Q&A: GameStop's holiday 'power' play

With the massive number of new gamers shipping this holiday, you'd think GameStop would be content to sit on its laurels. In many locales, the biggest nationwide games retailer is one of few--if not the only--stores with an extensive selection of games for all platforms. Were that not enough, GameStop's stock has more than doubled in value over the past year, thanks to a burgeoning US game market which topped $1.3 billion in sales in September.

With everything going GameStop's way, why has the retailer gone on the offensive with a new, multimillion dollar ad push in print, online, and on television? Titled "Power to the Players"--which is also the company's new tagline--the marketing push is the first nationwide coordinated campaign since GameStop acquired archrival Electronic Boutique in 2005. Indeed, it is the megaretailer's first national campaign ever, and seems designed to blunt the increasing number of chains beginning to sell games. Recently, both Radio Shack and 7-Eleven used the Halo 3 launch to kick off their own game efforts, joining such other nationwide chains as Best Buy, Circuit City, Target, and Wal-Mart.

How is GameStop staving off the competition? Recently vice president of marketing Tom De Napoli, sat down with GameSpot to discuss his company's new ad onslaught. He also shared his thoughts on how the new $399 PlayStation 3 and $279 Xbox 360 Arcade will shake up the crowded holiday shopping season.

GS: So this is your first big media push since you took over EB Games. Why now?

Tom De Napoli: The timing is right, since just we finished the integration with our EB Games. Over 95 percent of our stores now have been rebranded. We're all under one roof. We just finished a brand exploration that really provided for us the essence of who is GameStop. What is our DNA? And now it's time to take that and tell it to the world. So really, "Power to the Players" is our rallying cry. It's who we are, it's what we stand for. It's not just an ad campaign.

GS: What effect did the Halo 3 launch have on your business? How many copies did GameStop sell?

TDN: We haven't talked about specific numbers yet. But remember one thing: Our sales associates are gamers themselves. So it becomes a celebration of sorts. This gaming phenomena has really become the new rock and roll. It's a very, very hot space where we, as a company, find ourselves right in the middle. I mean, we'll open 500 stores this year.

GS: Yeah? Impressive! But now RadioShack and even 7-11 are selling games. What is GameStop doing specifically to fend off competition from other, non-game-centric retailers?

TDN: Quite frankly, focus. What we do, again it goes back to that, that's all we do, 24/7. Our associates are experts. We focus on what our core competencies are. And those core competences really revolve around expertise. We are the authority in the category from a retail perspective. We own one of the top gaming e-commerce sites in the business. We have GameStop TV. That's another asset that we bring. And then there's our used and trade business. You've got a game like Halo 3. People will want it. Or a new console that comes out like the Wii. Used and trade becomes a way for them to generate the currency to go and buy that new, that new, the latest newest thing.

GS: I noticed when I preordered Halo 3 you bumped up the trade-in value by as much as 20 percent. Is the trade-in value you typically offer so low that you can do that and still make a profit selling used games?

TDN: Again, it goes back to us focusing on the customer and knowing what their wants and needs are, where we can tweak the model a bit and reward or help. We want our customers to be able to be immersed in the newest games and the latest buzz. We want to help create that buzz. So it's not really that our margins are that deep in those areas. It's just that we're running a business and we have to, where we can find a way, to give back to our customers.

GS: What's your take on the upcoming holiday shopping season?

TDN: We see that there is a bit of a shift in terms of demographics, and we want to be responsive to that. We see the casual and the gift-giver becoming more prevalent in this space, and certainly at this time of the year. One of the things that we're doing is we're adding a section within our store that's really about music games. We're putting up music kiosks since obviously Guitar Hero III is going to be a biggie. EA's Rock Band is going to be a biggie. So you've got those things and these titles [and] we want to make sure that we bring them front and center.

Our core and avid players know what we're about. But casual folks, the newbies, they're coming in many times because they want to get the gift right. And they want to go to the gaming experts. So we want to take [that], and make sure that our stores are merchandised in a way to make that easy for them.

The other thing is we've got a family-friendly focus because gaming has become the new board games. We're going to have a section in our store for seniors and some of the wellness-type things--like Brain Age, for instance--and some of the children's titles. Some of these shifts are really seismic. I mean, 45 percent of the population now in terms of gamers is female. That's a huge shift from a few years back.

