GameStop’s New Game Plan

The video game conglomerate is responding to the digital threat with diversification, expansion, and reinvention.

Dan DeMatteo knows firsthand that business can be a minefield. Twenty years ago, he was a top executive at NeoStar, which sold software and computer games through stores called Software Etc. and Babbage’s. It went bankrupt and was bought by Leonard Riggio, the founder of Barnes & Noble, made more acquisitions, and then morphed into GameStop. The Grapevine-based video game chain was perfectly positioned as new gaming systems swept the market, turning the retailer into a stunning success with more than 6,000 stores around the world. But about eight years ago, with the Internet revolution beginning to upend other companies, DeMatteo, by then GameStop’s CEO, sensed the need to change again.

“2008 and 2009 were the best video game years in the U.S. forever,” he says. “We could have just sat back and said, ‘This is fantastic.’ But we said, ‘We have to look at this digital threat.’”

He hired Paul Raines, a former Home Depot executive, as president and chief operating officer in 2008 and asked him to lead a strategic study on the potential impact of digital distribution on sales of video game discs. That research led to several innovations and acquisitions that would eventually reshape the company. Today, GameStop is rapidly diversifying and showing how an established retailer can meet the digital challenge that has disrupted so many other big names.

Under Raines, who became CEO in 2010, the company has spent $400 million expanding its technology business brands, including Spring Mobile and Cricket Wireless, now the country’s top AT&T dealers with more than 1,000 stores, and Simply Mac, which sells and services Apple products at more than 75 locations. These stores are expected to generate about $850 million in sales by year’s end. Last year, they produced 25 percent of GameStop’s profit; the company wants it to reach 50 percent by 2019. Despite a decline in video game sales, GameStop had a record profit of $402.8 million last year on sales of $9.36 billion.

Diversification aside, the company believes that its core video game business remains on solid ground. Digital downloads have grown to 20 percent of the market; the company expects that to top out around 25 percent. Meanwhile, GameStop has figured out how to sell digital content, both online and in its stores, with digital sales reaching $1 billion.

It also spent $140 million last year to buy a business called Geeknet, and now sells toys and apparel tied to video games, TV shows, and movies in GameStop stores and online. Sales of collectibles, which it calls Loot, topped $300 million last year, are expected to near $500 million this year and hit $1 billion by 2019. Now GameStop is opening collectibles stores, called ThinkGeek, with plans for 20 locations in 2016.

Raines summed it up for analysts during an investor meeting in Grapevine in April: “This is not a transformation that you have to wait for. This is a transformation that is here today.”

The moves are particularly impressive after watching the downfall of Fort Worth’s RadioShack, the one-time consumer electronics icon that struggled for years to imagine a new future for itself. After failed initiatives, executives spent years cutting costs and spending millions on stock buybacks rather than finding new ways to make money. Eventually, RadioShack filed for bankruptcy, and now is trying to rebuild under new ownership.

Some on Wall Street are skeptical about GameStop’s future. But its new business plan is also winning praise. In a recent research report, Seth Sigman of Credit Suisse said GameStop is on a good strategic path but must continue to execute. He also gave the company kudos for launching its diversification “well in advance of the recent physical game challenges.”

DeMatteo, now GameStop’s executive chairman, says to successfully change course, a company’s culture must be open to doing so. You have to be willing to fail, because not every move will work out. And, much like a video game, it’s best to attack before you get hit by the enemy.


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