{audio:0:00:00} Can you set the context for when you were promoted to run Game Stop International?

{audio:0:00:10} It goes back to the theme that I’m going to talk about later: always volunteer. There was a position open to run international. They were having a tough time finding somebody to do that. I finally raised my hand and said I’ll do it, I’m ready. I spent the next ten years basically travelling internationally three weeks a month and working with other countries to turn around their businesses. I think that it was really interesting that a lot of the countries were just doing things on their own with not a lot of oversight. I helped pull everybody together and bring the business forward.

{audio:0:01:22} How did you deal with the different approaches that different countries and cultures had to running a gaming business?

{audio:0:01:33} You’ve got to be flexible. You can’t manage Germany like you manage Italy. It was always a challenge to try and move everybody forward at the same speed, but at the same time, you have to do totally different methods. I think one of the keys to that is being able to recognize the differences, whether it’s culture, whether it’s the business circumstances, whether it’s any of those things, I think you’ve got to be able to differentiate between what you’ve got to do in different businesses.

{audio:0:02:21} Did you standardize any processes or did you change anything material for Europe?

{audio:0:02:30} Absolutely. In the beginning, it was more about just getting everybody to be on the same page. Later, I implemented shared services in Ireland and head of accounting and HR and a few other functions, IT, centralized in Ireland to be able to get everybody to work together and save a lot of money, as well as being much more efficient.

{audio:0:03:05} Walk me through then. You step into the role, you’re running Game Stop International, what exactly was your strategy?

{audio:0:03:18} My strategy was to make the international businesses much more successful, frankly, than the U.S. business at that time. I wanted these guys to – it was an interesting structure. Each market, there were 14 countries, there were 7 regional markets and each market had a CEO. In Europe, they call those managing directors. The whole strategies were to get the managing directors, one, to feel like it’s their business, because they had everything. I had finance, I had IT, I had distribution, store ops, marketing, all of that. The strategy was to get them to be able to feel like they’re accountable and they can make a difference with their business. At the same time, get them to work together. I think that was the big turning point when we were able to do that.

{audio:0:04:38} A lot of internal meetings. A lot of communication. I told my guys, look, my role is not to be your big boss. My role is to guide strategy. My role is to give you the resources that you need. At the same time, to martial communication between all of the different entities. I think that worked, it took a couple of years, but I think that worked very well.

{audio:0:05:23} What was the most difficult part about martialing that communication between different regional CEOs?

{audio:0:05:30} Yes, that’s a good question. The most difficult part was, each CEO or MD was from a personality perspective focused on their business. They couldn’t care less. The guy in Italy couldn’t care less about what the guy in Spain was doing. Over time, it’s like you have to care about what Spain is doing because they’re going to help you, as well. Especially when we talk to vendors and try to negotiate things. I think that they really did a good job of eventually coming around, despite their independent personalities and working together.

{audio:0:06:32} How did you structure incentives for these CEOs to drive accountability for their region?

{audio:0:06:40} I changed the bonus plan to make it much more about their bonus but also with a tag of the overall performance of the region. If you were the Spain CEO, you were bonused on your performances, like 80 percent, but now there’s a 20 percent bonus on the way Europe was going. There was an opportunity and an advantage for them to work with the rest of the countries to try to help things better because they would get an advantage out of it, as well.

{audio:0:07:31} Did that change their behavior?

{audio:0:07:35} It did. It took time. I took over international at the end of 2009 and it was probably 2015/2016 we’re seeing things come together. They started to work together. It was really great to see.

{audio:0:08:00} Working together, I suppose they were obviously trying to help each other’s businesses, but also then working together to negotiate deals with vendors or the big gaming companies, how exactly were they helping each other?

{audio:0:08:16} I think it’s probably a few things. I think it was sharing best practices on issues regarding inventory management returns and so on. At the same time, yes, the vendor side became much more unified. Yes, you had the countries working together to discuss discounts and purchasing and so on. Even sharing inventory, where if Spain had too many PS4s, they’d ship it to Italy. That’s something that wouldn’t happen before.

{audio:0:09:01} Talk to me about the negotiation process or that dynamic with the vendors, which are such a consolidated group especially in the gaming industry? How difficult were those conversations?

{audio:0:09:15} Well, they’re actually not a consolidated group, depending on the vendor. Some of the vendors, like Sony for example, are very diversified. The president of Europe for Sony reports into Japan independently of the president of the U.S. or the president of South Asia, which includes Australia. I think that in some ways we push the vendors to come consolidated and to think more globally about their businesses, which they hadn’t done before.

