It has a high profile with consumers, perhaps more so than eMachines, so it will be interesting to see how it handles brand management. In the end, retailers will sell anything as long as they make the right margins."

Gateway has been suffering in the PC sector for some time, changing tack in 2003 to build a business around consumer products such as DVD recorders, LCD panels, digital cameras and camcorders.

Although sales have been rising, it recorded big financial losses at the end of 2003.

Indeed, Gateway has had just one profitable quarter in three years. Closing its retail outlets is seen by many as a commitment to eMachines' low-cost PC production and strong retail model.

A statement by analyst Gartner said: "Gateway's numerous retail outlets are costly to maintain and inhibit the development of relationships with other retailers that view the stores and Gateway's e-commerce site as competition.

"By contrast, eMachines had revenue of $1.1bn in 2003 and has been profitable for nine straight quarters.

"The company has established long-term relationships with consumer electronics retailers in Europe [such as with the Dixons Group] as well as in the US."