GameStop has consolidated the retail specialty game market in the U.S. -- having absorbed its strongest competitor, EB Games, in 2005. The company has also made major acquisitions and expansions in other countries, with recent moves in New Zealand and Scandinavia indicative of its plans to become the primary gaming retail chain the world over. The chain currently has more than 5,000 stores globally, and is expanding at the rate of 300 a year -- in the U.S. alone.
We have a tendency, as an industry, to concentrate on the games themselves. But the environment that surrounds them is equally as crucial as the games themselves, and that's why Gamasutra chose to attend the GameStop Expo, which took place last week in Las Vegas, Nevada.
The event -- read our full report here -- invites both the store managers of its North American stores and senior corporate management to the Mandalay Bay resort complex's convention center to experience product demonstrations, training, and meetings.
The event also gave Gamasutra the chance to speak with Bob McKenzie, senior vice president of merchandising, and Tony Bartel, executive vice president of merchandise and marketing.
The conversation was wide-ranging, and touched on many important areas of the business, from the expanding consumer base ushered in by the Wii and DS, to the health of the PC market, competition with digital distribution, the state of the current console market, the used game issue, and what differentiates the GameStop retail experience from its competitors.
To catch up on last year's interview with McKenzie, click here.
So, it's been a year since we spoke. How has the last year been for GameStop?
Bob McKenzie: It's been great. It's really been a fun year, and we've made a lot of progress, sold a lot of Wii hardware, since the last time we met. We've done a really good job of -- a year ago, when we met, we were just launching the brand 'GameStop: Power to the Players'.
We've done a great job with that, moving that along, and now we continue to refine our marketing and look at consumer research and figure out how we can market better to our customers -- and really figure out how we can get that expanded consumer in and really shopping with us.
Tony Bartel: If you look at the partnerships we've really been able to forge with the publishers, and with the Power to the Players message that Bob mentioned, I think you see in our advertising that what we're starting to do is really bring some exciting exclusive news to the gamers.
It's something that GameStop would love to stand for: that great experience, but a unique experience, that you can only get at GameStop. And we've really forged some great relationships with the publishers that have helped.
What do you see so
far that defines the unique GameStop experience?
TB: I think a couple of things: one thing that you saw with Madden, you saw that we came out with a $50 coupon book that went out with Madden. Some of those [other promotions] are about ready to launch, and I can't talk about those yet, but we're ready to release those very quickly.
With GTA IV, our commercials were one of the first times people were really able to see footage from the game, and it really took off on YouTube.
So again, what we understand from our consumers is that they want an exclusive experience; they want an experience they can't get anywhere else, so I think we've done a good job of moving in that direction this year.
The Big Story: The Expanded Consumer
Something you mentioned is that you've sold a lot of Wii hardware in the last year. Is that the big story for you in the last year, from the perspective of what you've sold?
BM: I think it's multiple platforms this year. In July, we had the announcement that came out of NPD that there's more Wii hardware -- a bigger install base now, than the 360. This obviously was big news, and points toward the continued growth that [Nintendo] continues to have. But obviously, the Xbox 360 platform has continued to grow very well for us, as well, and titles like GTA IV that finally are coming out on 360, that, and even on PS3. So really the whole market is really beginning to kind of rise for us.
With the PS3, the announcement early in the year with the Blu-ray, that they kind of won that de facto war, and GTA IV, which you got on PlayStation 3, and followed closely by Metal Gear Solid, those two titles really brought the PlayStation 3 hardware to a new level for us, and it isn't turning down.
TB: I think another thing that's changed for us is the explosion of the family gaming genre. I think at this time last year, people were kind of waiting to see if it was real. I think people now are firmly behind it, and they believe that it's real, and you've got developers -- and when we look at the numbers, the sheer number of games that are coming out in that genre, it's absolutely amazing.
BM: Yeah, that's a good point. I think last year I mentioned to you that we had put up dedicated merchandising sections in our stores, and to put that into an example of what Tony's talking about, currently in the kids' section, we have 215 active titles. A year ago we had 80 that were active.
We have 250 new releases yet to come, so we'll have over 450 titles that are going to be E and T-rated in this kids' entertainment section. We've done that merchandising and marketing-wise, with visual merchandising working with stores to, again, make our stores a little less intimidating for the expanded consumer, primarily the moms, and make that easier for them to come in and enjoy a good shopping experience. And again, our passionate players are able to provide a great customer experience for those customers as well.
Has the family section actually rolled out broadly across the chain yet?
