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Gateway changes stripes

On the back of record earnings, the second largest direct seller of computers will forge ahead with a strategy to expand sales at stores.

On the back of record earnings, the second largest direct seller of computers will forge ahead with a strategy to expand sales at stores.

Gateway will rely increasingly on selling PCs in stores, among other initiatives, as it moves to boost its presence in the more profitable small to medium-size business market and decrease reliance on the often unpredictable consumer market.

Some analysts think that stores owned by Gateway, called "Country Stores," will contribute the majority of the company's unit sales growth in 1999--and a fast growing portion of its revenue.

"During 1999, we expect the Country Stores to contribute 24 percent of total revenue and units, but 60 percent of total growth," said Salomon Smith Barney research analyst Richard Gardner in a research report issued today.

Gateway opened up more than 50 new stores during the last quarter, bringing the total number of Gateway-operated stores to 144. The company has also opened up stores in Europe, which executives said was partially responsible for a turnaround from a sales decline in the same period a year ago to a 20.9 percent increase in shipments.

The stores offer an opportunity for customers to browse and tryout all of Gateway's wares--something that direct sales companies have typically forsaken.

So why is a company known for selling computers directly to customers hoping to eventually open up to as many as 400 stores in the U.S. alone, mimicking rivals that offer PCs through retailers and resellers? In a consumer PC market characterized by incredible pressure on profit margins, the answer lies in Gateway's attempts to diversify its revenue stream.

While the company posted record profits of 81 cents per share for the fourth quarter of 1998, the company relied heavily on the consumer market to achieve those results. In a conference call with financial analysts yesterday, Jeff Weitzen, Gateway's president and COO, indicated that a significant portion of the quarter's sales came between November 15th and December 15th in typical holiday seasonal buying.

Stores to play bigger role at Gateway
The company grew at double the rate of the overall market, but with growth so dependent on the consumer market, executives continue to emphasize that they are going to use the Country Stores to target the small to medium-size business market.

"The [Country] stores have become very critical in the small business market," Weitzen told analysts. "A large portion of that market does want to touch and see products."

Weitzen noted that all of the company's stores now have "small business centers" that features the company's servers, notebooks, and desktops, along with networking equipment and third party software. Salespeople are also being specially trained to cope with the needs of this market, he said. Gateway absorbed server maker Advanced Logic Research back in June of 1997 which allowed it to enter the business market in earnest.

Rival vendors such as Compaq Computer, Hewlett-Packard are also beginning to look to the small business sector as a way to grow sales because large corporate accounts are becoming relatively saturated, analysts say.

Gateway's potential advantage in owning stores is that most, if not all, of the revenue associated with sales of higher margin service and support programs the company hopes to add will go straight to the company coffers. Also, the outlets highlight Gateway products but don't deal with inventory--systems are still shipped direct to customers--and Gateway doesn't have to operate the expensive marketing programs that vendors often employ to gain shelf space or premium sales locations. The company said that the stores cost no more to run than its traditional tele-sales operation.

Full-fledged service centers
Going forward, the company aims to turns the stores into full-fledged service centers where customers drop systems off for repair that is done on-site. This saves money on parts and other costs associated with shipping a system back to the factory for repair, which is the normal procedure for direct vendors.

"Efforts to target small business are paying off here," said research analyst Philip Rueppel with BT Alex Brown. By adding service capabilities and later on, classes that teach businesses on how to do network administration and setup, the company is well placed to take advantage of a market characterized by companies that are too small to have dedicated IS managers, he said.

Gateway's efforts to turn the stores into a one stop shop for small business customers is just the latest indication that a number of computer companies are looking to incorporate the efficiency of the direct sales models with the customer contact and support offered by the indirect model.

Compaq, for example, is selling PCs directly to customers through its Direct Plus program introduced in November. (See related story).

Dell prefers to be direct
Dell, which International Data Corporation said is tied with Compaq for the lead in the small business segment, is trying to buck the trend. While the company is expanding sales of components tied to PC sales--in effect, acting as a reseller--the company "wants to stay true to the direct model," said David Clifton, senior product marketing manager for Dell's small business group.

Dell, for instance, isn't hiring its own personnel to do the profitable act of network installation. Technicians from Wang Global will do the on-site work, while Dell will handle acts as a first point of contact for billing and support. Like Micron (through its Micron University program) and Gateway, selling training programs may be the next addition to the service lineup for Dell.

"We are looking into ways to address training needs, " said Clifton, but unlike Gateway, Dell will likely stick to the Internet. For now, the company plans to expand its free "Breakfast with Dell" seminar series, which covers topics such as showing small businesses how to deal with the Y2K problem, to a monthly format.