Q&A: GameStop illuminates Black Friday strategy

While it seems things are tough all over in the gaming industry these days, GameStop is whistling a different tune. The company just reported record sales of $1.7 billion for its third quarter, along with net profits of $46.7 million. With many economists worried about consumer spending this holiday season, this weekend's Black Friday sales and promotions will be looked at as a key barometer of what to expect through December and into January.

Tense as the retail environment might be, GameStop executive vice president of merchandising and marketing Tony Bartel is confident of his company's ability to weather whatever storm is on the way. Earlier this week, Bartel visited GameSpot for a wide-ranging discussion about the company's business, from what kind of importance is being placed on this weekend's sales to how it appeases angry customers pestered by preorder pitches.

The second and final part of this interview will run Monday, December 1.

GameSpot: How is the ongoing economic crisis affecting GameStop?

Tony Bartel: The current economic climate that we're in is a very difficult market to work with. And yet in the video game industry we have some really positive news. I'm sure you read our press release, but we were very strong in October. We've launched 700 games between September and December. We're in a great inventory position. We have strong demand in our stores. So where there are people looking for a positive story in this economic climate, I think the video game industry in general and GameStop in particular provides an excellent beacon out there of growth.

GS: You still missed your profit projections, right? And lowered them for the full-year last quarterly report and this quarterly report?

TB: We did lower our profit projections on a GAAP [generally accepted accounting principles] basis. On a non-GAAP basis when you add back acquisition cost as well as the currency fluctuations from our international business, we actually did exceed our guidance for the third quarter. We did feel it was prudent, given the outlook for December and not exactly knowing where the economy's going to go, to slightly back off of our targets. But still put out there 31 to 33 percent growth for the full year, which I think is still very strong growth even in this economic climate.

GS: How important is this Friday's business to your expectations for the whole holiday season?

TB: We, like every other retailer, look at Black Friday. But by the same token, we have a great day there and we're very, very comfortable with our expectations for that day. I think it gives us a good barometer for what we're going to face. At the same time I think this year is going to be unique in the amount of promotions that are out there. We've got some great deals, some great door-buster deals. We've obviously already seen everyone else's Black Friday ads, as they've seen ours. So we think that there is going to be a lot of promotional activity, but we actually are very bullish on this.

I think the big opportunity for us that we face is we talked about on our earnings call is we've had a plethora of great releases I'm sure you're aware of, from Call of Duty and Gears of War to Fallout 3 and Left for Dead. I mean, these have just been phenomenal--admittedly hardcore--releases. I don't think Black Friday will give us the full picture on this, but what we're really looking for is when we transition [from the core market to gift-givers]. We saw 40 percent of the transactions that took place in our store last week were bought as gifts. When we start to see that gifter come into our stores, that's really I think the key barometer for us. And that will probably happen after Black Friday.

A couple points of data on that. NPD did some research in September and talked to people who are buying electronic entertainment equipment. What they said is that 14 percent of those people expected to actually buy more than what they did last year during the season. When they talked to people at GameStop, nearly a quarter of those people actually said, "We expect to spend more," and when they said what they were going to spend it on, 80 percent of those people said, "We're going to spend it on video games." So trends like that are very exciting in this economy. Also NPD in a study they did said video games was almost dead last in the things people would not buy this holiday season, so we're very excited about where we're positioned.

We're very excited frankly for the video-game industry, and we're very excited for GameStop because we think that it's going to be a great fourth quarter for us. That being said, we do understand the economic climate that we're in, and you can't ignore that we're in uncharted territory.

GS: Nintendo has said that Wii hardware will probably be a little bit more available in stores this holiday season than it has been for the entire life span of the system but that Wii Fit would be probably just like the Wii was the last couple of holidays. Does that jibe with what you guys are seeing?

TB: Yes. That jives exactly with what we're seeing. We actually have slightly over a week's supply of Wiis, which is great. We haven't been there ever since the launch, and so we're excited about being there. And the Wii Fit, we have hours of supply, so as soon as it comes in it really is going out. And it is very much like the Wii of days gone by.

The other item that we believe is going to be hard to come by is the band kit, the Guitar Hero World Tour band kits, especially for the Xbox 360 and the Wii.

GS: Are you finding at this point that there are just too many band SKUs taking up too much space in your stores and in your warehouses? These are significantly sized boxes, and for every one of these that you take, that's 30 other boxed copies of a normal game that you don't have room for. And with rhythm game sales being a bit tempered from last year, is that an issue?

TB: Sure. Well, there's no doubt that they take up a lot of space in our stores. And as these things get bigger, you definitely begin to get creative with how you use space. So we've dealt with that by representing them on the floor with smaller boxes and then just ensuring that we can store them in the store.

The other thing that we've done very well, and again I can't stress this enough, we have a very good proprietary logistic system which gets things there just in time. I mean, we literally have a system that allows us to get things exactly to our stores exactly when they need them. And so we are running a very quick balance, and definitely in this economic climate what we are doing is we are ensuring that we order conservatively but enough to get all of our stores fully stocked. So our goal is to ensure that when demand is there, we've got the product there, and then replenish it on a daily basis to make sure that our stores have sufficient space for people to shop.

GS: Are you making sure other publishers toying with the idea of bundled rhythm games like this know that you're ordering conservatively?

