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Gateway Country Stores Silence Critics, Intrigue Others

As Gateway's new Manhattan flagship draws crowds, Apple is rumored to be considering a store of its own.

It's the night before Father's Day, and the electronics stores along New York City's 57th Street are rustling up business.

Radio Shack

is staying open late, and down the block, a



employee wearing a red-and-white uniform waves customers into the 50,000-square-foot superstore with flyers announcing current sale items.

But he keeps a close eye on the black-and-white sign across the street that boldly proclaims "Gateway Country." "I really like it in there," says the CompUSA employee, who naturally wants his name kept secret. "They do one thing, and they do it well."



spotted cow motif has spread far and wide from Sioux City, Iowa, where the company started as a direct seller of fast PCs 14 years ago. Since then, the company, which recently moved its headquarters to San Diego, Calif., has developed a number of different strategies for selling its computers. Gateway's 164 down-home Country stores have been quietly spreading into cities across the nation, often right across the street or across the mall from the local CompUSA or

Circuit City

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. The barn-like stores, complete with a silo and cedar wood paneling that would make

Bob Vila

proud, display Gateway's full line of PCs and peripherals.

In the PC market lately, it seems as if a company needs a multitude of models to compete in the consumer and corporate arenas. In just three years, Gateway has become a major player in the hardware industry by finding imaginative ways to sell what is essentially a commodity object -- the PC box. Even

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, the onetime icon of cool, is rumored to be eyeing Gateway's success. Gateway provides Internet access and has its own portal site offering software, computer peripherals, service and training. Gateway also offers financing for consumers wanting to purchase a company PC. "We have to go after the entire puzzle," says Gateway CFO John Todd.

And the stores are a big hit. "This place is definitely better than CompUSA," says Jay Seitz, a psychology professor trying out a Gateway PC with a flat-panel display that costs $2,600 (or $59 a month in 48 payments). Seitz is impressed that the staff knows what it's selling, and he appreciates it. "We're ready to lay down some gold plastic."

Those words must be music to CEO Ted Waitt's ears. No wonder that, in contrast to the rest of the PC industry, Gateway's gross margins have actually risen over the past year, climbing to 21.4% in the first quarter of 1999 from 19.5% in the year-earlier period. The company earned $100 million, or 62 cents a share, in the first quarter this year, generating revenue of $2.1 billion on 1.1 million PCs sold.

Gateway's Country Stores Keep Stock Price Afloat
The company's "beyond the box" sales initiatives are winning over Wall Street.

Source: Baseline

The direct seller took a big chance when it first decided to open its own stores. The spin? Selling PCs without the merchandise. The Country store offers plenty of choices, but shoppers cannot take an actual PC home. Instead, Gateway staff members take the orders and the company delivers the unit to the customer's home. Gateway expects to have 300 to 400 inventory-free stores when all is said and done. Monday it announced plans to spend an additional $25 million to create business centers in each of its stores to go after the small- and medium-sized business markets.

It took a while, but it seems Wall Street has fallen in love with the Country store, keeping Gateway's stock price above the rest of the struggling PC sector. Customers, who have sometimes felt

neglected, are also embracing the company.

Now computer makers such as Apple, which rely on the retail channel to push their products, are thinking of adopting a strategy that the industry largely dismissed as foolhardy only a year ago.

"The industry couldn't understand why Gateway was opening these stores, but now the model is working well," says John Brown, a PC analyst with

International Data

. "It gives the company a chance to hit consumers and small businesses while improving support at the same time."

Thinking Outside the Box

Gateway's strategy over the past three years has been to think beyond the PC box. After Gateway introduced the Country store concept in 1996, it developed, the company's own ISP service, in 1997. In 1998, Gateway launched its YourWare program, a financing plan that allows customers to upgrade to a new PC and return the old unit to the company. The triple strategy is winning plaudits everywhere.

"Of all the PC guys, Gateway has this business best figured out," says Jeff Matthews, a money manager with

Ram Partners

. Matthews, who doesn't have a Gateway position because of valuation concerns, points out that Gateway's Country stores are built to sell computers and that's it. "I had only planned on buying one PC when I went there, but I ended up buying two," says Matthews.

After Gateway's Country stores took off, Apple decided to open stores within CompUSA's outlets, while



-- the PC retail-channel kingpin -- set up a similar deal last year with Radio Shack, a division of


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. The resurgence of Apple makes its cutting-edge, neon-colored products look extremely out of place in the drab confines of CompUSA, a company in disarray that hasn't been treated well by Wall Street. The retailer's stock has dropped 50% over the past 12 months.

"I think it would make a lot of sense for Apple" to open its own stores, says Eric Klein, a PC consultant with the

Yankee Group

, a Boston-based tech research firm. Klein, who says he first heard the Apple store rumor last month, points out that the company's retail focus has centered almost exclusively upon the iMac. Other lines like the PowerBook aren't standing out from the CompUSA pack, he notes. An Apple spokesman says the company doesn't comment on rumors or speculation.

Apple, which in the late 1980s tried unsuccessfully to open up a number of outlets, is contemplating another attempt because of the great margins, says Klein. "Gateway claims it's generating the same margins at its stores as for its online sales. That seemed to get Apple's attention."

In order for Apple to successfully return to the retail game, it can't just sell iMacs. The company is planning to heavily promote a new consumer portable, the iBook, later this summer or in early fall, and this would be an ideal storefront product. The iBook, along with Apple's many hardware, software and video-game offerings, could be enough to get even Wintel users -- the 95% of computer users who use


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chips -- interested.

"The key to any retail venture would be to snag Wintel users to switch them over," says Dave Tremblay, a senior industry analyst at

ZD Market Intelligence

and a former Apple executive. "And a retail store might be a good way to do that."

A retail store would seemingly allow the company to better market itself against this Wintel standard. After all, Apple's intangibles, its "us against the world" attitude, its new-age marketing strategy and its next-generation products would all be on display. "It's the intangibles that are going to win sales these days," says International Data's Brown. "A PC box is

just a box."

True. But Gateway, the company that made spotted cows hip, looks set to be a trailblazer again.