FuncoLand was an American video game store located in Eden Prairie, Minnesota. It sold both new and used video games. It was the first major store to let customers sell or trade used games. The company that owned FuncoLand, called Funco Inc., was started in 1988 in the home of David R. Pomije. At first, Funco Inc. rented video games to stores, and later became a mail-order business that sold used games. After this business grew, Pomije moved Funco Inc. to a warehouse in Minneapolis and began opening FuncoLand stores across the United States.

After Funco Inc. went public in 1992, the company grew quickly because the video game industry was expanding and FuncoLand had a unique way of doing business that made it hard for other companies to compete. FuncoLand stores, often found in strip malls, had areas where customers could try games before buying them. Pomije compared this practice to how people test cars before buying them. FuncoLand had many older game titles that other large stores no longer sold, so other stores sometimes sent customers to FuncoLand for these items. FuncoLand used a magazine called Game Informer, a mail-order catalog, and an online store for marketing.

FuncoLand faced challenges in the mid-1990s when the video game industry slowed down. In 1995, the company was accused by shareholders of making its stock price higher than it should have been by overestimating its computer systems’ ability to manage the business. This dispute was resolved without going to court in 1999. The release of the fifth generation of video game consoles helped FuncoLand recover, and the launch of the Dreamcast set a record for one-day sales. Over its lifetime, FuncoLand operated in 406 locations and was listed twice by Fortune as one of America’s fastest-growing businesses.

In April 2000, two competitors—Electronics Boutique and Barnes & Noble, which owned Babbage’s Etc.—competed to buy FuncoLand. Barnes & Noble won with a bid of $161.5 million. FuncoLand was bought by Barnes & Noble in June 2000 and later combined with Babbage’s to create GameStop in December 2000.

History

In 1985, David R. Pomije started a mail-order company called Protectronics. The company first sold Commodore 64 computers, but later sold many different types of consumer goods after the Commodore market declined. At first, the business was successful, but Pomije’s spending too much money on personal things and poor management of finances, operations, and inventory led to the company going bankrupt in March 1988. Pomije had leftover inventory that included 1,100 Nintendo games, which he rented to video stores. To update his inventory, he began buying used games from mail-order businesses across the country. After some difficult interactions with unkind dealers, he created another mail-order company named Funco and advertised his offer to buy and sell used video games in industry magazines. During the Christmas 1989 season, he needed to install four telephone lines at his home to handle his growing business and hired his wife, father, and uncle as staff. The number of teenagers and young adults visiting his home to do business became so large that one neighbor called the police.

In February 1990, Pomije moved Funco to a warehouse in New Hope, a suburb of Minneapolis. In August 1990, he opened a small retail shop near his office, which became the first FuncoLand location. The following month, he ran advertisements in a Minneapolis newspaper, attracting customers from as far as Wisconsin and the Dakotas. Around this time, a Japanese company that operated 330 stores similar to FuncoLand in Japan asked about a partnership. To test the company’s interest, Pomije asked the Japanese company to pay $10,000 to read his business plan, but he decided not to form a partnership. By late 1990, Funco’s sales reached $50,000, and the company opened two FuncoLand stores in Eden Prairie and Roseville to prepare for the Christmas season. Funco also became a sponsor for Christmas broadcasts of Gophers ice hockey games on KITN-TV.

By December 1991, Funco had opened 10 stores in the Minneapolis area. Pomije credited the company’s success to hiring executives from B. Dalton and Häagen-Dazs who had experience expanding into new markets. These hires, including Stanley Bodine, Michael Hinnenkamp, and Robert Hiben, cost Funco $519,779 in 1992, but Pomije accepted the expense to improve the company’s information systems and financial controls, which had been lacking in his previous business failure. By October 22, 1992, Funco had 29 FuncoLand locations in Minneapolis, Chicago, and Dallas, 190 employees, and projected sales of $22 million for the 1993 fiscal year. Pomije estimated the company would have 110 stores nationwide, 250 employees, and $63 million in sales by March 1994.

On April 6, 1995, Funco announced that Bodine became president and chief operating officer, replacing Pomije, who remained chairman and chief executive. Hiben was named chief financial officer, while Hinnenkamp left the company for other opportunities. In fiscal 1998, Funco launched an online store called the FuncoLand Superstore. It earned $300,000 in its first year and $1,572,000 the next year. In April 1999, Funco became one of the first companies to sell items on Amazon’s Auctions service. On April 15, 1999, Navarre Corporation agreed to distribute consumer software to Funco’s online customers.