GS: Oh, absolutely. Now you mentioned Rock Band and Guitar Hero. Those games come in pretty big boxes, especially Rock Band. Are you having difficulty rearranging your stores around these larger items?

TDN: We've gotten out in front of it in terms of with our fall relay. We knew this was coming. We also see that the...just in terms of this genre of the gaming business it's just exploding right now. So we, again, as we look at space within our stores and our merchant team is very savvy about allocating square footage to certain sections. We look at that by linear foot, we found a way to solve for it.

GS: What kind of effect do you expect the new, cheaper PS3 to have on your business?

TDN: I think having a $399 price point definitely helps to migrate certain folks off a certain platform into a more broader experience. So I think it's smart. With us, we're certainly not looking to shift console market share. But we are looking to continue to bring in the new experiences to our customers. So I think it helps to do that. The other thing is, what's going to be available on the PS3? I wouldn't say its catalog is robust yet. But it's certainly grown. I think that's the other piece that Sony needs to put in place.

GS: Are you concerned about its lack of backward compatibility with PlayStation 2 games, given that GameStop makes much of its profit off of used titles?

TDN: I think at the end of the day, this is really a transition step for somebody who might be migrating off one console. Where they ultimately would like to be is on the PS3, but they need a stepping stone in between. That said, I don't think in the whole that [the lack of PS2 BC] is really going to have a big effect on our used trade business. I mean, it's a pretty robust business. There's a lot of life in the PS2 platform for Sony.

GS: Now one other thing I want to talk to you about is the Wii. Obviously this has been a huge phenomenon. But it's still impossible to find. Even Nintendo of America president Reggie Fils-Aime said that the Wii shortage will continue through next year. What's your reaction to that? I mean, does it frustrate you guys?

TDN: Right now, Reggie has a problem that I guess we'd all like to have. They've got a couple of really hot SKUs. I mean obviously, Wii has been a huge success for them. And I'll tell you, their DS platform has been a huge success for them. Their library is very robust. There's certainly a lot of demand being generated right there, and it's a pent-up demand.

But anytime you've got a worldwide launch like they've had, they're trying to get their production under control. They're doing a good job of communicating to us in terms of the retail community, I think, of what they can expect when in real time. But it's going to have to catch up with itself. And I think in the end of the day that enthusiasm is good. Our concern is to make sure that we're getting our fair share of the allocation so that we're taking care of our customers.

GS: And do you feel like you are?

TDN: Yeah. We feel like we are. But we are encouraging people to shop with us early because it's going to be on everyone's wish list. Definitely shop early, if that is the item.

GS: What's your take on the Xbox 360 Arcade? Microsoft's Robbie Bach is touting it as an alternative to the Wii. Do you see it as people that's coming into the store, seeing the Wii is sold out, and saying, "OK, I'll guess I'll get that"?

TDN: I think the Nintendo Wii versus the Xbox 360, at its core you still have a console versus a console. They're very different. Certainly, the Nintendo Wii has really got around the old stereotype notion of the video game guy sitting in there doing his own thing. When you go to the Wii it's just a different experience. It's not a sedentary experience. It's off the couches. It really plays into that social gaming aspect where you'll walk into people's house and it's a Christmas party and people are up and playing. So I think they complement each other. I don't think it's an either/or game.

What we're seeing is a lot of folks are talking about all the broadening of the category with the Wii and DS. But we're also seeing a lot of core and avid gamers that are buying the Wii as a second console in the house and then experiencing that kind of gaming community with their parents or their friends.

So I don't think it's a win-lose proposition. Microsoft's stepping up with, with this Arcade and they're giving a more value-added experience to the consumers. [It's] good for everybody.

GS: Now this is an exceptionally crowded holiday season.

TDN: It is.

GS: Though it's getting less crowded every day! How are you handling all these, like the shipping schedules, these delays?

TDN: Well, we've been in this business for some time. We are very nimble in the way we're able to react. When Grand Theft Auto IV moved out to Q2 2008 it was not foreseen.

But there's enough right now in the queue that's coming out during the holiday. Just look at the titles. Guitar Hero III is going to be huge--it's the first time it's going to be available on the Wii. Rock Band is going to do good, and I think it's going to do probably better in the first quarter. Call of Duty 4 is going to be great, and Halo 3 is going to have a big holiday.

