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Funco Inc.
Company typePublic
Nasdaq: FNCO
IndustryRetail
FoundedMarch 1988 in Minneapolis, Minnesota, United States
FounderDavid R. Pomije
DefunctDecember 2000
FateMerged with Babbage's to form GameStop
SuccessorGameStop
Headquarters
Eden Prairie, Minnesota
,
United States
Number of locations
404 (2000)
Area served
United States (contiguous)
Key people
David R. Pomije (chairman and CEO)
Stanley Bodine (president and COO)
Robert Hiben (CFO)
Products
Number of employees
1,500 (1999)
ParentBarnes & Noble (2000)
WebsiteFuncoland.com (archive)

FuncoLand was an American video game retailer based in Eden Prairie, Minnesota that specialized in selling new and used video game software. It is considered the first video game retailer to allow consumers to sell and trade used video games. The brand's parent company Funco Inc. was established in the home of David R. Pomije in 1988, initially as a leaser of video games to Minneapolis–Saint Paul video rental shops, and then as a mail-order business specializing in used video games. Upon the success of this venture, Pomije moved the business to a Minneapolis warehouse, and began opening retail outlets nationwide. In May 2000, Funco was acquired by Barnes & Noble for $161.5 million, and was merged with its subsidiary Babbage's to form GameStop in December 2000.

History

Early history

In 1985, David R. Pomije established the mail-order company Protectronics,[1] which initially sold Commodore 64 computers, but then transitioned to an eclectic array of consumer goods after the Commodore market dried.[2][3] While the venture was initially successful, extravagant personal spending and lack of financial, operational and inventory control resulted in a Chapter 7 liquidation around March 1988.[3][4] Pomije's leftover inventory included 1,100 Nintendo games, which he leased to video rental shops in the Minneapolis–Saint Paul area.[3][5] To update the inventory, Pomije began buying used games from mail-order businesses across the country. After a couple encounters with particularly rude dealers, Pomije was inspired to start another mail-order company of his own, and began advertising his offer to buy and sell used video games in industry magazines.[3] Pomije made $35,000 by March 1989,[5] and during the Christmas 1989 season, Pomije needed to install four telephone lines in his house to accommodate his growing business,[3] and recruited his wife, father and uncle as staff members.[2] The amount of teenagers and young adults driving to Pomije's house for his business was so great that one of Pomije's neighbors called the police out of suspicion.[6]

In February 1990, Pomije moved Funco to a warehouse in the Minneapolis suburb of New Hope,[6] and he made $375,000 by March 1990.[5] In August 1990, Pomije set up a small informal retail shop next to his office, which would be the first FuncoLand location.[3][4] The following month, Pomije began running an advertisement campaign in the daily Minneapolis newspaper. In two days, FuncoLand made $25,000 in sales, with customers coming in from Wisconsin and the Dakotas. Around this time, a Japanese company – which operated 330 stores in Japan similar to FuncoLand – inquired about a partnership with Funco. To gauge the company's interest, Pomije charged $10,000 just to read his business plan. Pojime ultimately decided against a partnership.[6] In late 1990, after sales reached $50,000, Funco opened two FuncoLand stores in Eden Prairie and Roseville to prepare for the coming Christmas season.[6][3][7] Funco also became a sponsor for Christmas-season broadcasts of Gophers ice hockey games on KITN-TV.[2] During the Christmas 1990 season, the three FuncoLand locations made sales of over $260,000.[3]

Expansion

At the end of the 1990 fiscal year, Funco posted a net profit of $84,579 on $2.5 million in sales.[4] By December 1991, Funco had established 10 stores in the Minneapolis market.[6] Pomije attributed the company's success to executives he lured from B. Dalton and Häagen-Dazs who had expertise in expanding into new markets.[6] While these key hires – which include executive vice president Stanley Bodine, MIS director Michael Hinnenkamp and financial controller Robert Hiben – cost Funco a total of $520,000 in 1992, Pomije was willing to absorb the loss to ensure the presence of adequate information systems and financial controls that were absent in his previous business failure.[3]

