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 major video game retailer to allow consumers to sell and trade used video games. The chain's parent company Funco Inc. was established in the home of David R. Pomije in 1988, initially as a leaser of video games to video stores, and then as a mail-order business specializing in used video games. Upon the success of this venture, Pomije moved Funco to a Minneapolis warehouse, and began opening FuncoLand retail outlets nationwide.
Following Funco's initial public offering in 1992, the company experienced rapid growth spurred by the increasing momentum of the video game industry and the retailer's unique business model, which fended off any direct competitors. FuncoLand stores, which were often located in strip malls, featured sampling areas that allowed consumers to test a video game before its purchase, a practice that Pomije compared to the automobile industry. The retailer's considerable inventory of older titles no longer carried by larger national chain stores sometimes led competing retailers to refer customers to FuncoLand for such purchases. Marketing for FuncoLand included the self-published monthly magazine Game Informer, as well as a mail-order catalog and e-commerce platform.
Funco endured a downturn in the mid-1990s caused by an industry-wide slump, and in 1995, the company was subject to a shareholder suit accusing it of artificially inflating its stock price by overstating the capacity of its information systems to control the business; the suit was settled out of court in 1999. The fifth generation of video game consoles brought about the company's recovery, and the release of the Dreamcast granted a single-day sales record. Over the course of its lifespan, FuncoLand operated in 406 locations, and was twice listed by Fortune as one of America's fastest-growing businesses.
In April 2000, two of Funco's rivals – Electronics Boutique and Babbage's Etc. parent company Barnes & Noble – engaged in a bidding war for the company's purchase, concluding with Barnes & Noble's winning bid of $161.5 million. Funco was acquired by Barnes & Noble in June 2000, and was merged with Babbage's to form GameStop in December 2000.
History Origins, founding, and early development In 1985, David R. Pomije established the mail-order company Protectronics, which initially sold Commodore 64 computers, but then transitioned to an eclectic array of consumer goods after the Commodore market dried. 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. Pomije's leftover inventory included 1,100 Nintendo games, which he leased to video stores. To update the inventory, he began buying used games from mail-order businesses across the country. After a couple of encounters with particularly rude dealers, he was inspired to establish another mail-order company named Funco, and began advertising his offer to buy and sell used video games in industry magazines. During the Christmas 1989 season, he needed to install four telephone lines in his house to accommodate his growing business, and recruited his wife, father and uncle as staff members. The number of teenagers and young adults driving to Pomije's house to do business there was so great that one of his neighbors was suspicious and called the police.
In February 1990, Pomije moved Funco to a warehouse in the Minneapolis suburb of New Hope. In August 1990, he set up a small informal retail shop next to his office, which would be the first FuncoLand location. The following month, he began running an advertisement campaign in a daily Minneapolis newspaper, which attracted customers coming in from as far as Wisconsin and the Dakotas. Around this time, a Japanese company – which operated 330 stores in Japan similar to FuncoLand – inquired about a partnership with them. To gauge the company's interest, Pomije charged $10,000 just to read his business plan, but ultimately decided against a partnership. 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. They also became a sponsor for Christmas-season broadcasts of Gophers ice hockey games on KITN-TV.
Growth and national expansion By December 1991, Funco had established 10 stores in the Minneapolis market. Pomije attributed the company's success to executives he lured from B. Dalton and Häagen-Dazs who had expertise in expanding into new markets. 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 $519,779 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. By October 22, 1992, there were 29 FuncoLand locations between the Minneapolis, Chicago and Dallas areas, 190 employees within the company and a projection of $22 million in sales for the 1993 fiscal year. Pomije projected a total of 110 stores nationwide, 250 employees and sales of $63 million by March 1994.
On April 6, 1995, Funco announced that Bodine had been promoted to president and chief operating officer, replacing Pomije, who would remain as chairman and chief executive. Hiben was also named chief financial officer, while Hinnenkamp resigned from the company to pursue other career opportunities. In fiscal 1998, Funco launched an e-commerce service named the FuncoLand Superstore; after posting sales of $300,000 in its inaugural year, it quadrupled this figure the following year, making $1,572,000 in sales. In April 1999, Funco became one of the first companies to offer items for bidding at Amazon's short-lived Auctions service. 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.
Acquisition and merger On April 3, 2000, Funco rival Electronics Boutique Holdings Corp. agreed to purchase them 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 his company had been "stalking" them 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. On April 5, they 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. On April 12, Funco gave Electronics Boutique five days to raise its offer before they would accept Barnes & Noble's offer. In response, Electronics Boutique matched Barnes & Noble's offer. 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. On May 3, Electronics Boutique announced the withdrawal of its bid, 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. Pomije grossed an estimated $35 million for his stock and options, and left the company to focus on developing the secondhand golf equipment retailer Second Swing, in which he was a majority shareholder.
Barnes & Noble's acquisition of Funco was completed on June 14, 2000, and Babbage's became a wholly owned subsidiary of Funco thereafter. In November 2000, Funco's Eden Prairie headquarters were phased out, with some functions being moved to the Babbage's headquarters in Dallas; Bodine had also departed the company. Funco and Babbage's were merged to form GameStop in December, and an initial public offering for the new company was completed on February 12, 2002. 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 in major markets were rebranded under the GameStop banner.
Business operations Products and services FuncoLand specialized in selling new and used video games and equipment; it was considered the first major 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. The value of a trade-in varied between 10 cents and $55; Funco changed the offered prices for games twice a month, much like the stock market does for commodities. During 1990, the names, prices and supplies of games were charted by hand on a whiteboard in the New Hope warehouse; Pomije converted this method to a computerized format in 1991.
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. 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. New games carried a 90-day warranty, which also applied to hardware and accessories. 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. 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". Company officials preferred to use the term "previously played" in reference to used games, as "used", according to Hiben, carried a connotation of wearing out.
Store format and customer engagement FuncoLand stores ranged from 1,000 to 3,000 square feet in size, with the average store being approximately 1,650 square feet. The stores 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. Each store cost around $55,000 to build and stock, and they carried an average of 1,700 items, 10% of which consisted of accessories. The stores were equipped with several television monitors displaying operating video games, as well as sampling areas that allowed consumers to test games within the store. FuncoLand employed around 1,500 full-time and part-time employees by November 21, 1999. The chain would recruit temporary part-time employees during seasonal peak periods. All store locations were leased, typically for an initial three-year term and with varying options for renewal. In addition to its retail outlets, Funco leased a 50,000 square foot distribution center and office facility in Eden Prairie, where its corporate headquarters was located.