BM: Yes, it was rolled out, and it continues. There are a few small stores which don't have it, or they may have moved it from a wall section to a gondola, but yes, it pretty much is in more than 95% of our stores.
TB: It's rolled out, and not only has it rolled out all the way, but as we go through our fall relay it will almost double in size, as we roll... into the Holiday season.
Do you have partnerships with different manufacturers that are targeted towards merchandising that section?
BM: Yes, we work primarily, again -- like with kids' entertainment, we work closely with Nintendo. A lot of it is focused towards their formats; a lot of it is focused towards DS. We do some double-merchandising, like with DS hardware, to make sure that the consumer knows that we have that available as well, within the stores.
Also we work with other publishers like Ubisoft -- they've got such a great lineup that is focused right at that, like with their Imagine series, and again THQ with their SpongeBob and all of their franchises that they've got dedicated toward that [target]. And this fall with EA, coming out with the Mattel lineup -- again, those are going to be some classic games, like Nerf and Monopoly, that the consumer is really looking for.
TB: I think a great example of how we work with publishers is how, when we launched Guitar Hero for the DS, every single one of our stores, you could go in and actually play -- we gave them a DS with Guitar Hero on it, and they could go in, and you could hand it to them, and they could play it.
That's the type of thing that, in that genre, really needs to happen. People need to experience it. We were the only place you could go, and literally get your hands on it, and play it. And you had to physically hand them the DS, but that's something that we worked with the publisher -- to get that into all 4,300 stores.
You talked about the expanding demographic of your stores. Trying to appeal to different audiences, and obviously, the expanding demographic of games with the Wii and all of that. Have you done any research into how the demographic of your consumer is changing?
BM: Yeah, we really have. Tony made a great hire about 10 or 11 months ago. Now, Mike Hogan is our senior vice president of marketing. Mike has done a great job, not only doing independent research, but we've also partnered with some of our bigger publishers and shared results on consumer research that they have done within the market as well.
It's been very interesting, because a lot of the data that we've done independently is coming back really the same as the research that they've done, and it's really pointing toward GameStop as the preferred location for the core gamer, obviously, but for the expanded market as well. And that was a little bit different than I think what our publishing partners had definitely perceived and it was a little bit surprising to us as well.
TB: Let me give you a great example of the expanded audience. We have the capability to track, now, on a weekly basis, what people buy and the psychographics of those people. So, for instance, when we sold Wii Fit. We know that over 50% of the people who came in and bought Wii Fit. On average, the women who bought it were five years older than the average women who buy other games. We also know that they had a higher customer satisfaction -- almost 100%, which is obviously the highest that you could get -- in our stores.
But what was most impressive is that nearly 50% of the women who came in and bought Wii Fit hadn't been to a GameStop before. That's what we like. We love to see those games that are drawing people in, because as Bob mentioned, we do know this. Not only has independent research actually driven this, but also publisher research has driven this.
When you talk to mom, when you talk to the expanded customer, ask them, "What's your favorite place to shop?" We come out on top every single time. Obviously, with the core, we're two-to-one over our second competitor, we're three-to-one over our third competitor. The delta's not that high when you look at the expanded user. Definitely, GameStop's a solid number one, and the competition's behind us. We're excited about that.
And it's not a surprise to us, because we know our people are knowledgeable and that's where we really differentiate as compared to some of our competition. So it doesn't surprise us, but we are glad to see other people recognize it as well.
And this is information you're gathering via surveys?
TB: This is information we're gathering via surveys.
The types of surveys that you get on receipts, as most stores are doing these days?
TB: Yes. Most stores are doing this these days, I think, yes. I'm not sure how many of them are actually hooking it up with the transaction data, to say, "Okay, this is the transaction that these people actually did." I think that makes us unique. So, for instance, I can tell you last week that 53% of the people who bought DS last week are women. 49% of the people who bought Wii last week are women. The average age of the woman who bought the Wii was four years older than our average age that was in there.
So the good news is that we are monitoring this weekly to make sure that we are going after that expanded audience, as well as making sure that our share stays extremely strong with the core. Because we are not going to lose the core as we continue to cater to the expanded audience. The core is really what we've grown up with and what we're seeing is that our model can expand and adapt, with the expanded audience, and that we can thrill them as well.
The PC's Place at Retail, and Digital Downloads
Now, something that bears talking about, also, is the performance of PC sales in your stores. Have you found that it's been consistent and strong?
BM: That is down from a year ago. We had planned for it to be down. Again, the number of new titles we have on PC is down probably more than what I had anticipated it would be down, but again I don't see that as a threat or a signaling -- we're not backing away from it at all.