On April 3, 2000, Funco’s competitor, Electronics Boutique Holdings Corp., agreed to buy Funco for $110 million, paying $17.50 in cash for each share. Analysts had predicted this sale because Funco’s stock price had been low for a long time. Electronics Boutique’s CEO said the company had been trying to buy Funco for two years and waited until the stock price was right. After the announcement, Funco’s stock price rose by more than 42% to $16.875 per share. On April 5, Barnes & Noble’s subsidiary Babbage’s Etc. offered $135 million to buy Funco, either in cash or a mix of cash and Barnes & Noble stock. The next day, Funco’s stock price rose further to $20.50 per share. On April 12, Funco told Electronics Boutique it had five days to increase its offer or Funco would accept Barnes & Noble’s bid. Electronics Boutique matched Barnes & Noble’s offer. On April 26, Barnes & Noble raised its bid to $161.5 million, or $24.75 per share, giving Electronics Boutique five more days to respond. On May 3, Electronics Boutique withdrew its bid, and Funco accepted Barnes & Noble’s offer the next day. The original agreement with Electronics Boutique included a $3.5 million breakup fee, which Barnes & Noble paid. Pomije earned about $35 million from his stock and options and left Funco to focus on developing Second Swing, a secondhand golf equipment business in which he was a majority owner.

Barnes & Noble’s acquisition of Funco was completed on June 14, 2000, and Babbage’s became a fully owned part of Funco. In November 2000, Funco’s Eden Prairie headquarters closed, with some operations moving to Babbage’s headquarters in Dallas. Bodine also left the company. Funco and Babbage’s merged to form GameStop in December 2000. GameStop’s initial public offering occurred on February 12, 2002. Many GameStop stores continued to use the FuncoLand, Babbage’s, and Software Etc. names until 2003, when all stores in major markets were rebranded under the GameStop name.

Business operations

FuncoLand sold new and used video games and equipment. It was the first major store that let customers sell or trade their used games. Used games were often sold for half the price of new ones. Customers could trade used games for money or store credit, which could be used to buy other games. The value of a trade-in changed often, ranging from 10 cents to $55. Funco adjusted prices for games twice a month, similar to how prices for items are set in the stock market. In 1990, game names, prices, and supplies were written by hand on a whiteboard in the New Hope warehouse. In 1991, Pomije changed this method to use a computer instead.

The company had about 500 million video game cartridges in stock, some of which were rare items no longer sold by their makers. Pomije noted that stores like Toys "R" Us sometimes sent customers to FuncoLand for older games that were no longer available elsewhere. New games came with a 90-day warranty, which also covered hardware and accessories. FuncoLand sold cleaning kits to remove dust and oxidation from game cartridges. If a customer bought a cleaning kit with a game, the warranty could be extended from 90 days to one year. Pomije compared FuncoLand’s practice of testing new games and trading used ones to how car dealers test vehicles before selling them. Company officials preferred the term "previously played" for used games because the word "used" might suggest the items were damaged.

FuncoLand stores ranged in size from 1,000 to 3,000 square feet, with an average size of about 1,650 square feet. Each store usually had three to five workers and was often located in strip malls near larger stores like Toys "R" Us, Target, and Best Buy. Building and stocking a store cost about $55,000. Each store carried around 1,700 items, with 10% being accessories. Stores had TV monitors showing games in action and areas where customers could test games before buying. By November 21, 1999, FuncoLand employed about 1,500 full-time and part-time workers. Temporary workers were hired during busy seasons. All stores were leased for three years, with options to renew. Funco also leased a 50,000-square-foot building in Eden Prairie for its headquarters and distribution center.

FuncoLand’s marketing focused on TV ads, newspaper ads, in-store promotions, and direct mail. The company worked with game makers on special promotions, such as for Mortal Kombat, Madden NFL ’94, and NBA Jam in 1993. These events helped many customers learn about FuncoLand. In 1992, Funco started publishing Game Informer, a monthly magazine with game reviews. By March 1999, the magazine reached over 195,000 readers. The magazine was published by Sunrise Publications, a company owned by Funco. Funco also sent a catalog every two months to about 60,000 customers in areas without FuncoLand stores. These customers could buy games and equipment from the company’s headquarters. Funco’s online store, the FuncoLand Superstore, listed new games and reviews of both new and classic games. The company used slogans like "Experience the Fun at FuncoLand" and "More Video Games at Half the Price" in its marketing.

Corporate affairs

By 1993, FuncoLand was the main seller of used video games. Its early competition came mostly from small local shops and smaller regional stores. At the start of 1993, FuncoLand had no competitors in the Minneapolis and Chicago areas and only one competitor in Dallas. FuncoLand’s early success in creating its business model made it easier for the company to enter large cities before other serious competitors arrived. Over time, the video game retail business included stores like Target, Walmart, and Kmart, as well as computer software stores like Babbage's Etc. and Electronics Boutique, toy stores like Toys "R" Us and KB Toys, electronics stores like Best Buy and Circuit City, department stores, and other entertainment retailers. Because some of these stores, especially computer software retailers, offered trade-in programs for used games, FuncoLand always considered the possibility that these larger stores might enter the used game market and become direct competitors. FuncoLand continued to compete with smaller companies like It's About Games and MicroPlay, as well as video rental stores like Blockbuster LLC and Hollywood Video, which sold or rented used video games.