At the end of the 1991 fiscal year, Funco posted a net profit of $20,527 on $7.06 million in sales.[4] On May 25, 1992, the TwinWest Chamber of Commerce named Pomije "Emerging Entrepreneur of the Year".[8] On July 2, 1992, Funco reported that it filed a registration statement with the U.S. Securities and Exchange Commission for an initial public offering of one million shares of its common stock at $5 a share, with plans to use the proceeds from the sold shares to repay short-term debt and finance the opening of other FuncoLand locations.[9] On July 13, 1992, Funco opened the first Chicago-area FuncoLand location in Bloomingdale.[5] Funco's initial public offering, which was underwritten by Miller, Johnson & Kuehn Inc., was announced on August 12, 1992.[10] On September 8, 1992, Funco announced plans to open 15 additional locations in the Dallas–Fort Worth metroplex by the end of the year; by that time, the company had established 11 locations in the area. Funco also announced long-term plans for 40–50 additional stores in the Houston, San Antonio and Austin markets.[4] On September 22 and 25, 1992, Funco opened the first south suburban Chicago-area locations in Orland Park and Matteson respectively, and Pomije announced plans to open 10–20 more locations in the Chicago area by the end of 1993. By October 22, 1992, there were 29 FuncoLand locations between the Minneapolis, Chicago and Dallas areas,[5] 190 employees within the company and a projection of $22 million in sales for the 1993 fiscal year.[6] Pomije projected a total of 110 stores nationwide, 250 employees and sales of $63 million by March 1994.[5][6] By December 4, 1992, Funco's stock price rose 40.9% from its initial public offering, closing at $7.75 a share that day.[11] On December 31, 1992, the stock was trading at $9.50 a share.[12]

On January 8, 1993, Funco's stock price continued to increase to $12 a share, 118% from the initial public offering.[13] After peaking around February 11 at $17.75 a share, the stock price steadily dropped to $8 a share by April 23, 1993. Miller, Johnson & Kuehn analyst Steven Hosier acknowledged that Funco's stock was becoming pricey, and attributed the stock's most recent weakness to an April 14 announcement by Sega of America of a joint venture with Time Warner and Tele-Communications Inc. consisting of an interactive cable channel that would allow subscribers to download and sample new Sega games. By this time, FuncoLand was operating in 59 locations, with Milwaukee included as a new business hub.[14] On April 24, 1993, Funco announced plans to open 12 locations in the Detroit area by July.[15] On May 11, 1993, the first FuncoLand location in McHenry County, Illinois opened in Crystal Lake, bringing its total number of locations to 62.[16] On August 4, 1993, Funco reported that it had leased space for new locations in six shopping centers in the New York City area.[17] By June 1994, Funco expanded into the East Coast with locations in New York City, New Jersey, Philadelphia, Connecticut and Washington, D.C., making for a total of 117 stores.[18] The chain further expanded to 163 stores by October 1994, and Fortune listed it as one of the 11 fastest-growing businesses in the nation.[19]

Downturn and comeback

On December 15, 1994, Funco announced that it would increase promotional spending and aggressive price cuts in response to heavy competition caused by a price war between Circuit City and Best Buy, which influenced retailers such as Musicland and Target to lower the price of new releases. Funco reported that as a result of this measure, its third-quarter earnings would fall below analysts' expectations. The next day, Funco's stock plummeted by 46.5% down to $5.75 a share. Regardless, Funco anticipated record sales for the fourth quarter, and stated that it has met its store-opening objectives for the year. By that time, Funco was operating 180 stores in 11 metropolitan areas, and planned to open 120 additional stores over the next two years.[20][21]

On April 6, 1995, Funco reported that its fourth-quarter sales dropped 24% from the same period the previous year. As a result, its stock price dropped 16.2% to its lowest point of $3.871⁄2 per share the following day. Funco stated that its fourth-quarter results were adversely impacted by comparison against the previous year's strong fourth-quarter video game release of NBA Jam, as well as an industry-wide slump caused by consumers deferring purchases in anticipation of upcoming next-generation video game consoles. Funco declared an intent to focus on increasing sales in existing markets and improving expense controls and margins during the industry's recovery. The same day, Funco announced that vice president and director Stanley Bodine had been promoted to president and chief operating officer, replacing founder David R. Pomije, who would remain as chairman and chief executive. Financial controller Robert Hiben was also named chief financial officer, while vice president of merchandising and information systems Michael Hinnenkamp resigned from the company to pursue other career opportunities.[22]

