Gateway Loses The Folksy Shtick

CEO Waitt looks west to lure sophisticated talent

At Gateway's North Sioux City, S.D., offices, Chief Executive Theodore W. Waitt meets often and easily with everyone from the chief financial officer to rank-and-file workers. Even after building his personal-computer business from a two-person shop in his parents' barn to a sprawling $6 billion company, Waitt does much of his managing by strolling the hallways. In early June, he popped in on a team designing new self-help software called "Help Spot" and peppered it with questions. The 35-year-old CEO's verdict? "Cool. Keep it up," according to one of the team members.

But impromptu face time with the boss is about to become a Prairieville relic. Come August, Waitt and a team of 20 executives and assistants will move from the cornfields of South Dakota to the beaches of San Diego, Gateway Inc.'s new administrative headquarters. Manufacturing operations and its 5,500 workers will remain in North Sioux City. As for the group out west, it could expand to 200 within a year and, later, swell to 1,000 employees.

LOCAL HERO. Why is Waitt leaving Sioux City, the land where his family raised cattle for five generations and where he has become a hometown hero? It's essential for ensuring Gateway's future, he says. Waitt wants the world's second-largest direct marketer of PCs to increase revenues 40% to 45% per year, to hit sales of $25 billion by 2001. To get there, he needs the top managers and engineers he hasn't been able to attract to South Dakota. "It's all about growth, at the end of the day," Waitt says.

With better talent, Waitt figures he can tap into markets well beyond Gateway's stronghold of selling consumers high-end PCs by phone. He wants to increase his 4.9% slice of the $18 billion small-business market. To do that, Waitt says he must build up a consulting service for small and midsize businesses, offering expertise in such areas as Web-site setup and design.

At the same time, he's betting that San Diego's wider pool of engineers can help him reach more consumers by coming up with ways to make PCs easier to use. A prime example of Waitt's plan is Help Spot, a program scheduled for release in mid-July that offers detailed tutorials for customers who have problems with everything from Internet access to simple word processing. Waitt also wants to sell more services, particularly Internet access. One new offering allows consumers to buy a PC, including Net access, for a flat monthly fee of $50. And, in a controversial move, he's expanding Gateway's retail outlets to as many as 400 from the current 47.

The risks of Waitt's new growth strategy are staggering. With the move to San Diego, Gateway is turning its back on the folksy, Midwestern culture and marketing that have defined the company and helped make it a brand name. Even its trademark Holstein cows--featured in many of its award-winning ads--are being put out to pasture. Newly minted President Jeffrey Weitzen thinks Gateway needs to spruce up its marketing to appeal more to consumers who buy cutting-edge PCs and to small businesses. But dumping a successful corporate image could turn off the company's existing customers. "Waitt's strategy is [based on] being in the middle of nowhere," says James E. Schrager, clinical professor of entrepreneurship and strategy at the University of Chicago. "I think he's being a traitor."

If employees think the same thing, morale could suffer. Waitt has always been the company cheerleader. With his ponytail, boots, and hearty barroom laugh, Waitt is one of their own. "Do employees feel a loss? Sure, they do," says Robert N. Beck, Gateway's former senior vice-president for human resources, who left in January when Weitzen brought in his own team. Workers also worry that their jobs may eventually migrate to Southern California. "Are we going to have to move as well?" asks one employee. "I, for one, prefer to call North Sioux City home."

Waitt's laugh turns to a sigh when he hears such concerns. He realizes people are sensitive to his departure--he kept the expansion under wraps, waiting until the last hour to announce it to employees on Apr. 7. "We knew it would be a very emotional issue here," he says. Still, he insists any worries are overblown. "It's an additional location," he insists. "It's not a move or a relocation."

Besides, the new San Diego digs could soon bear fruit, he says. During the past year, Gateway has been unable to fill about 250 job openings in finance, marketing, and engineering in North Sioux City. After the San Diego announcement, Waitt says he's seeing "a whole new level of candidate."

Waitt realizes he needs all the help he can get. Gateway has stumbled over the past year, while direct-marketing rival Dell Computer Corp. has become the envy of the industry. Although Gateway's sales increased 25% in 1997, to $6.3 billion, its net income was cut in half, to $110 million, because of an embarrassing $107 million loss in the third quarter due to overestimated demand. "They blew it," says analyst Louis J. Mazzucchelli Jr. of Gerard Klauer Mattison & Co.

What's more, Gateway is retreating from the big corporate market it targeted just last year. After trying to go up against Dell and IBM, the company found that it was simply overmatched. Gateway couldn't afford to pay for the expanded sales team it needed to knock on the doors of big corporate clients. Gateway's stock is trading at 44, 25% off its 52-week high. "Dell is such a powerhouse that Gateway kind of gets left in its shadow," says Jane Snorek, research analyst for Oberweis Asset Management Inc., which recently sold its Gateway stock because it was underperforming other PC companies.

RISKY RETAILING? Analysts fear Waitt's planned expansion of Gateway's retail outlets--called "Country Stores"--could lead to another misstep. The stand-alone stores only sell Gateway gear and are about half the size of a typical computer store because they don't include a warehouse. The company's eightfold expansion of the stores comes just as other PC makers are scrambling to imitate the cost efficiencies of direct sales as demonstrated by Dell. But Waitt insists the stores will be a plus. "Only 25% of the consumer and small-business market bought PC hardware over the telephone or the Internet, and we don't see that getting over 50% anytime soon," he says.

Still, many analysts are leery of the retail push. Unless it leads to big market-share gains, it's "a losing proposition," says Piper Jaffray analyst Ashok Kumar. Building a retail chain is hugely expensive--the cost to launch a Gateway store is about $1.5 million a year, or $450 million for 300, say analysts. Other PC makers haven't fared well in retail: Tandy Corp. sold its Incredible Universe and Computer City stores because it couldn't turn a profit.

Even with the retail push, Waitt will have a hard time hitting his target of $25 billion in sales in 2001. At Gateway's current 25% revenue growth rate, it would reach some $15 billion by 2001. It will be extremely difficult to pick up another $10 billion in sales in the markets Gateway is targeting, say analysts. "There's no way in hell," says Kumar. "They must be smoking something that's not legal." This year, Gateway sales are projected to increase 27%, to about $8 billion.

Already, Waitt is building the management team that he expects to help him prove doubters wrong. He recruited Weitzen and David Robino, executive vice-president for administration, from AT&T. "We needed to get a better blend of people than we have here, with people who have more experience," he says. Both men influenced his decision to move. During interviews, they asked: "Are you willing to do this?" Waitt recalls, "because it's a serious concern if you're really trying to build a [big] company."

Waitt isn't leaving home just to hire more engineers and top execs, though. With a taste for sun and beaches, he began renting a vacation home in San Diego in the mid-'90s and bought a $14.4 million mansion in the city's tony La Jolla neighborhood last summer. But he insists the move isn't for his own benefit. Gateway hired Coopers & Lybrand to do a market study of several cities, including Chicago, to find out where it could best recruit high-tech workers--and San Diego came up on top.

As for the Sioux City region, it's losing more than a company to call its own. The local economy, once dependent on agriculture, has benefited from Gateway's high-paying white-collar and assembly jobs. The region's unemployment rate has dropped to 3.4%, from 8.3% in 1985, when Gateway was founded. Now, the loss of Gateway's top jobs could hurt everything from tax revenues to the real estate market. With Waitt packing, "everyone is kind of holding their breath, waiting to see what the impact is going to be," says Ritch LeGrand, owner of a local real estate appraisal company. As Waitt moves his headquarters out of the Midwest, he may find that he has to convince his customers to follow.

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