Interview: GameStop's DeMatteo Talks State Of Holiday Market

As GameStop goes, so goes the game industry? At the very least, analysts, industry execs, and investors alike have been watching closely for the retail giant's third quarter as one key measure of the games biz's health. And the news was fairly good for the company -- yesterday, it reported sales up 5.2 percent to $1.7 billion. But profits edged down to $46.7 million from $52 million in the same period last year, and comparable store sales saw a decline of about 2 percent. Part of this is due to the 'Halo effect' -- that Halo 3 did so well last fall, it's making the entire business look bad this year. GameStop in particular had the number one market share of the title, and now suffers from the comparison. GameStop CEO Dan DeMatteo tells Gamasutra he's actually quite pleased with the quarter's result -- being down just two percent when up against Halo 3 is still a strong showing. "What we saw in the quarter was a real strengthening of new-release titles beginning in October, and titles, at least thus far, into November," DeMatteo says. "Most, if not all new titles have either met or exceeded expectations." So in other words, GameStop's cautious lowered forecast and cautious signals from companies like Activision and Electronic Arts might cause investors to start hitting the panic button ahead of the crucial holiday season. But it's still business as usual for the industry's fundamental buyers. "The core gamer [has] clearly not been affected much by the macroeconomic news," says DeMatteo. "They may be affected in other ways, but indeed they are still coming out and buying the new titles much as we had expected." Things Change In Lean Times Speaking at the BMO Capital Markets event recently, Take-Two Board chairman Strauss Zelnick said he believed that foot traffic is actually down at game stores. "I can’t say that, because I can’t actually quantify it," says DeMatteo. "But... October was strong, and [in] the first two weeks of November, our comps [year over year comparisons] are up 20 percent -- so that implies there's foot traffic... so, at least the new titles are bringing out the buyers." But in an economic downturn -- where the consumer can be conservatively expected to be more hesitant even in major buying seasons -- retailers do change their behavior somewhat. DeMatteo says that GameStop has an advantage as a specialty retailer, and so any evolutions in how it handles game inventory is lessened, compared to a big-box outfit where games are just a section. "I know that many of the big-box retailers who are not as familiar with the category when they are going into economic times like this -- they'll buy once on a new title and then not reorder," he said. "We will not do that -- what we will do is we will be somewhat more cautious, and order in smaller quantities more frequently," DeMatteo explained. "As long as something is selling, we’re going to continue to buy it. And that’s our philosophy, even though we might not buy as heavy because we may be a little less certain." But do titles and genres that are usually more reliable sellers ever displace the higher risk titles at a sharper rate when times are tough? "There's not a change by genre, or by format, or by platform," DeMatteo said. Keeping Good Tabs Part of the retailer's leverage on the situation is its "very accurate" inventory management system, with some help from what DeMatteo says is "some of the best intelligence in the industry on how to predict how many units to order of a particular title." GameStop's pre-release marketing campaigns help a great deal with this. They work with publishers and developers well ahead of a game's release to set up in-store promotions and reservation programs. These not only help drive sales, but also provide GameStop a reliable set of data on which to estimate release day sales. And according to DeMatteo, this methodology, refined over almost 20 years, is so reliable that even publishers use it for their own internal planning. A new head of marketing at Electronic Arts, DeMatteo said, once set his best and brightest to work on a three or four month study to determine how many units of a title the company should make at launch. But, DeMatteo, claims, he ultimately concluded that GameStop reservations of similar titles were the best indicators they could find. Speaking of EA though, analysts and investors worried throughout the summer that Madden NFL's latest iterations might underperform -- because its GameStop reservations were lower than last year's. But as it turned out, Madden NFL 09 performed just about the same as last year's predecessor. "Madden was an exception and I will tell you why," DeMatteo said. "We had a head of store operations that was fanatical about Madden, and every year, on Madden, he would put together contests, et cetera, for the field to see how many copies each store could reserve -- a big competition." But that employee left the company before this year's game launch, and so there were no such competitions to encourage Madden reservations this year. "I told some people who had called beforehand, trying to use that as a predictor... I told them, don’t look at this year that way, because we’re not doing the big campaign!" DeMatteo laughed. Sale, Sale, Sale? If retailers change the way they stock in light of economic pressures, do publishers and distributors behave differently, too, possibly with price reductions? "I see people take prices down on products that don’t sell as well as expected -- that’s normal," says DeMatteo. "But I don’t see anybody reacting to the economy by saying we have to lower new titles' release prices, or anything like that. They’ve all held at $59 and $49... but some people will take price actions on titles that haven met expectations." But what about hardware? "I think Microsoft is having a hard time keeping up with demand on the $199 Arcade system," says DeMatteo -- which spells a no for further reductions on the Xbox 360, no matter what the economy does. "Same way with the Wii," DeMatteo adds. "While we’re in stock, and we believe we’re going to be much better off than before, I think the Wii still has a chance of being a sellout this year." "Given the economic environment, [the PS3] is clearly pricey," DeMatteo acknowledged. But Holiday season ads are already well in place -- "so even if they did do a price drop, it wouldn’t get any press," he said -- making it an unlikely move for Christmas sales at this stage. Is the price disadvantage for PlayStation 3 leading more consumers to adopt the Xbox 360 instead? Not necessarily -- the widening gap between competitors can be attributed largely to the $199 Xbox 360 SKU, DeMatteo suspects. "That $199 price point is striking a strong chord with the economically-strapped consumer," he says. "I would have to say Sony eventually will drop the price -- I just don’t think it's going to be anytime real soon." Did Somebody Stop The Music? Another area of interest in the game biz right now is the perception that many analysts have of the once-booming music game genre as a waning fad -- EEDAR's Jesse Divnich was the latest to make this suggestion. Is DeMatteo seeing "softness" at retail for music games? "It has been softer than the prior year," DeMatteo acknowledged -- but cautioned that the large year-over-year drop in Guitar Hero sales could be attributed to many factors other than customer interest. "This is the first Guitar Hero band kit," DeMatteo noted. "And the Guitar Hero band kits for the Xbox 360 and the Wii are out of stock," he said. "So I think there has been somewhat of a underestimation, of maybe the band kits, or there’s just supply problems," he added. "It seems like the consumer has voted on wanting the more expensive band kit. They’re selling right out as fast as we can get them in... when I look at our out-of-stock reports, the Guitar Hero band kits are right at the top of the page, all the time. Overall, despite prevailing concerns, DeMatteo still feels strongly about games' ability to perform this holiday -- and GameStop's position at retail. "If you were sitting in my shoes, and you had 20 percent comps the first couple weeks [of November], you’d say product looks good and customers are coming in," he said. But that doesn't mean he's in an easy seat: "As the primary driver of sales shifts from gamer to gift-giver, given all the doom and gloom you read about, you would have some level of concern."