Asia: For Sale: Toothbrushes. (Oh, and PCs too.)

SAN FRANCISCO (02/08/2000) - If you think it's odd that someone is selling cow-spotted electric toothbrushes online, then you'll find it positively strange to discover that the seller is Gateway. Yes, that Gateway. The computer maker.

Hawking toothbrushes emblazoned with the company's trademark Holstein pattern - along with golf balls, foreign-language lessons and a spate of other goods - is just one of the innovations Gateway has come up with in an effort to adapt its direct-computer-sales model to the Japanese consumer market.

The idea is to help Gateway Japan attract more customers and boost online sales. But the company is also thinking that, long term, it can move beyond its core business of selling PCs and become an Internet portal site for consumers in general. Faced with the same challenge - how to raise online sales - Dell, another U.S. computer company operating in Japan, is using more traditional methods. Both are making a name for themselves as online pioneers, and Japanese customers are responding enthusiastically.

E-commerce in Japan is a tricky business. Only 14 percent of the population uses the Internet, according to Computer Industry Almanac, compared to 40 percent in the United States. Household PC penetration, meanwhile, was just 29 percent in Japan last year vs. 51 percent in the United States, says market researcher IDC Japan.

There are more basic retailing difficulties as well. Many Japanese are notoriously averse to credit cards. And first-time PC buyers in Japan generally favor the face-to-face experience they get in a store. These considerations have forced online merchants like Gateway to set up "new" systems for payment such as bank transfers and cash on delivery.

Despite these hurdles, Gateway's online sales effort in Japan has been a success so far. In three years Web-based orders have grown to account for 15 percent of Gateway Japan's shipment volume - nearly the same as in the United States. Gateway Japan pulled in $100 million in online revenues last year, doubling its 1998 figure.

Yet for Gateway, selling PCs online is only the start. "Gateway has embarked upon a course [in Japan] that takes us beyond that of being a maker and seller of boxes," says Derek Schneideman, president of Gateway Japan. "This is not simply one-stop shopping - it has more to do with making the access to information and the benefits of technology simpler and easier [for consumers]."

There's more to come. By June, Gateway will offer some 20,000 noncomputer items on its Japanese site, up from 2,000 today. Consumers will be able to buy everything from DVDs to computer furniture. Gateway plans to add more products to the mix but declines to be specific for competitive reasons.

Visitors to the U.S. Gateway site can buy similar stuff but it's several clicks deep. In Japan it's in the front window, right on the homepage.

Gateway Japan introduced its noncomputer products two years ago. Response has been so enthusiastic that Gateway now holds contests for online visitors and readers of its print magazine to come up with ideas for new products. One of last year's winners - the electric toothbrush - sold out in two days. Gateway scrambled to replace the 500 that were snapped up for about $22 each, and the toothbrushes are still being sold today. Gateway's noncomputer merchandise accounts for less than 10 percent of its sales, and branded goods are just a fraction of that. But every time someone buys, say, a spotted umbrella, that's an important branding message.

"Fans of Gateway PCs like carrying around our branded goods," says Sakae Suzuki, acting senior manager of business planning and online business at Gateway Japan. "They are among our strongest sellers [of non-PC goods]. Even our cow-spotted PC boxes have appeal."

Some analysts wonder about the strategy. "Targeting general consumers with Internet sales [of merchandise] can help revenues today," says Katsushi Shiga, senior industry analyst of personal computers and industry services with Dataquest Japan. "But it may not be successful for Gateway in the future if they lose their focus."

Schneideman disagrees. "We do not view this as a departure from our core competency. Rather, we see this as our core competency." He adds that Gateway is "now looking to develop from being a Web site into a portal."

Gateway Japan has also introduced online auctions, something executives back in the United States have yet to do. The auctions let people bid on canceled orders and PCs that have been returned.

To boost interest, Gateway lets bidders include personal remarks. "We get comments like, I want this one for my daughter. Leave it alone!'" says Suzuki.

Occasionally bidders get so emotionally involved that they bid each other up.

Instead of paying less, they end up paying more than original price.

Not every U.S. PC maker is going to such lengths to sell online in Japan. A far more nuts-and-bolts strategy is at work at competitor Dell Japan. As in the United States, it focuses primarily on the business sector.

Three years after it launched online sales, Dell Japan's Web orders today account for 35 to 40 percent of its revenues. That's close to Dell's global online ratio of 43 percent. Worldwide, Dell pulls in some $35 million daily from its Internet operations. It won't say how much revenue comes from its Japanese sales site.

Dell's Premier Pages, dedicated Web pages where corporate customers can place and track orders in private, are a big reason for its success in Japan.

Companies can customize these pages and take advantage of several layers of security to meet their internal purchasing requirements. Dell Japan started offering Premier Pages in November 1998 and now has more than 1,500.

"It's a way for us to give personalized service, to communicate directly with customers," says Kevin Baker, director of Dell Japan's Web business activities.

Baker rejects the notion that Japanese customers are more difficult to sell to online. As proof, he points to the fact that the site generated roughly $500,000 a day in sales within seven months of its 1997 launch. "We are generating multiples of that number in daily sales today," he says, although he won't get specific.

Dell Japan uses XML technology to incorporate content from other Dell regional sites. "We can grab something that's working well in Europe just by taking the template they've developed and integrating it into our Web site, after localizing it for language and content," Baker says.

For now, Dell and Gateway enjoy a significant online-selling advantage over their Japanese competitors, though they're still relatively small overall compared to local giants like NEC, Fujitsu, IBM Japan and Toshiba. Dell and Gateway were ranked ninth and 11th, respectively, in the market by IDC Japan in the first three quarters of 1999.

"Dell and Gateway have been successful in Japan," says Takahiko Umeyama, an IDC vice president. Domestic competitors, he adds, are starting to increase online sales of PCs but their percentages are still tiny, given the conflict they face with their traditional channels.

"Gateway and Dell's direct-business model is very different compared to Japanese PC vendors' business model," says Dataquest Japan's Shiga. "Fujitsu and NEC depend on reseller sales. They cannot easily sell directly, except to some major customers like the government, because it will hurt the resellers."

That could change in the next year or two, as domestic vendors respond to the direct-marketing efficiencies and online conveniences being exploited by people in the United States.

Baker says Dell will monitor the competition's online efforts. "As competitors come to the Web, they use the latest technologies," he explains. "So the challenge for us is staying ahead."

At Gateway Japan that's been the toughest challenge - getting employees to embrace change as a means of staying ahead, says Theodore Miller, director of strategic and operational planning at Gateway Japan. "People didn't want to take chances, to break the rules. But we like to break rules and make new ones - like selling by auction. If we don't, we must operate under the same rules as behemoths like NEC and Fujitsu, and we'll never beat them."

John Boyd is based in Yokohama, Japan. He covers the Internet for several Japanese and overseas publications.

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