{audio:0:10:10} Internally, those big gaming companies are not necessarily negotiating global deals with Game Stop, these are region by region contracts in effect?

{audio:0:10:22} It was, certainly, I think it’s changed a little bit over the last couple of years. Sony is now trying to get their pieces together and negotiate a global contract. Microsoft is still discombobulated. Nintendo was also very disparate. I think over time it will change, so that the vendors look at the world as one piece versus all of these little micro kingdoms.

{audio:0:11:05} As they shift to digital, you mean, they’ll be releasing more over the air stuff and therefore, negotiating more direct?

{audio:0:11:17} Taking a step back again and looking at the strategy of Game Stop International potentially making hard decisions. How did you look to close stores and really turn around that segment of Game Stop?

{audio:0:11:40} Yes, I don’t think store closures was a big piece of the strategy. When you look at store closures, you obviously look at the stores that are negative cashflow and you look at that and you try to decide, is this an aberration? For example, a store that’s negative cashflow, it could be because the mall just went under reconstruction and so they’re losing money but it’s only temporary because they’re refurbishing the mall. Or there’s construction in the street, or there are all kinds of reasons. Negative cashflow stores in general would be closed. You’ve got to be able to do that.

{audio:0:12:40} What was the merchandising strategy in the stores then to increase either same store sales or margin per store?

{audio:0:12:50} The easy pieces were, you wanted to be able to sell private label products which are a really nice margin. You want to be able to sell collectibles and you try to tag on digital. Then it comes to used which is always a battle. You put those four things together, that’s where you get your margin. I’d say in general with accessories and collectibles, it was very successful. Used has just been a slaughter.

{audio:0:13:40} What so difficult about the used market?

{audio:0:13:42} That’s a good question. There’s a piece of the used market that the consumer really appreciates because they can trade in their games and they can get trade credits and so on. At the same time, it’s difficult for people to remember to bring in your old games. I’d even say for myself, my 13-year-old, he’s probably got 100 old games in his playroom, and trying to remember to take those games into Game Stop is not easy. Hell, I trade in my own better than anybody. Yes, I think consumer awareness and getting people to know that it’s a viable option is the key.

{audio:0:14:56} How does that work then, if I buy a brand-new game from Game Stop, let’s say it’s 60 bucks and then you will then buy that back off me the next iteration of the game for 30 bucks or for a fraction of the price and then I get that discount when I buy a new game instore?

{audio:0:15:15} Exactly. It comes in handy the most when I always say 70 percent of new videos games are released in the fall. The average gamer doesn’t have the money to spend $60 ten times over between October and December. The advantage is, you buy the game and then you can trade it in for 30 bucks. 30 bucks is about right depending on the game, and then you get another game. It’s not a complicated proposition.

{audio:0:16:04} Only suits the hardcore gamers, it seems.

{audio:0:16:10} I wouldn’t say it only suits the hardcore gamers, I’d say the hardcore gamers are the most astute in terms of taking advantage of the program. Again, if you go into your kid’s bedroom and there are like 25 Nintendo games, taking those, wrapping them up and bringing them to the store and going to Game Digital for example and just trading them in is a huge advantage to you. People just don’t think about it.

{audio:0:16:44} Then in terms of increasing your margin then, you’d then resell those old games in the store at a markup which would be favorable to what you’d get on the new stuff?

{audio:0:17:00} Yes, I think this is public information. The average used sales are around 40 percent margin. New video games, it’s more like 20. Yes, there’s a big difference between the two.

{audio:0:17:22} Talk to me about how you approached really driving margin growth with the private label and the collectable and accessories, which is like you said, is where the margin is and where you typically increase that gross margin. What was so difficult about driving that growth from those products?

{audio:0:17:45} On the collectibles’ side, I think there was just resistance within the chain. This is the same, so in 2001, we were trying to promote used. The store managers and obviously their employees at this point didn’t like used. They thought it was dirty and not something they want to handle. Guys, this is a lot of margin. It’s good for the customer. It took ten years to really get the used business going. I think with collectibles, it’s a little bit of a similar situation, depending on the market, it started in Australia where we first tested it. It had a huge impact on the business. It’s really a matter of getting everybody to understand that this is something we really need to do. On accessories, I think NPD has accessory sales at about 20 percent of total video game sales. If you look at the results, again, public, Game Stop has ten. Now, these are margins which are at least 150 percent better. I’m not sure I can tell you why the disparity, but certainly accessory sales, increasing accessory sales would make a big difference.

