A mission to reach the next level

Standing in a GameStop store off San Francisco's Union Square, it is not hard to survey the walls lined with disk-based titles and imagine this video game outlet going the way of Virgin Mega­store and three big bookstores that have closed nearby in recent years.

The growth of digital media and web sales helped destroy those books-and-mortar and CDs-and-cement businesses. But the store manager has come over to chat with Paul Raines, chief executive of GameStop, and says that while his branch will indeed be shutting down soon it is simply in order to move to better premises on a busier street.

"We're going to have stores for a very long time," says Mr Raines, who has headed GameStop for two years, and visits the stores regularly. "That's because they are more than a transaction space, they're a place to go for a community of gamers to talk about and discover games."

You could say people also like to talk about books, music and movies in bookstores, record shops and Blockbuster-style video rental stores – and much good it did them.

But Mr Raines, who stands out among the casually dressed, mainly male browsers in his neat dark suit and open-neck blue shirt, responds that he can offer plenty of evidence that with more than 6,000 GameStop and EB Games stores in 15 countries, and where the staff are avid gamers, his strategy to meet the digital challenge is on course.

It needs to be. GameStop is facing as many obstacles as a Super Mario game. The industry is moving to digital distribution and there are fewer lures to pull customers into stores, as struggling publishers cut down the number of titles they launch a year and console makers delay their next-generation machines.

GameStop has tried to find other lines of profitable business, such as trading used games and electronic goods, selling new tablets, making its own hardware and streaming games, but these also put it in intense competition with other retailers, manufacturers, publishers and online services. "GameStop's is a unique story," says Mr Raines. "It's a company with a lot of transitions happening at the same time in a category that is maybe the most pressured of all right now."

Born in Costa Rica in 1964, he grew up in the US and studied at the Georgia Institute of Technology in Atlanta. "I'm very active with a lot of Hispanic groups," he says. "Costa Rica is a small country and needs everyone pitching for it."

He initially joined GameStop as chief operating officer four years ago after its two founders – Daniel DeMatteo and Richard Fontaine, who had run the company since 1996 – decided they wanted to hand over to a professional management team. Mr Raines joined from Home Depot, where he had been executive vice-president of US stores, after four years in global sourcing for the clothing retailer LL Bean. One of his remits was to carry out a strategic review as the threat from digital loomed.

"I'd worked for two founders at Home Depot – Bernie Marcus and Arthur Blank – so one of the reasons I came here was I felt like, and I think so did they, that I had some skills in the area of transitioning the company from founders' leadership to professional management," he says.

"LL Bean and Home Depot are arguably two of the greatest retailers of the past century, for different reasons. LL Bean has [excellent] customer service and values ... Home Depot is an extraordinary growth story, also with a focus on customer service."

The danger with joining founders is that they can be resistant to change, but Mr Raines says the opposite was true. "Dan DeMatteo is still executive chairman and is really one of the architects of our strategy. He's fully engaged and it really helps because he's able to align the board ... in today's environment you must have a chairman that's aligning the board around change, otherwise you can never win those battles." He adds: "I lived through leadership transitions at Home Depot and I learnt a lot."

Mr Raines led a six-month strategic review that began with a study of where other similar stores, such as Blockbuster or Tower Records, had gone wrong.

"Many of the companies we looked at had a high debt load, so we've eliminated that – we're one of 28 debt-free companies in the S&P 500. [The other stores] also did not embrace the rate of change around new technology, so we've pushed very hard to do that in a rational way, without overpaying for our acquisitions."

One of the lessons he learnt at Home Depot was to "move with velocity" rather than waiting to respond to events.

"You really have to understand multiple models and navigate through a rate of change that has been very aggressive," he says.

Most of the strategic recommendations he made to the board have been implemented, he says. One was a loyalty programme, called PowerUp Rewards. Its 18m members are responsible for 35 per cent to 40 per cent of all video game consumption in the US, according to the company.

A second tactic was for GameStop to become the first games retailer to introduce digital content sales in stores, in which shoppers download games in-store and buy items such as Facebook credits or gift cards.

A recommendation to exploit gaming innovations led to the creation of a $100m venture fund. It in turn led to acquisitions including Kongregate, a casual gaming online service; Impulse, a digital-download gaming service; and Spawn Labs, a video game-streaming cloud service that is awaiting its launch.

"I think generally they've been the right decisions, one or two things I'd of course correct, but as you look at how everybody else has fallen by the wayside, while we are certainly not through the woods, we do believe we've made good choices and the company is positioned very well."

GameStop is the market share lead­er in video games, fighting off competition from Walmart, Best Buy and Amazon. It competes with online services such as NextWorth and Gazelle in the higher-margin business of trading in used electronic goods, but he points out that its bricks and mortar store network gives it a presence they lack.

A 200,000 sq ft facility near GameStop's Texas headquarters employs 1,100 people to refurbish the traded-in game disks, consoles, tablets and phones. It also houses an R&D unit where a bestselling Bluetooth gaming controller for tablets was developed for sale in store alongside Google's Nexus 7 tablet.

Mr Raines has become more of a gamer himself since joining the company, playing about four hours a week. "I played a lot of video games growing up and with my kids."

Because the company employs staff who are "very passionate about gaming", he says, that involves the senior executives too. "We have to be authentic about this – I force myself to play every game, even though I'm not a big fan of some genres." The fantasy role-playing games (RPGs) are among his least favourite.

In real life, meanwhile, he is playing his own real-time strategy game – as he plots the course of GameStop's digital transition and creates complementary businesses.

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