GameStop has refused to pay $30 million in fees to Boston Consulting Group (BCG), the consulting firm alleged in a lawsuit filed Tuesday.
BCG said that GameStop has “unpaid fees of approximately $30,000,000” but added that the exact amount “is undetermined at this time” because GameStop executives have refused to attend mandatory meetings or “furnish the data necessary to determine certain profit improvements.” The lawsuit was filed in US District Court for the District of Delaware, and it seeks financial damages for breach of contract and breach of the covenant of good faith and fair dealing.
The complaint says that GameStop and BCG signed a contract in August 2019 in an attempt to turn around the game retailer’s business. “Once a highly profitable company, GameStop’s profits and financial prospects had fallen precipitously by the mid-2010s and by 2019 GameStop was on life support,” the lawsuit said. “Hemorrhaging customers and unable to grow its business, GameStop reported net operating losses of almost $800 million in 2018, including a $970.7 million ‘goodwill impairment charge’ to account for the loss of value from its brand.”
Fees based on projected profit improvement
BCG’s complaint briefly referenced the short squeeze that contributed to a meteoric rise in GameStop’s stock. “Already one of the most heavily shorted stocks relative to its float in early 2019, GME (GameStop’s stock ticker) became the most heavily shorted stock in the United States by the first quarter of 2020,” BCG pointed out.
But the lawsuit isn’t about GameStop’s stock price or even actual profit improvements. BCG said that its contract with GameStop “provided that BCG would be compensated on the greater of a fixed fee or a variable fee based upon projected profit improvement.”
“Projected” is a key word in the complaint because, it said, “BCG’s variable fees were based upon projections, not actual profit improvements.” The complaint continued:
The concept of basing BCG’s variable fees on projected improvements rather than actual results was negotiated and agreed upon by the parties specifically to ensure that BCG and GameStop’s incentives were aligned. This structure was intended to: incentivize BCG to significantly improve profits; prevent BCG from taking credit for and/or being penalized for exogenous factors outside the parties’ control; and to protect BCG from additional factors, such as GameStop’s execution risk, i.e., GameStop failing to take the actions necessary to implement the plan and achieve the predicted results.
GameStop defense: “Stockholders’ best interests”
BCG said that it “spent tens of thousands of hours working on this project and it overachieved, identifying and creating plans to capture substantially more profit improvement opportunities than what had been estimated in the SOW [Statement of Work] and what was contemplated in the SOW’s original scope.”
GameStop told the Financial Times, “We do not believe it is in our stockholders’ best interests to pay the tens of millions of dollars sought by BCG, especially given their seemingly meager impact on the company’s bottom line. We will fight this suit and are proud that GameStop no longer utilizes the likes of BCG for any services.”
GameStop also said the lawsuit reflects BCG’s “prioritization of excessive fees over clients’ interests,” according to a Bloomberg article. “It is confounding that the high-priced consultants at BCG claim to have delivered hundreds of millions in value for GameStop during a period when share price, sales, and debt were at perilous levels,” GameStop added.
We asked GameStop for more detail supporting its argument that it doesn’t have to pay the fees and will update this article if we get a response.
BCG: “No legitimate dispute” over fees
To calculate anticipated profit improvements and determine the amount of BCG’s fees, the contract “expressly required GameStop to cooperate with BCG in its performance of the services, including to provide timely access to data,” BCG said. The contract also required GameStop executives to attend “Thermometer Meetings” where they would “agree upon financial baselines for each workstream and the anticipated profit improvement to each workstream, which would determine BCG’s fees,” the lawsuit added.
BCG said that it had “a healthy working relationship” with GameStop—but that ended after GameStop Chief Transformation Officer Daniel Kaufman left the company in 2020. BCG alleged:
After Mr. Kaufman’s departure, however, Jim Bell, GameStop’s then new (and now former) Chief Financial Officer, took over Mr. Kaufman’s role in the profit improvement project and GameStop has since failed and refused to perform as required by the SOW. Specifically, under Mr. Bell’s management and since his departure in March 2021, GameStop has refused to pay significant amounts of BCG’s fees, despite there being no legitimate dispute over BCG’s full performance and the fees coming due. GameStop has also taken unreasonable positions, unilaterally demanding discounts on certain workstream fees with no justification and refusing to continue contractually obligated meetings to confirm profit improvement estimates and BCG’s resulting fees.
BCG said that even when GameStop paid required fees, “it has done so late, in some cases by over eight months even on fixed fees which were agreed upon upfront… and often refused to pay at all based on spurious and unsupported defenses.” Additionally, “GameStop ceased its attendance at Thermometer Meetings, despite the fact that such meetings are mandatory under the SOW,” BCG said. “GameStop’s cancellation of these meetings prevented the parties from engaging in discussions to confirm fees owed to BCG, despite the indisputable fact that BCG successfully completed work that would entitle BCG to its variable fees under the SOW.”
BCG described work it did for GameStop
BCG said that its work for GameStop included 10 overarching goals such as “identify[ing] new revenue models and partnership structures to improve GameStop’s economic position and collaboration with OEMs and game publishers… assess[ing] the strategic fit and viability of GameStop’s pre-owned/refurbished electronics business… [and] facilitat[ing] GameStop’s ability to capture additional profit through revamped pricing strategies, including revised pricing algorithms, markdown optimization, historical look at promotions, and other optimization levers.”
Other work focused on saving in procurement spending, creating a more effective reporting structure with redesigned roles and responsibilities, and turning around GameStop’s failing customer loyalty program. “Prior to BCG’s involvement, GameStop’s loyalty program was in a steep decline, with its membership base dropping by 20 percent per year,” the complaint said. “BCG transformed the loyalty program, reversing the trend, and increasing membership sign-ups by more than 40 percent above the baseline. This revamp of the program resulted in an estimated run-rate profit improvement of $73 million, well beyond the original expectation.”
The Financial Times quoted a financial analyst as saying that “GameStop ended last year with $1.3 billion in cash and cash equivalents. They can easily afford to pay a $30 million consulting fee.”
GameStop’s year-end financial report said that the company generated net sales of $6.01 billion in fiscal 2021, up from $5.09 billion in fiscal 2020. GameStop reported a net loss of $381.3 million in fiscal 2021, compared to a loss of $215.3 million in fiscal 2020. GameStop previously posted net losses of $470.9 million in fiscal 2019 and $673 million in fiscal 2018.
GameStop’s stock fell from $141 to about $137 today, as of this writing. It’s down about 10 percent in 2022 but is significantly higher than the $78.11 level it dipped to on March 14. The stock’s all-time high was set on January 28, 2021, at $483, while its highest closing price was set on the previous day at $347.51. GameStop had been trading at $17.25 at the beginning of 2021.