In a bid to offset market forces, Pomije cut his $180,000 salary in half, Bodine took a 40% cut, and salary increases for other senior officials were frozen. Additionally, the headquarters staff was reduced by 20% to 100 employees, and work schedules were tightened to avoid overstaffing. As a result, general and administrative expenses decreased by 1.5% to $1.8 million. Most significantly, scheduled openings of 50 new stores were cancelled, leaving the total number of stores at the end of 1995 at 182. In the late summer of 1995, a class action shareholder suit against Funco was filed in the United States District Court for the District of Minnesota alleging that the company artificially inflated its stock price by overstating the capacity of its information systems to control the business.[23] In 1997, the suit was settled out of court for $900,000 minus $202,000 in attorney's fees.[1]

After trading at $2.621⁄2 per share on January 11, 1996, Funco's stock price climbed to $14.121⁄2 per share by January 17, 1997. Pomije and industry analysts attributed Funco's revenue growth to the revitalization of the video game industry brought about by the popularity of the Nintendo 64, PlayStation and Sega Saturn consoles and related products. By this time, Funco was operating 189 stores in 12 metropolitan areas, and its recent prosperity inspired it to increase the pace of opening new stores by planning to open 40 within the year, particularly within the West Coast.[24][25] FuncoLand opened its first Greater Cincinnati locations in October 1997,[26] and opened its 300th location in Nashville, Tennessee on November 28, 1998. In its September 1998 issue, Fortune named Funco the second fastest-growing company in America.[27]

Funco's e-commerce service, the FuncoLand Superstore, made $1.6 million in sales in 1998, four times as much as the previous year.[28] Funco was one of the first retailers to offer items for bidding at Amazon's short-lived Auctions service, which opened in April 1999.[29] On April 15, 1999, Navarre Corporation announced that it had reached an agreement with Funco to distribute consumer software to the company's e-commerce customers.[30] Upon the September 1999 United States launch of the Dreamcast console, Funco set a single-day sales record, and high demand for the console boosted Funco's second quarter earnings for the 2000 fiscal year to $52.7 million, 49.2% higher than the previous second quarter's earnings. Funco's net income of $716,000 was nearly double analysts' estimates. During the quarter, Funco opened 38 stores, bringing its total to 363.[1][31] On December 21, 1999, Funco reported that a "significant softening" of December sales would result in third-quarter sales and earnings falling below analysts' expectations. Funco attributed this projected decline to a shortage of high-demand products such as the Game Boy Color handheld console and the video game Pokémon Yellow, as well as a lack of major title releases for the Nintendo 64 and PlayStation compared to the previous year and price-discounting on consoles by competitors. Funco warned that the sales and earnings slowdown would linger until the following fall, when the highly-anticipated PlayStation 2 would be released.[32][33]

Acquisition and merger

On April 3, 2000, Funco rival Electronics Boutique Holdings Corp. agreed to purchase Funco for $110 million, paying $17.50 in cash for each of Funco's shares. The news of the acquisition was not surprising to analysts, as rumors of an imminent sale had been circulating since the previous summer; according to Bob Evans of the Craig-Hallum Capital Group, "Funco's stock has been depressed for some time, and they never seemed to get a high PE multiple, so we always thought one of the exit strategies would be the sale of the company". Electronics Boutique CEO Joseph Firestone remarked that the company had been "stalking" Funco for two years, and waited until the stock price was right. Following the announcement, Funco's stock price rose by more than 42% to $16.875 per share.[34][35][36][37] On April 5, Funco received an unsolicited $135 million buyout offer from Barnes & Noble subsidiary Babbage's Etc., who offered to pay in either cash or a combination of cash and Barnes & Noble stock. The following day, Funco's stock price rose even further to $20.50 per share.[38][39][40][41] On April 12, Funco gave Electronics Boutique five days to raise its offer before Funco would accept Barnes & Noble's offer.[42] In response, Electronics Boutique matched Barnes & Noble's offer.[43][44][45][46] On April 26, Barnes & Noble raised its bid to $161.5 million, or $24.75 a share, leaving Electronics Boutique with another five days to respond to the bid.[47][48][49] On May 3, Electronics Boutique announced the withdrawal of its bid,[50][51] and Funco accepted Barnes & Noble's buyout the following day. Electronic Boutique's original definitive agreement with Funco included a breakup fee of $3.5 million, the cost of which was covered by Barnes & Noble.[52][53] After phasing out Funco's Eden Prairie headquarters in November,[54] Funco and Babbage's were merged to form GameStop in December in anticipation of holding an initial public offering for the company.[55] Many of the stores owned by GameStop continued to operate under the FuncoLand, Babbage's and Software Etc. names until 2003, by which time all stores were rebranded under the GameStop banner.[56]