{audio:0:19:49} How do you prevent that inertia or unwillingness to change in an organization. It seems so prevalent in companies where people just don’t want to change or a new products comes in, the store manager doesn’t adopt it, or people don’t really relate to it. How do you change that mindset for employees and the organization?

{audio:0:20:19} I think that’s a good question. I think when we first started talking about accessories at Game Stop and there are two competing headset manufacturers. One is called: Astro and one is called Turtle Beach. You go to a store and ask them, what’s your best-selling headset? Turtle Beach - they don’t have any returns, they’re amazing. You look at their numbers and Turtle Beach was like 80 percent of our headset sales. Then you go to another store and: Astro was amazing. Never have any defects, everybody loves Astro. Their Astro sales would be 80 percent. It’s really the store managers that have to be convinced because you can’t order them, I want you to sell Astro. You really have to convince them that this is the path we’re going down, and this is why it’s good for you. It just takes time. Being autocratic in something like that just doesn’t work right.

{audio:0:21:36} You incentivize the store manager on the performance of their store specifically?

{audio:0:21:44} Yes. Once in a while, we’ll incentivize a store manager on a specific initiative. You get a spiff on X or spiff on Y. Yes, absolutely, I think that’s important.

{audio:0:22:04} I’m really curious about your core lessons from running such a large retail chain, specifically around retail management and really organizing operations, organizing supply chain to make inventory flow through the network as efficiently as possible, what were the big lessons that you learned from your career in that sense?

{audio:0:22:34} That’s a good question. First of all, the Chairman and Founder of our company Dan DaMatteo would literally spend every single day looking at inventory spreadsheets. Focus from the top is incredibly important. I try to continue that practice because if you don’t pay attention to it, it’s going to get out of control. I think that you need to be very careful in terms of what you’re buying and how much you’re buying and your skew proliferation. At the same time, you’ve got to make sure you’re not out of stock, so we would measure every day what the out of stock was and the items, which probably represents about 70 percent of the sales. It was really critical to keep your eye on the inventory because it was amazing how inventory can get out of whack in three days. We try to do a good job and always being vigilant on that.

{audio:0:24:05} What exactly did your spreadsheet have? Were they columns or rows, what were you really tracking, specifically?

{audio:0:24:10} We tracked obviously how much you have. Then you would track weeks of supply. On the spreadsheet, you would have how many sales were last week, and you would track returns on it and you would track – those are probably the key items, there might be a few other things, but it’s really a matter of knowing how many weeks of supply you have and if you start bumping up against more than something of like two, you know you have too much.

{audio:0:24:45} You aim for around two weeks’ supply and you obviously look at the skew level for the inventory?

{audio:0:25:00} Absolutely. You only need to look at the top 50 or 100 you don’t need to look at the little laggards that are not having any sales.

{audio:0:25:09} What would you do if inventory got out of control and you were at three weeks, pushing four weeks, for example, how would you react to that?

{audio:0:25:23} In that business, you have things like defective allowance, you have price protection with the vendors. There are things you can do to mitigate issues, or you just eat it and you try to sell everything off. The last thing you want to do is carry it because you don’t want to take a write down, which is always the first choice of your merchants. They don’t want to take the write off of 100,000 units of Fallout. They’d love to see it just carry. You don’t want to definitely do that.

{audio:0:26:14} You would really be laser focused on the inventory level and if it went over, you’ve be looking at distributing it elsewhere. Like you said, distributing it for different regions, wherever in Europe, you can sell it to Germany, from Italy, and manage it like that.

{audio:0:26:35} Also, it’s interesting, I’m originally supply chain, but your supply chain guys will tell you when something is out of control. Even if you’re not paying attention to the spreadsheets, your supply chain guys are going to come in and go, “I don’t have any more space in the warehouse anymore because we have all of this crap.” Then you take a look at the crap and see what to do with it. One of the things that’s important is these supply chain guys have the ability to give feedback on stuff like that.

{audio:0:27:11} You’d make sure that you have direct contract to supply chain guys, those in the ware house, those actually on the ground.

{audio:0:27:24} What were your biggest lessons from running the international business and turning around that unit?