So there is not a loss of titles in the pipeline, and software sales are going to be robust. I think hardware sales are going do well--we'll sell all we get. And then with the gift card season, I think we'll see a lot of traction into January and February of next year with that.

GS: I mean, do you think that publishers put too much emphasis on the holiday season? I mean, a lot of these publishers are basically cannibalizing their own the sales by releasing all these great games at the same time.

TDN: I think we all know the old retail notion of you want to fish when the fish are swimming. It's as simple as that. And when you look at the percentage of retail sales that are done in the fourth quarter, it's a lot, so.

GS: Now I know a lot of companies, like Netflix--I'll use them as an example--whose business model is being threatened by digital distribution being on the horizon have their stock value drop. However, digitally distributed games are already here, but GameStop's stock is going through the roof. Why do you think that is?

TDN: Well I can't speak for Netflix and what their business model is doing or not.

GS: Of course.

TDN: But what I can tell you about for us. You know we, we have been a company that's been built as a series of roll-ups. We were Etcetera, we were Babbage's, we were FuncoLand, we were EB Games. So what we've been able to do now is put a roof over all this, and now say, define it as, who are we? What are we? We've done that. The brand architecture is now done. We're running a national branding campaign that consists of print, network [TV], and cable [TV]. That puts us in a position where we're focused.

Then you look at digital distribution--it's on the horizon, sure. But you know what? Brick and mortar isn't going away. And when you look at this category and where it is in the life cycle, it's just getting started. When you have that intangible product that we have, meaning the service aspect of the knowledge, expertise, advice, selection, convenience, the parade model that's all about currency for new games. That's something that I don't think the digital download models are going to.

GS: But I mean are you making any kind of preparations for it? You don't see it as a big competitor a couple years down the road?

TDN: We certainly see it as a channel that is going to become more prevalent in our business. We are also looking at some things internally that we're working on to complement our current channel offerings. So it's something we're very aware of, and something that we'll continue to gauge how far out the technology is, where our customers are in terms of adopting that technology, and where we want to live in that space.

GS: Now, you mentioned your rebranding is complete. So all stores have been rebranded GameStop now? There's no more EB Games outlets anywhere?

TDN: In all but maybe--I'm guessing--5 percent of our stores. So 95 percent of the chain has been rebranded. The ones that aren't are only because there's a lease requirement or a lease restriction that says you can't put the new sign up yet.

We didn't want to launch this new brand campaign until we had the lion's share of our stores rebranded. It's a very rare occasion where you'll see an EB Games sign still up. And even when we look at our international model, it's really, it's moving that way too, with the exception of Canada.

GS: Why Canada?

TDN: We're still evaluating our mind share and our identity with EB Games and the Canadian market. It's just before you do move that way want to make sure that you really understand what your top mind awareness is and your brand equity is, before you want to make your shift. So we're still doing some due diligence.

GS: Now I don't know if you've been following the Manhunt 2 controversy, but I just wanted to clarifying something. Am I correct in understanding it's GameStop's policy to never stock AO games, not even if it's a high-profile one?

TDN: That is our policy. We do not stock AO games.

GS: So what's your take on all these various game laws which would mandate you display M-rated games in a different section, like adult magazines?

TDN: Well, so far you the states have tried to regulate it, without much success. It's certainly something that's out there. It's going to be something that we need to look at state by state, municipality by municipality. But right now it seems like the best guidepost is the ESRB guidelines, making sure that we're a good partner there. And that's what we're doing.

We did a campaign earlier this year that was all about the ESRB guidelines. Last year, the ESRB came together with five retailers including us, and we did a commitment to parents and our take on it was a Respect the Ratings campaign. We created a Web site, respecttheratings.com, that's basically Gaming 101 for parents.

We are protecting the youth, in addition to a whole public education component that we are working with the ESRB on. There was a huge push last November, and a second push with [ESRB president] Pat Vance and our company president [Steve Morgan] this November, especially around the holiday time, to let parents know it is the natural time to be aware of games and game ratings.

The other thing that we did, too, is a little bit of self-compliance. We've implemented a secret shopper program, where we're making sure that we've got the compliance in terms of checking for ID for each and every store. And we've sent a real strong message that it's a zero tolerance. We actually have terminated employees for the violations. We do stick to what we say when it comes to game ratings.