A year ago we had 350 stores that didn't carry PC merchandise and today, that number hasn't grown any. There are some big titles coming out, especially World of Warcraft: Lich King. For a PC title to approach being in the top 10 for the year, there are very few that can do it, and obviously Blizzard does have the majority of them when that does happen.
TB: And we just had a great launch on Sunday, with Spore.
BM: That's correct, with Spore. The PC market is definitely still very alive, and a portion of our business that we're hanging onto.
TB: Another thing that we've done since last year -- Bob really lead this initiative -- but we've taken a lot of the PC games where we kind of had them on a gondola, from a space perspective, but we've just realized, this is too important of a category, so we've put a lot of them up on the wall again where there's stronger representation in our stores.
Do you find that those kinds of decisions make a really big difference in consumer reaction?
BM: Yeah, we really did. It's a lot more accessible, the customer doesn't feel like it's just an afterthought or that we're closing out that merchandise. It is meaningful. We represent our top sellers. Still, with value product, we'll continue to have that merchandised within a gondola. That doesn't need as much prime wall space as the frontline assortment.
Do you feel the bite
from the competition of download services like Steam, on the PC platform?
BM: It has changed a lot. It is growing, but we're also growing with it. We offer digital downloads on PC, especially, through GameStop.com, we see that continuing to be a market that will continue to grow, obviously. EA has made some recent announcements on download of a full game.
But again, our position with our publishers is that we're not afraid to compete with them -- against that digital distribution model. We can offer it. It's really another choice for the consumer, as long as they're not making that choice an unfair advantage for them, where they're able to sell it earlier or they add something into the game that we can't get our hands on for our consumer.
TB: We know that we have evangelists -- you're seeing them all walk by here [at the show] -- but they're evangelists for the game world. We know that there are a lot of people, the majority of people, that are still going to want to experience the retail experience -- we think, in particular, the GameStop experience, where you go in and talk to a knowledgable person about the game.
And you're able to get it at the same time, most of the time even before [you could otherwise], when you go into a GameStop and pick it up. As Bob said, we're at parity. We're all about giving consumers what they want, so if consumers want to digitally download it, then that option is available. We just want to continue to offer the best retail experience that we can.
How has the performance of the digital downloads through GameStop.com been? Have you been satisfied with that?
BM: Yes, I would say that we are. Again, on Spore, we had a pretty good response on the number of digital downloads. I wouldn't say that it's a significant part of our business, but again, as we've mentioned, it's another option or a choice for our consumer that we'll make available to them and they can decide whether they want to sit at how and download or come into the store.
What do you think of EA moving to having the full Burnout Paradise game downloadable on the PlayStation Network?
BM: That particular game, that's a game we've had on the shelf and we've been selling. The difference there again, is that it's a smaller game --
TB: About two gigabytes, I believe.
BM: So it's an option for the consumer to have a game we've already been able to say that and market it to our consumers. It's another distribution option for them.
Sure, and you have been able to sell the game for quite a long period of time, but games like that could potentially have a lot of success as a Greatest Hits title, and that could potentially eat into that success. There's still significance there.
BM: Yeah, you're right. I think the position that we're in there is that really it's a choice for the consumer. Our passionate salespeople are really what represent what we believe is the advantage that we have and will continue to have, and as you know from being in our stores and working there for us, it's that it's just part of what the excitement that we create -- especially around these launches, giving them the ability to come in and talk to the talk with these people. [Ed. note: by "working there for us", McKenzie is referencing a previous conversation where the author commented he had previously worked in Babbage's and FuncoLand stores.]
TB: I see the publishing very much as a partnership. In this case, you could see it as a competition to the way that we sell. So we're going to treat it like any other competition -- we're going to try to be the best experience for the consumer, and we think that we're going to become that. So again, if the customer wants to digitally download it, then it's available for them, but we really fundamentally believe we offer a much better experience in our stores.
BM: We've done some internal studies, really looking at the bandwidth of the internet in the U.S. as it is now, and I mean it's years before you would be able to take a larger game and timely download that within the current configuration of the internet, within the U.S.
So again, there is a percentage of the consumers that are going to want to have that type of distribution choice, but as far as it turning into a significant threat, I think is several years -- from the study we had, it is out to 2020 or beyond, before the bandwidth of the current internet configuration would allow that.
The State of the Consoles
You talked a bit about the pickup of the PlayStation 3, as some of the more significant platforms for the title came out, and you said that it's a continuing trend for you.