{audio:0:27:36} I think the biggest lesson was each business situation is unique. We talked about that a little bit early, you can’t treat the guy in Italy and talk to him and manage him like you’re managing Germany. On top of that, there was a real push/pull quandary where you want the businesses to be independent and you want the managing directors to feel like they’re in control and managing their business. At the same time, you want them to work together, which is not an easy task because they don’t want to work together. It’s necessary. Yes. I think the biggest challenge is trying to figure out that balance between working together and being totally individually independent. It took a while, but we ended up figuring that out.

{audio:0:28:50} What advice would you give to someone then, let’s say that I have different units that are not working together, what would you suggest that managers can do to really align interests while also keeping the accountability at the regional level?

{audio:0:29:10} The first thing is not to take away accountability at the regional level. Everybody wants to do a good job. If you’re talking about people at a high level, again, these are mainly CEOs, some of the businesses, like France are like $800 million, so it wasn’t chump change. You want that person to feel like, I’ve got my business and I’m going to do the right thing.

At the same time, you’ve got to figure out how to make them realize that they need to work together because it helps all of them. That just took time and there’s some trust involved in that. You want the guy in France to go, okay, so the guy in Spain had a good idea, let’s take a look at it, without feeling threatened that he’s making all the ideas. I think the main thing is trust, where they need to feel trust that their peers have good ideas, as well, and that the boss is not going to penalize them for not having all of the right answerers all the time.

{audio:0:30:40} How do you drive trust within an organization?

{audio:0:30:44} Lots of conference calls and lots of meetings and lots of visits. Before I took over international, I’ve been told the managing directors have never been in the same room together ever. We changed all of that, where they actually became friends and having calls without me. I think that was a huge benefit to the business. That’s the only way to do it, is to really get these guys to work together. You can’t order them to work together. You’ve got to facilitate the relationships.

{audio:0:31:40} Looking more specifically at the industry now, what is your long-term view on that mix between digital and physical gains?

{audio:0:31:54} Yes, I think long-term it’s not going to be more than 50/50. If you look at books and music and CD’s or movies, 50/50 seems to be the plateau. I think that will continue to be the plateau. I do like the fact that there’s more progress being made on the physical side. To give you an example. There’s been a few games that were digital, Minecraft is a good example. Where Minecraft was off the charts, only digital. Then it released on disk and it was the top ten selling disk in videos for like a year.

There’s a version of the population that wants physical and there’s a version that likes digital. I think the two can live together. I don’t see one thing replacing the other, certainly, it hasn’t with any other genre.
The other thing is, what retailers can do with loyalty and omnichannel is pretty amazing. Companies like Amazon, I’m sure Amazon is higher market share today because of the coronavirus thing. Amazon six months ago was seven percent market share on video games. The reason for that is, people want to go to the store, they want to talk to somebody who’s an expert in video games. They want to buy a physical gift for their kid or their cousin. I don’t see that changing at the moment. It might be counterintuitive, but I don’t see it changing.

{audio:0:34:36} You think the consumer behavior around going to the store, buying a physical product for Christmas, for birthday, for friends, for family, that’s the kind of emotional attachment that people have to those physical games versus downloading it, for example?

{audio:0:34:55} I believe that. I can’t imagine my 13-year-old going to a party and giving them a download receipt. It’s just not very exciting. I definitely think that will continue. The coronavirus I’m sure will change things for a little bit here, but I think it goes back.

{audio:0:35:24} How did you think about building the loyalty scheme for Game Stop?

{audio:0:35:35} It’s interesting. I think that we recognized that it was really important to have a loyalty program. We wound up with 55 million members, something like that. The thought about it is, I think there are two different schools of thought, one is you’re a loyalty member and you get perks when you buy. The other is, the benefit is you’re a loyalty member and I get all of your data of what you want to buy. I think the benefits are the latter. I don’t think anybody goes to a store and goes, “I can get a loyalty perk if I buy Call of Duty.” I just don’t believe that. I do think that knowing all of your Nintendo customers and you launch a new Nintendo product, like the Nintendo Switch, knowing who those customers are and being able to market to them, that’s the real benefit of the loyalty program.

{audio:0:36:50} It’s actually more about information rather than just perks.

{audio:0:36:56} I think so. I don’t think on British Airways or American Airlines, you take a flight just to get some more points. I don’t think people do that. I think it’s the ability for them to market and send me an email that says, you can go to Jamaica for 100 bucks is much more powerful.

{audio:0:37:30} Which could then feed through into making you book to gain points and it’s like a feedback loop into the loyalty for the retailer.