Business operations

FuncoLand specialized in selling new and used video games and equipment; it was considered the first retailer to allow consumers to sell and trade used video games. The used games were often sold for 50% less than new copies, and customers could sell used video games for either money or store credit that could be used to purchase other games.[4] The value of a trade-in varied between 10 cents and $55;[5][19] Funco changed the offered prices for games twice a month, much like the stock market does for commodities.[5] During 1990, the names, prices and supplies of games were charted by hand on a whiteboard in the New Hope warehouse; David R. Pomije converted this method to a computerized format in 1991.[2] New games could be tested within a store and carried a 90-day warranty,[5] which also applied to hardware and accessories.[4] FuncoLand additionally sold cleaning kits for removing oxidation and dust from game cartridges; a game's warranty could be extended from 90 days to a year if purchased with a cleaning kit.[2] Pomije compared the chain's policy of trading used games and testing new ones to the practices of the automobile industry, saying "You wouldn't buy a new car without driving it around the block".[5] Company officials preferred to use the term "previously played" in reference to used games, as "used", according to Robert Hiben, carried a connotation of wearing out, and most video games last for decades.[19]

FuncoLand stores averaged 1,500 square feet in size, typically employed three to five workers apiece, and were often located in strip malls, usually near major regional malls and national chain stores such as Toys "R" Us, Target and Best Buy.[4][19] Each store cost around $55,000 to build and stock.[3] The stores carried an average of 1,700 items, 10% of which consisted of accessories.[5] The company's total inventory included around 500 million video game cartridges, some of which were rare collector's items no longer sold by their manufacturers.[5][18] Pomije remarked that competitors such as Toys "R" Us would sometimes refer customers to FuncoLand if they requested older games no longer carried by the larger chains.[2] In 1992, Funco began publishing Game Informer, a bi-monthly magazine that includes reviews of new games.[4] Game Informer reached a circulation of over 100,000 by 1994.[18][19] Funco distributed a mail-order catalog every other month, and ran an e-commerce platform named the FuncoLand Superstore.[28]