BM: Yeah, definitely. I think we're seeing the number of new releases that we have from now till the end of the year is close to 100, which is up considerably -- it's almost up 50% from the same time a year ago -- so again they're finally hitting that install base where the publishers are starting to get that development and really bring it over for that format.
TB: Not to mention great exclusives as well, like LittleBigPlanet and Resistance 2. They've got some great exclusives that are system sellers as well, and we saw that before -- Metal Gear Solid and GTA IV were great system sellers for the PS3.
Can you talk about your reaction to the price drop on the Xbox 360?
BM: I'm very pleased with it. I think it was very timely. I think they did a great job. A month ago with the 20 gig configuration on the Pro model, taking that price move just feels like, now, looking back at it, that was a strategic move to get a little gauge for 'em on how reactive that was going to be.
Obviously, within the current 360 cycle, now being positioned, going into Q3 and Q4 with a $199, $299, $399 price point, it really sets it up well for us, as retailers, to get that messaging across. Now they're truly the first next-gen console to make the sub-$200 price point.
Again, we anticipated we would get significant increases in sell-through. It's early; we've had four days now [as of interview time] to compare it to, and we're very pleased. We're actually surprised. The momentum is coming more on the Arcade model than it was on the Pro. But all three have seen more than a two-fold increase in sell-through.
How do you feel about the PlayStation 2 as it slides into its 10-year plan?
BM: When Jack [Tretton] mentioned that, it's two years ago now, at [a Sony retailer event], you kind of went "Ahh, they're not going to get there." But I've got to give 'em credit -- they're doing a good job. I had anticipated and I had hoped it would be a $99 retail by now. We're not, but we're seeing good development on PlayStation 2. Not as much as a year ago, but again, you wouldn't anticipate that.
I didn't realize how hard it was for some of these publishers to make the [leap]. You'd think, "Ahh, it's PlayStation. So you're making a game, make it on PlayStation 3 and PlayStation 2. What's so hard about that?" Now that we've got the games behind us, it's almost a totally different development team [requirement].
It's a big commitment not only for Sony, and for us as retailers to continue with [selling the PS2], but for publishers to continue to make meaningful content, and to make that [commitment], and get the ninth season and hopefully toward the 10th. There's definitely is plenty of room left in that. The value of it is there. Again, my son, half of the games he's playing, he's playing on PS2.
TB: I thought it was fascinating that in June, the software sales for PS2 were only down 4.7 percent. That's amazing for a system that's eight years old, after the year we had last year.
I don't think we've seen that, ever.
TB: It's an amazing statistic.
Speaking of Sony, there's been a resurgence for the PSP. People really thought the PSP was going to go down for the count, I think, but it's really picked up. Hardware sales have picked up -- software is still a little softer than I think it needs to be. Still, there are some big titles -- particularly Crisis Core and God of War were big.
BM: Yeah. We had really seen significant movement on PSP hardware last year, again, when they took the hardware markdown last year in August, and really, the momentum hasn't let up since that time. Again, it was, strategically, a really great move. It was a great price point -- they really needed to get there.
Now that they've announced the PSP-3000, again, that's something that the consumer really wants. They want something that's newer technology, that's a little bit sleeker, that's got a brighter screen, that's got a built-in microphone.
That might not be meaningful to everybody, but still, having something new that [Sony] can get behind and promote; they've got a renewed interest within Sony as well. They've brought in new people to get after their third party publishing and there will be a significant number of more releases on PSP in 2009 than there have been in 2008.
Square Enix announced a number of compelling games for the system recently, and I've heard about a number of unannounced games that are quite strong and a little bit surprising.
BM: It's great to have two handheld systems, and again, the great thing is that they're really geared toward different consumers. Not totally, but again, the DS is reaching that broader customer, from the younger kids -- again, my daughter has been playing her DS for a couple of years now -- from five years up till some of the Brain Age games and so forth, they're utilizing them inside of nursing homes and so forth. It's really great to have that handheld strength as well as the consoles.
The Friendly Ogre: Trade Values, Used Game Sales, and the Economy
Something I wanted to talk about is a packet I got a few weeks, maybe a month ago.
TB: From GameStop?
From GameStop, with the ogre, and the air freshener and everything -- it seemed to be about perception, the perception of GameStop.
TB: Trade value perception?
Yeah. Can you talk about that?