{audio:0:37:39} What was your biggest challenging launching the loyalty scheme?

{audio:0:37:49} I think the biggest challenge was to get the stores to be focused without forgetting about everything else. Video game retail is actually pretty complicated. I know it wouldn’t seem so from the outside, but there are a ton of things that you want your store to focus on, whether it’s getting praise, or selling used, or getting warranties on the hardware. You throw a new thing like loyalty into the mix, you want to make sure that that’s top of mind, but at the same time, you don’t want to take away from those other areas of focus. If you quit emphasizing it, loyalty signups will go down. If you emphasized it, loyalty signs would go up, but then warranties go down. Trying to get that as an area of focus and still maintain all of the other areas has always been a challenge.

{audio:0:39:00} How did that loyalty scheme work, exactly, for the customer?

{audio:0:39:06} How it worked? It worked well.

{audio:0:39:10} What were the terms of it. Let’s say I was a customer, I walk in, do I just give you my information, you market to me certain deals, how did the loyalty scheme really work and function?

{audio:0:39:23} In the U.S., you would get the loyalty program and you would get the free magazine in the former, and you would then get all of the pers in terms of a bigger discount on used, more trade-in prices on trades and so on. Outside of the U.S., in the U.S., you also get points. You could use the points to buy a pizza, for example. Outside of the U.S., the points had no value. It’s interesting that the signup and the participation was no different than in the U.S. It was very similar.

{audio:0:40:25} These were just customers that wanted to be updated or had the chance to have those offers and then you marketed them, given the information they gave you, you could market to them specific deals and upsell them on offers?

{audio:0:40:45} What do you believe are the strategic options today for retailers to adapt to the long-term structural changes toward digital? Is it this doubling down on loyalty really focused on omnichannel? How would you be looking at Game Stop today?

{audio:0:41:04} I think it’s building that ecosystem where once the customer is in, you try to add on a number of things. Game Stop, for example, you get into the ecosystem, you’ve got the loyalty program, you’ve got the Game Informer magazine. You have trades, you have all kinds of things going on, and digital downloads, which also happen online. You have omnichannel. It’s a huge advantage for maintaining market share or building market share. The one thing to remember is, when it comes to omnichannel, Amazon for example is missing the most important channel in omnichannel. Physical brick and mortar are still 90 percent of retail. Amazon doesn’t have that, except Whole Foods. To be omnichannel is really important. I think Game Stop made a lot of headway with that.

{audio:0:42:22} Do you think that shift between 50/50 mix between digital and physical, do you think we’re going to see lots of store closures from the retailers to balance that brick and mortar exposure out?

{audio:0:42:42} Well, barring the current situation aside, which you can’t really take that into account. Yes, I think there will be some closures. There are companies in terms of omnichannel that are in very different positions. Best Buy, for example, has done an amazing job at building their omnichannel business and their stock price shows it. I think Game Digital in the UK has done a really good job with omnichannel. They have a great loyalty program. I think the companies that are staying focused on omnichannel and not trying to kiss a falling knife by just keeping closing stores are the ones that are going to succeed.

{audio:0:43:52} What do you think Best Buy or Game Digital have done so well?

{audio:0:43:58} I think both have really good loyalty programs. It’s really interesting, Martin in the UK has created instore e-sports arenas and Best Buy has done a great job at diversifying their store and making it relevant. There was a time five years ago when everybody said they’re just a showpiece for Amazon. Now people are talking the other way. That people go on Amazon, they go, “Let me go to Best Buy and see if I can beat this.” I think they’ve done a really good job with customer relations and better customer service. I think he has really done a good job.

{audio:0:45:05} Do you think the digital players, Amazon and the ecommerce retailers, do you think they can replace that physical customer relationship and touch and feel?

{audio:0:45:25} Not in any way. That’s just my opinion. I don’t think there’s anything except getting stores or making a partnership with some chain, I don’t think there’s anyway Amazon can replace the feel of just ordering a box and having it show up on your doorstep. That’s going to work for insignificant things, but if you’re going to buy a piece of electronics, I don’t think most people would want to just go online and spend a thousand dollars. I think that will even itself out over time.

GameStop: The Shift from Physical to Digital Gaming

Former CEO at Gamestop

inpractise.com/articles/running-gamestop

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Mike Mauler

Former CEO at Gamestop

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GameStop: The Shift from Physical to Digital Gaming(April 22, 2020)

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