References

  1. ^ a b c Phelps, David; Moore, Janet (November 21, 1999). "Previous failures have driven current success, Pomije says". Star Tribune. Minneapolis. p. 64 – via Newspapers.com.
  2. ^ a b c d e f Wascoe Jr., Dan (December 2, 1990). "Electronic-game whiz deals in used fun". Star Tribune. Minneapolis. p. 61 – via Newspapers.com.
  3. ^ a b c d e f g h i j Youngblood, Dick (September 13, 1993). "Third time is the charm as Funco chief succeeds after 2 business failures". Star Tribune. Minneapolis. p. 34 – via Newspapers.com.
  4. ^ a b c d e f g h i Baker, Sandra (September 8, 1992). "Video game firm to add 15 Metroplex stores". Fort Worth Star-Telegram. Fort Worth, Texas. p. 39 – via Newspapers.com.
  5. ^ a b c d e f g h i j k l Ronald, William (October 22, 1992). "Video chain zaps into market". Southtown Star. Tinley Park, Illinois. p. 31 – via Newspapers.com.
  6. ^ a b c d e f g h Ronald, William (October 22, 1992). "Video chain zaps into market". Southtown Star. Tinley Park, Illinois. p. 32 – via Newspapers.com.
  7. ^ Foster, Jim (January 14, 1991). "Store openings". Star Tribune. Minneapolis. p. 35 – via Newspapers.com.
  8. ^ "Honors". Star Tribune. Minneapolis. May 25, 1992. p. 32 – via Newspapers.com.
  9. ^ "Public offerings". Star Tribune. Minneapolis. July 2, 1992. p. 32 – via Newspapers.com.
  10. ^ "Business forum". Star Tribune. Minneapolis. August 17, 1992. p. 31 – via Newspapers.com.
  11. ^ Howatt, Glenn (December 5, 1992). "Market moves". Star Tribune. Minneapolis. p. 37 – via Newspapers.com.
  12. ^ Schmeltzer, John (January 1, 1993). "Used-game chain blooms like secondhand rose". Chicago Tribune. Chicago. p. 45 – via Newspapers.com.
  13. ^ Howatt, Glenn (January 9, 1993). "Market moves". Star Tribune. Minneapolis. p. 32 – via Newspapers.com.
  14. ^ Carideo, Tony (April 24, 1993). "Analyst sees selloff in video-game retailer Funco as a buying opportunity". Star Tribune. Minneapolis. p. 38 – via Newspapers.com.
  15. ^ "Michigan Memo". Detroit Free Press. Detroit. April 24, 1993. p. 16 – via Newspapers.com.
  16. ^ Graunke, Julie (May 11, 1993). "FuncoLand opens in Crystal Lake". Northwest Herald. Woodstock, Illinois. p. 31 – via Newspapers.com.
  17. ^ "In brief". Star Tribune. Minneapolis. August 4, 1993. p. 33 – via Newspapers.com.
  18. ^ a b c Sinnock, Bonnie (June 9, 1994). "Strictly Shopping: Fun For All At New Store In Bridgewater". Courier News. Bridgewater Township, New Jersey. p. 101 – via Newspapers.com.
  19. ^ a b c d e Carlson, Meredith (October 27, 1994). "Store offers trade-ins for used video games". Hartford Courant. Hartford, Connecticut. p. 31 – via Newspapers.com.
  20. ^ Apgar, Sally (December 17, 1994). "Funco Inc. stock plunges 45.6% on news of expected lower earnings". Star Tribune. Minneapolis. p. 46 – via Newspapers.com.
  21. ^ Apgar, Sally (December 17, 1994). "Funco Inc. stock plunges 45.6% on news of expected lower earnings". Star Tribune. Minneapolis. p. 48 – via Newspapers.com.
  22. ^ Apgar, Sally (April 8, 1995). "Investors bail out of Funco in wake of woeful 4th quarter". Star Tribune. Minneapolis. p. 37 – via Newspapers.com.
  23. ^ Youngblood, Dick (December 4, 1995). "Funco Inc. toys with turnaround". Star Tribune. Minneapolis. p. 30 – via Newspapers.com.
  24. ^ Phelps, David (January 20, 1997). "Funco bounces back with new generation of games". Star Tribune. Minneapolis. p. 29 – via Newspapers.com.
  25. ^ Phelps, David (January 20, 1997). "Funco makes strong comeback with new generation of games". Star Tribune. Minneapolis. p. 33 – via Newspapers.com.
  26. ^ Koenig, Angela (October 15, 1997). "Funco Landstore coming". The Cincinnati Enquirer. Cincinnati. p. 5 – via Newspapers.com.
  27. ^ "FuncoLand game store opens at 100 Oaks". The Tennessean. Nashville, Tennessee. November 28, 1998. p. 53 – via Newspapers.com.
  28. ^ a b McCartney, Jim (July 5, 1999). "Best Buy, Musicland take to web". Miami Herald. Miami. p. 42 – via Newspapers.com.