TB: When I say "conservatively" it doesn't mean low. When we order conservatively, it means we order in a shorter time frame. So it's not that we're ordering less. It's just that we're ordering in a shorter time frame. We're accepting things in a shorter time frame. We're accepting more smaller orders. And the good news is that for the most part the publishers have done a great job of being in stock.

GS: In the last year or so there were a couple of exclusive titles to GameStop, like The Settlers DS and Tenchu DS. And then Wal-Mart had its own exclusive with Chibi-Robo for the DS. A whole game exclusive to this retailer or that retailer. There hasn't been much of that lately. Have you experimented with that and realized it's not the best way to go about it? Or do you think that practice still has steam?

TB: Obviously what we're trying to do at all times is to get exclusive content or content that is different from anyone else to differentiate ourselves. Most recently we've done it with Guitar Hero where you can unlock all of the songs, Call of Duty where you can unlock a [high-level] weapon before anyone else could.

In terms of full games, we'd love to have full-game exclusives, but those are really hard to come by simply because even though we have a large share of the market, I think after all the development costs and so forth and the marketing costs that go into it, you have people that are reluctant to just give you a single product. It would typically be probably like a B title where you're actually looking to make a market for it, and I think that's what we would do. We love to look at those opportunities and expand it, but that's not a huge part of our plan moving forward.

GS: On that note, I noticed if you bought the Hulk game at GameStop, you would get access to the red version of the Hulk. This trend seems to be expanding a bit with the Shaun White snowboarding game. If you buy it at Target, you get a whole other mountain, which is like another 20 percent of the game. Are retailer-exclusive elements like this going to be a big trend going forward, to the point where you're fighting other retailers for these?

TB: I would definitely anticipate that. I think we lead with that and have led with that effort because we talk to the consumer and we're really close to the consumer, and what they're talking about to us is they're saying, "OK, I can get this game at a lot of places. What makes it special about getting it at GameStop?" So we've been working for about the last 18 to 24 months to really go after some exclusive content. So it wouldn't surprise me if other people tried to mimic that approach and go after that because we think it is a very effective approach.

GS: Do you think the scope of the exclusive content is going to get bigger? With the Call of Duty thing you mentioned, or Guitar Hero, you're just getting the song or the weapon a little bit sooner, but the Target mountain seems like a much larger component of the game.

TB: I'm not exactly sure from an industry standpoint how that's going to evolve. I definitely know that it's something that we would like to continue to push as we work with the publishing community. I think in order to do that, you have to really have a tight partnership with the publishing community and start working a lot further out than what we have in the past. So I think if in fact we can really develop these strong partnerships that work further out, I think that we can see some more extensive exclusive content that will happen. I'm not sure, though, if it's going to be an industry trend simply because the deadlines to get these games done and on time are so tight that in order for them to really build in exclusives, it takes a huge partnering effort.

GS: We've seen reports of a GameStop-EA sports discount program. Is there any truth to those?

TB: I think at any given time we are testing a lot of different concepts with a lot of different partners. Sometimes some of the concepts that we are testing actually get leaked out onto the Internet, and that's what took place in this case. So I would say that there is truth to the fact that we are looking at several concepts with several publishers. That just happens to be one of many. At any given time, I would say that we're testing over 100 different concepts with consumers, so unfortunately sometimes they slip out, and in fact this one did slip out.

GS: GameStop.com sells downloadable versions of some big-name, new-release PC games. But I almost never see it promoted. Why is that such a low-key part of the Web site?

TB: It definitely is not something that we're putting out as a low-key element. I mean, we're very proud of the fact that we do actually digitally download games, and we think that it's great that we're actually involved in that business on the PC side. And so it's definitely not something that we are trying to keep hidden. It's probably just something that we have not put to the forefront.

Clearly what we developed on the Web site was an experience that was to sell boxed product, and we actually have evolved to downloading digital games as well. And so we're taking advantage of that, but I think that we can do a better job of articulating that on our Web site.

GS: Gamers are increasingly able to get these big-name retail games through their PCs or the console marketplaces. How much of a threat does GameStop perceive from digital distribution like the PlayStation Network or from competitors like Steam?

TB: Actually we really don't see it as a threat. When you talk about a threat, we actually see a couple of things. First of all, when you look at the digital download space, 95 percent of the games that are downloaded today are on the PC side, the majority of which are casual. About 2 percent of the entire console market is downloaded today, and that's growing at a rate that's slightly less than the actual boxed product on video games. So the console market really today consists of what we call microtransactions, where you add the extra maps, where you add the extra pieces. So there's very little of the full game download that is actually taking place on the console side.

What we see is that the games are incredibly complex, and with the complexity--and especially with the investment that they actually have as well both in terms of time and money--we actually see that there is an increased need for someone to explain the game. Our customers are saying, "We want to talk with somebody who's actually played the game, maybe even beaten the game." In fact many times you can go into our stores and actually play the game before you buy it on one of our interactive units.

And as we talk to our customers, the other thing that they're concerned about is they always want transferability of the game. I mean, one of the reasons that we're able to support a $60 price point in the industry is that we offer residual value for that, so the customers look at it and say, "OK, I can spend $60 for this game, but I can take it to GameStop and I'm going to get $20 back, or I can take it to eBay or I can give it to my friend." But there's some transferability of that boxed product. We think that's a really important part of the transaction, and that's definitely something that you would lose in the digital download world.

But where it's at today, we believe that definitely it's adding enhanced value to the experience as people are able to drive these microtransactions. We think that it actually prolongs play and enhances the play for the people who are coming into GameStop every day.