How GameStop Can Survive

The recent $GME fiasco led me re-visit GameStop and its financials. What I found was a nightmare: without reinvention, GameStop is bankrupt.

The recent $GME fiasco led me re-visit GameStop and its financials. What I found was a nightmare: if GameStop doesn’t re-invent itself, it’s headed for bankruptcy.

GameStop’s Current Situation

GameStop’s lack of preparation for the digital transformation of gaming has had a huge impact on the company. As it stands, the world’s largest video-game retailer is headed for bankruptcy. Squeezed by secular trends within the gaming world, the retailer is banking on an antiquated business model and the profit-sharing of Microsoft and Sony’s digital downloads (even if those downloads aren’t made within the GameStop ecosystem), which is nothing short of philanthropy by the two console manufacturers. This is far from a sustainable and profitable business model.

To drive the point in further, GME’s net sales have dropped by 24.35% since FY2017 and the retailer has operated on a net loss since FY2018 (2020 10K). It currently maintains 5,509 stores around the globe (3,642 domestic), whose comparable store sales have been decreasing since FY2018. In FY2019 alone, comparable store sales decreased by 19.4% (2020 10K).

Software sales, which do not require a store to be sold, have also been steadily decreasing since FY2017 (2020 10K).

Already before COVID, GameStop was running into the ground.

If this wasn’t enough already, GameStop’s stock ($GME) has also been declining and under-performing the S&P and the Dow Jones Speciality Retailers Index since 2015 (2020 10K).

Note: the graph above, taken from the 2020 10K, does not take into account the recent artificial surge.

GameStop is becoming irrelevant

GameStop makes most of its money from buying and selling used games. Unfortunately, this business is going to become irrelevant for a number of reasons:

  1. New-generation consoles are being sold without disk drives

  2. Digital game sales outnumber physical sales

  3. Sales of pre-owned games have been steadily declining

  4. It’s in Sony & Microsoft’s interest to capture the value of direct-to-consumer game downloads

GameStop faces a severe issue of supplier power. That is, Microsoft and Sony have so much supplier power that they effectively choose whether GameStop stays afloat or goes under. If Sony and Microsoft were to only offer their consoles and games via their own platforms, GameStop would go under.

So what has GameStop done to try and combat their supplier power problem?

GameStop’s “Strategy”

In May 2019, GameStop announced a transformation strategy which they called “GameStop Reboot”. The strategy focuses around four tenets:

  1. Optimize the Core Business (improve efficiencies)

  2. Become the social/cultural hub for gaming (enhance PowerUp loyalty program)

  3. Build a frictionless digital ecosystem (build an e-commerce platform)

  4. Transform vendor partnerships (find additional high-margin revenue streams)

Unfortunately, these four tenets are projects that should already have been completed long before 2019, let alone 2021.

These four tenets also do not formulate a strategy. They are, at best, a series of tactics lacking an overall strategy. Business strategy is about leveraging key activities in order to achieve a competitive advantage, which cannot be said about the four tenets mentioned above.

GameStop is failing to develop a defensible sustainable competitive advantage over a market or a market segment.

GameStop’s “multi-year transformation initiative” misses the main issue: the supplier power they face. Why wouldn’t Sony and Microsoft aim to capture more of the value they create? After all, both manufacturers have the infrastructure to sell digital downloads or disks exclusively on their platforms, enabling them to capture the entirety of the value they create. With GameStop failing to add value to the game-selling process, there is no reason why Sony & Microsoft should decide to sell their games through the antiquated retailer. In short,

GameStop has no strategy.

How GameStop Can Save Itself

Video games are moving to digital-only. Stores are bleeding money. Sales of pre-owned games are plummeting. GameStop needs to completely re-invent itself.

I believe that GameStop needs to focus on the players and give “power to the players”. GameStop’s biggest asset to leverage is its customers. Building a value proposition around this group will give GameStop an edge in the gaming market, transforming their business model from a traditional retail model to a customer-focused e-commerce business model, like Amazon with Amazon Prime.

The company needs to focus on developing a defensible and sustainable competitive advantage within the gaming market and become an omnipresent online hub for all things gaming. On top of a robust e-commerce platform selling new and pre-owned games, software, accessories and collectibles, GameStop should offer a subscription offering access to exclusive amateur and professional gaming-tournaments, news (interviews with gaming/streaming celebrities, etc.) and store discounts.

However, their core competency of buying and selling used game should not be ignored — it should be simply be moved online. Just like StockX lets sneaker-heads buy and sell pre-owned shoes, GameStop should move to e-commerce focused buy & sell model of pre-owned games, and new disk-games should also be sold online, except for select big releases. Moving everything online enables GameStop to minimize losses when consoles inevitably adopt a digital-only approach.

As for the stores, GameStop needs to transform them. Some of the stores should become experiential in nature and offer exclusive, member-only in-person and online events, gaming tournaments, and more. Stores need to become “the stop for gaming”, rather than simply a place to sell old games. People need to be excited to go to GameStop instead of seeing it as a chore.

Meanwhile, the rest of the stores need to become a distribution asset. GameStop has more stores globally than Sony and Microsoft combined, giving them a unique edge in distribution if leveraged correctly. In order to satisfy young gamers’ demand for instant gratification, GameStop needs to create a robust distribution network to quickly deliver items to customers.

Pursuing such a strategy would leverage GameStop’s biggest asset, its customers. By creating a community-focused business model, GameStop would create a defensible and sustainable competitive advantage which would be extremely hard for retail competitors to copy. The company would thus be adding value as a direct result of its own activities, rather than relying on the philanthropic efforts of its suppliers.

The community-focused business model would become an asset for gamers and would help GameStop sustain the tough 5–7 years between video game console releases. Just like Amazon Prime members spend 2.33x more and are more loyal to Amazon, GameStop pivoting to a subscription-model offering access to a robust community of gamers would create more loyalty within its customers.

For this strategy to work however, GameStop needs to fully embrace it. Enhancing a loyalty program which only 11% of subscribers pay for and optimizing the core business is not enough to create the defensible, sustainable competitive advantage GameStop needs to avoid going under.

Only a truly transformational effort by GameStop will save it.