  29. ^ "Funco one of first on Amazon.com Auctions". The Bismarck Tribune. Bismarck, North Dakota. April 4, 1999. p. 52 – via Newspapers.com.
  30. ^ "Briefs". Star Tribune. Minneapolis. April 15, 1999. p. 49 – via Newspapers.com.
  31. ^ Blahnik, Mike (October 20, 1999). "Funco, riding Dreamcast wave, nearly doubles earnings estimates". Star Tribune. Minneapolis. p. 40 – via Newspapers.com.
  32. ^ "Funco sees same-store sales fall". Star Tribune. Minneapolis. December 22, 1999. p. 51 – via Newspapers.com.
  33. ^ "Company says it ran short of season's hit games". Star Tribune. Minneapolis. December 23, 1999. p. 45 – via Newspapers.com.
  34. ^ Moore, Janet (April 4, 2000). "Funco is sold to rival retailer". Star Tribune. Minneapolis. p. 31 – via Newspapers.com.
  35. ^ Moore, Janet (April 4, 2000). "Electronics Boutique had been 'stalking' Funco for 2 years". Star Tribune. Minneapolis. p. 38.
  36. ^ Woodall, Martha (April 4, 2000). "W. Chester firm is in the game". The Philadelphia Inquirer. Philadelphia. p. 35 – via Newspapers.com.
  37. ^ Woodall, Martha (April 4, 2000). "$110 million deal to unite game firms". The Philadelphia Inquirer. Philadelphia. p. 46 – via Newspapers.com.
  38. ^ Moore, Janet (April 7, 2000). "Funco receives higher offer". Star Tribune. Minneapolis. p. 45 – via Newspapers.com.
  39. ^ Moore, Janet (April 7, 2000). "Two offers are 'a great situation' for stockholders". Star Tribune. Minneapolis. p. 46 – via Newspapers.com.
  40. ^ Woodall, Martha (April 7, 2000). "Game-seller gets a higher bid". The Philadelphia Inquirer. Philadelphia. p. 37 – via Newspapers.com.
  41. ^ Woodall, Martha (April 7, 2000). "$135 million is offered for Funco". The Philadelphia Inquirer. Philadelphia. p. 46 – via Newspapers.com.
  42. ^ Phelps, David (April 14, 2000). "Funco receives higher offer". Star Tribune. Minneapolis. p. 56 – via Newspapers.com.
  43. ^ "Electronics Boutique ups bid for Funco". Star Tribune. Minneapolis. April 21, 2000. p. 43 – via Newspapers.com.
  44. ^ "Merger would create largest retailer of electronic games". Star Tribune. Minneapolis. April 21, 2000. p. 44 – via Newspapers.com.
  45. ^ Fernandez, Bob (April 21, 2000). "Electronics Boutique matches competing bid for game retailer". The Philadelphia Inquirer. Philadelphia. p. 33 – via Newspapers.com.
  46. ^ Fernandez, Bob (April 21, 2000). "West Chester firm raises its bid for a games retailer". The Philadelphia Inquirer. Philadelphia. p. 34 – via Newspapers.com.
  47. ^ Moore, Janet (April 27, 2000). "Barnes & Noble raises bid, again, for Funco Inc". Star Tribune. Minneapolis. p. 45 – via Newspapers.com.
  48. ^ Moore, Janet (April 27, 2000). "CEO could reap $35.2 million if Barnes & Noble deal prevails". Star Tribune. Minneapolis. p. 46 – via Newspapers.com.
  49. ^ Schlisserman, Courtney (April 27, 2000). "Barnes & Noble increases its offer". The Philadelphia Inquirer. Philadelphia. p. 31 – via Newspapers.com.
  50. ^ Moore, Janet (May 3, 2000). "Funco suitor drops chase". Star Tribune. Minneapolis. p. 39 – via Newspapers.com.
  51. ^ Moore, Janet (May 3, 2000). "Shareholder suit filed Tuesday is now left in uncertain status". Star Tribune. Minneapolis. p. 41 – via Newspapers.com.
  52. ^ "Funco accepts buyout by Barnes & Noble". The Philadelphia Inquirer. Philadelphia. May 5, 2000. p. 48 – via Newspapers.com.
  53. ^ Moore, Janet (May 6, 2000). "Fate of Funco's local operations unclear". Star Tribune. Minneapolis. p. 46 – via Newspapers.com.
  54. ^ St. Anthony, Neal (November 17, 2000). "Babbage's appears to be phasing out ex-Funco's Eden Prairie headquarters". Star Tribune. Minneapolis. p. 57 – via Newspapers.com.
  55. ^ Musero, Frank (10 September 2001). "New Game Plan For Barnes & Noble: Spinoff". The IPO Reporter.
  56. ^ LaHood, Lila (April 1, 2002). "Ahead of the Game". Fort Worth Star-Telegram. Fort Worth, Texas. p. 114 – via Newspapers.com.
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