GATEWAY IS SWINGING--AT A DIZZYING SPEED
If and when computer industry heavyweights jump into mail order, they'll have a tough time matching the prices of Gateway 2000 Inc. Ted Waitt, Gateway's 29-year-old, ponytailed president, has given new meaning to the idea of low overhead. Working for an average wage of about $7 an hour plus a share of profits, Gateway's former meatpackers hand-assemble personal computers in a corrugated-metal building in North Sioux City, S.D., abutting a gravel-covered parking lot. A similar one-story structure serves as the headquarters. Waitt's idea of an executive lunch is a bite at the local truck stop.
But low overhead has made possible the low prices--often 10% to 20% less than those offered by dealers--that have pushed Gateway to the top of the booming $4.6 billion U.S. mail-order computer business. Last year, Gateway surged past Dell Computer Corp., the longtime mail-order leader, to ship more than 250,000 PC clones in distinctive black-and-white boxes--inspired by the Holsteins of the Waitt family cattle business. Revenue for privately held Gateway more than doubled, to $627 million, and pretax earnings spurted 137%, to $59.7 million, Waitt says. Despite vicious price competition, he adds, pretax margins widened to 9.4% from 9.1% in 1990. This year is off to a flying start: Although Waitt won't disclose first-quarter earnings, he says sales jumped 97%, to $237 million.
Not bad for a shoestring startup. In 1985, a year after dropping out of the University of Iowa to work in a computer store, Waitt teamed up with a friend to sell by mail hard-to-get parts for a discontinued line of Texas Instruments Inc. desktop computers. He borrowed $10,000 from his grandmother and set up shop in a deserted barn on the family farm. In 1987, Waitt and co-founder Michael Hammond switched to selling their own low-cost IBM PC clones.
Life at the top is tough for Gateway, however. Dell "definitely wants to take back" the top U.S. spot, says CEO Michael S. Dell, who just cut some prices by an average of 17%.
LATE DELIVERIES. But Gateway's biggest challenge, says Waitt, is from within: Rapid growth is taking its toll. Gateway has struggled just to train enough employees--there are 1,400 now--to handle the flood of orders. By winter, some deliveries were taking six weeks instead of two, and quality suffered badly. "The company has grown so fast that its systems have not caught up," says Thomas Walsh, executive director for Houston law firm Mayor, Day, Caldwell & Keaton. Mayor Day ordered 50 Gateways early this year. But 3 wouldn't work out of the box, and 14 monitors and 10 more computers soon failed.
Gateway is moving quickly to overcome its growing pains. In February, it hired several managers from Compaq Computer Corp., including one in the new job of quality assurance director, and removed four of its own. Gateway also worked with suppliers to redesign the main circuit board of one PC. That improved reliability and helped persuade Walsh to buy several dozen Gateways in March. He says he has discovered few bugs so far.
Gateway will have to do better than that to reach Waitt's goal of $1 billion in sales this year. It must boost sales to large companies, which buy computers in bulk but demand better service than the small firms and individuals who now account for 55% of Gateway's sales. "You can get business with price," says Waitt, "but you have to have service to keep it." So he is working with major customers, including Microsoft Corp., which has bought more than 500 Gateways, to improve service. One innovation: Major buyers soon will place orders and check on them electronically. And rather than build computers to order, Gateway says it may stockpile inventory for big customers to speed shipments.
But even as Gateway caters more to corporate customers, Waitt plans to stick with his tightfisted success formula, save for one minor indulgence: He may pave the parking lot.Lois Therrien in North Sioux City, S. D.