TB: We did some research with customers and that's what it was born out of it. You're talking about the 150 titles every day, worth over $15. What we found was that the perception of our trade value was far different than the reality of our trade value. Far different. I'm sure you see that on the blogs, and so forth, you don't have to read very far. The reality is that there are a significant portion of our games that do actually represent a strong value.
So that was the basis of our campaign -- to let people know that a large portion of our games are over $15 when you trade them in. We see that really as a very unique part of GameStop. We provide currency for the purchase of new games.
We really believe, and the reason that we're so passionate about our trade program, is that it drives new games. Last year, alone, we put over $700 million of trade credit back toward new games. I think that new games is about a $9 billion market. So if you stop and think about the currency that we're generating for the sale of new games, it's an absolutely amazing proposition.
BM: Especially, we feel, with the economy in the current situation where it is, and it seems to continue to be probably a tough economy -- gasoline prices, the way they've been and so forth -- the value perception is something that we feel very strongly about and are committed to.
What about your relationships with publishers? We've talked about this before, and we talked about it last year -- I know it's come up a lot. There's a certain point at which publishers become uncomfortable with the used game market.
BM: I think, again, as Tony mentioned, it's a significant amount of currency that we've put back into the new gaming market. Again, over $700 million worth of games. And what's interesting, is that the transactions where we have trade-ins, 80% of those transactions, the credit is applied to the purchase of a new game. Again, it's a significant amount of money that we're generating purchasing power to allow them to buy the games that they want.
TB: And actually, it's something that we speak very openly with the publishers about. It's not a hidden topic. It's who we are. It is not something we are not proud of. We believe that we are bringing a tremendous value to the customer by doing it. I think that all of the publishers, from a trade perspective, there's really very little discussion on that.
To your point, there is discussion more on the used side, but I will tell you that, as we've explained the model and as Bob has articulated, over 80% of those trade credits go back toward new purchases. And, quite frankly, as our frontline market share continues to increase year after year after year, it's a little hard to argue that that portion of the business is hurting our frontline market, when our market share continues to increase year after year.
I would say that it doesn't hurt you, but the question is how much do the publishers perceive it as hurting them?
TB: I really think, again, when you look at the fact that nine percent of the total currency spent on new games last year was generated out of one company's trade program, I guess you'd have to ask yourself, "Okay, if that went away, how much would the industry suffer?"
I think that from a trade perspective, a great example is the used car industry. Let's say that you were just to take out the trade program on used cars. How many new car sales would be impacted by that? I think it would be a dramatic reduction in the sales of new cars. I think the same thing would happen here.
Actually, we had a lot more of those conversations two years ago than we have had in the last two years.
BM: Yeah, definitely, we have. I would say in the last year more of the conversations are on digital, and again, our position is as we've stated. We're not afraid to compete against any of our competitors, and if they turn the tables and they create a non-parity situation, and it's not a fair situation where they're giving us a chance to compete.
TB: And I'd say we've had a dramatic reduction this year -- and that's another thing that's has changed from last year -- we've had a dramatic reduction in the number of discussions on trade and used, simply because trade is becoming such an integral part, especially in this economy, in the affordability of the games coming out, that we really are just not having a lot of discussions about it.
You spoke a little bit about this, but I wanted to talk about the impact of the economic downturn on you guys. Obviously, it's been news within the industry that we've been fairly resistant to the downturn -- in fact, there's been growth over and over and over. At the same time it's been at the forefront of people's minds, particularly as things don't seem to be improving.
TB: The economy is difficult. There's no doubt that for retail, the economy's difficult. At the same time, we just released our second quarter earnings, and our sales are up 38% year to date. So I don't think there are a lot of retailers that could even articulate those numbers. I think that's where our model really helps us -- the trade currency that we talked about has really come into play. It's been very strong for us, and it's kept us in a very strong position for frontline market share. And obviously, we're selling a lot of new games to be up 38%.
BM: I think, too, that with a tighter economy, the consumers are making entertainment decisions that are in our favor. That entertainment choice is now at home -- whether it be a game for their own needs, or for a family interaction. That's one of the neat things, I think, about what we keep referring to as "the expanding market", it's the family focus of getting these games and really bringing that into the fold.
TB: My family's a little unique. I have six children. So when I go out to a movie, I just take out a loan, basically, to go out. But for the cost of a normal family to go to the movies, you could buy a video game. So I take my family out and basically spend 70 bucks to take them out to a movie. For a little more than that -- if we get Rock Band, let's say, which we play a lot of at our house. Two movies, versus Rock Band, which we've played for hours and hours and hours, I mean, it just... there's no correlation whatsoever.
Definitely. If y