From 1991 to 1993, FuncoLand grew from three stores to 56 locations. In its 1993 annual report, FuncoLand said this rapid growth was because of the growing popularity of video games and the company’s unique business model. FuncoLand’s first store outside the Minneapolis–Saint Paul area opened in Dallas in April 1992. On July 13, 1992, it opened its first store in the Chicago area in Bloomingdale. On September 22 and 25, 1992, it opened two more stores in the south suburbs of Chicago: Orland Park and Matteson. FuncoLand’s first store in the Milwaukee area opened in January 1993.

On May 11, 1993, FuncoLand opened its first store in McHenry County, Illinois, in Crystal Lake, bringing its total number of stores to 62. By June 1994, FuncoLand expanded to the East Coast with stores in New York, Delaware Valley, and Washington–Baltimore, reaching 117 stores total. Stores in Boston, Houston, and Kansas City opened during fiscal 1995. FuncoLand opened 72 more stores in fiscal 1995 and planned to open 120 new stores in the next two years. However, a drop in the video game industry and a fall in the company’s stock price caused these plans to be canceled, leaving FuncoLand with 182 stores at the end of 1995.

FuncoLand saw better business in 1996 and expanded to the West Coast by opening nine stores in the San Francisco Bay Area. This success led FuncoLand to plan to open 40 new stores in 1997. FuncoLand continued its West Coast expansion in fiscal 1998, opening its first store in Greater Sacramento on June 28, 1997, and eight stores in Seattle. During the same time, FuncoLand opened its first stores in Greater Cincinnati in October 1997 and expanded to Columbus, St. Louis, Indianapolis, and Louisville. FuncoLand’s 300th store opened in Nashville on November 28, 1998. Other areas expanded in fiscal 1999 included Los Angeles, Hampton Roads, Richmond, Austin, San Antonio, Memphis, and Pittsburgh.

At the time FuncoLand was acquired, it had 406 stores. During its history, Fortune magazine listed FuncoLand as one of the fastest-growing businesses in America twice: once in 1994 and again in 1998.

After starting Funco as a mail-order company from his home, Pomije earned $35,000 by March 1989. Sales from March 1989 to March 1990 reached $375,000. In September 1990, a month after Pomije opened a retail store next to the company’s warehouse, a newspaper ad campaign brought $25,000 in sales within two days. During the Christmas 1990 season, the growing retail chain, which now had two stores, made over $260,000 in sales.

On July 2, 1992, FuncoLand filed papers with the U.S. Securities and Exchange Commission to sell shares of its stock for the first time. The company planned to use the money from the sale to pay off short-term debt and open more stores. The initial public offering, handled by Miller, Johnson & Kuehn Inc., was announced on August 12, 1992. After the offering, the stock price rose and reached $17.75 per share in February 1993 before dropping to $8 per share by April. An analyst from Miller, Johnson & Kuehn said FuncoLand’s stock had become too expensive, and the drop in stock price was partly because of Sega of America’s announcement of a partnership with Time Warner and Tele-Communications Inc. to create the Sega Channel, a cable channel that allowed users to download and try new games. Investors saw this as a sign that stores like FuncoLand might become less important.

On December 15, 1994, FuncoLand announced it would spend more on advertising and lower prices to compete with Circuit City and Best Buy, which were lowering prices during a price war. FuncoLand said this would cause its third-quarter earnings to fall below expectations. The next day, its stock price dropped 46.5% to $5.75 per share. Despite this, FuncoLand said it expected strong fourth-quarter sales and had met its store-opening goals for the year. On April 6, 1995, the company reported fourth-quarter sales dropped 24% compared to the same time the previous year. The stock price fell 16.2% to $3.87 1⁄2 per share the next day. FuncoLand said the drop in sales was partly because of weak video game releases compared to the previous year’s strong releases, like NBA Jam, and a slow industry caused by people waiting for new video game consoles. FuncoLand said it would focus on increasing sales in existing markets and improving expenses and profits during the industry’s recovery. To help, Pomije cut his salary in half, Bodine reduced his salary by 40%, and salary increases for other senior leaders were stopped. Headquarters staff was reduced by 20% to 100 employees, and work schedules were adjusted to avoid overstaffing. This helped reduce general and administrative expenses by 1.5% to $1.8 million

Litigation

On August 17, 1995, a lawsuit was filed in the United States District Court for the District of Minnesota. The lawsuit, titled Christopher Cannon v. Funco, Inc. and David R. Pomije, was brought by Christopher Cannon on behalf of all individuals who purchased Funco’s common stock between May 18, 1994, and December 15, 1994. Cannon claimed that Funco had raised its stock price unfairly by overestimating the ability of its information systems to manage the company’s business.

On October 18, 1996, the court decided that the claims based on state laws would not be considered again, and the claims related to federal securities laws could be refiled. On January 6, 1997, Cannon filed a revised complaint, repeating his previous claims and adding new claims under the Securities Exchange Act of 1934. He sought an unspecified amount of money, along with costs and attorney fees.

After Funco and Pomije asked the court to dismiss the case, the parties reached an agreement to settle the lawsuit outside of court. On April 30, 1999, the court approved a settlement totaling $900,000, with $202,000 of that amount allocated to attorney fees.