- GameStop is experimenting with different new store concepts to try and become "the social and cultural hub of gaming".
- At first glance, these concepts seem to have tons of potential.
- In reality, most of these concepts don't bode well with GameStop's business model.
- Instead, management should accept the fact that GameStop is a dying business and maximize the puff out of this old cigar butt.
- GAME Digital tried a similar approach with its stores, but this did not provide the turnaround hoped for.
Management is trying to reimagine GameStop (NYSE:GME) stores with the goal of becoming "the social and cultural hub of gaming". These new store designs look sleek and are filled with potential at first glance. But in reality, these stores concepts are unrealistic and won't do much good to shareholders.
GameStop's reimagined stores
GameStop is experimenting with four different store concepts:
GameStop Social is a revamped GameStop store that serves to specific audiences, or, as GameStop puts it, "focuses on our core customer". GameStop Social has a video game arena for esports events, mostly used by children, actually. Some of these stores also have a place for tabletop games, catering to a totally different audience unrelated to GameStop. It is clear that GameStop Social wants to become the social hub of gaming.
GameStop Retro is a transformed GameStop with only retro gaming products for sale. Some of these might also have video game arenas with old consoles.
GameStop 2.0 is a more sophisticated approach of the GameStop Social. GameStop 2.0 includes couches, smaller video game arenas, and in general, more room for socializing. The idea is to redesign a GameStop into a more customer-friendly place.
GameStop has been seeing modest success in selling collectibles over the last few years, which has partially compensated decreasing gaming sales. The idea of a GameStop Pop! store is to create a store that only sells collectibles.
The UK-based gaming retailer Game, owned by GAME Digital (OTCPK:GDIGF), is a gaming retail chain very similar to GameStop. In the United Kingdom, the transition from physical sales to digital sales has been very similar to that seen in the United States. GAME Digital has been fighting to remain profitable for years and looked at similar store concepts as its saving grace. GAME Digital has been remodelling its stores since 2016, and its goal is very similar to GameStop's goal now to become "the social and cultural hub of gaming", except it started years earlier.
Since both companies are so similar, it will be interesting to see how GAME Digital experienced this transition. It is very probable that GameStop will undergo a similar fate.
(Source: GAME Digital Investor Relations)
The timing was no accident. In 2016, when GAME Digital started transitioning its stores, the company was struggling to remain profitable. It tried to create stores very comparable to GameStop's social concept. The company started losing money in 2017 after its EBITDA dwindled for a few years. The new stores were unable to combat declining physical sales, and so, the trend continued.
GAME Digital was bought by Sports Direct for £52 million in 2019, for a price-to-book value of 0.56. Shareholders ended up with a total return of -80% if they had bought the stock in 2014.
(Source: GAME Digital Investor Relations)
Yes, transformed stores saw a significantly higher average spent by clients, but it clearly wasn't worth the investment. These stores required a much higher footprint, and thus, much higher upkeep costs. It is clear that the sales/footprint ratio is much lower in the bigger, transformed stores, which is bad for a low-margin retailer.
For GAME Digital, the new stores were performing relatively good, but it did not turn out be the miracle that would turn the company around. Recently, it announced the closure of 10%+ of its stores.
Doomed to failure
The reimagined GameStop stores won't provide a turnaround some investors, or even management, might hope for. GameStop is a low-margin retailer, and the reason it was profitable over the last years is because of its extraordinary high revenue/footprint ratio, combined with the lucrative second-hand business. Most of the store concepts simply put fewer items per square foot. This looks great, but is terrible for the company's bottom line.
It's great to put a sofa or table in a GameStop store. However, the company's working business model is the convenience of walking by the store, taking a look, and then getting some stuff you desire and leave. It is that fast flow rate that is making GameStop a profitable business. Creating social areas will have a minor impact on sales and a major impact on costs.
But is this approach to make GameStop "the social hub of gaming" even realistic?
Stores are too small
GameStop stores are typically 1500-1700 square feet. Often, this space is packed with tons of games, collectibles, and consoles. The typical GameStop store does not have room for a sofa, let alone room for an entire gaming arena.
'we do not intend to completely remodel our chain of stores'
- CEO George Sherman on the Q2 2019 Earnings Call
This makes me wonder, what is GameStop's plan? If you don't intend to completely remodel your chain of stores, then the plan to become "the social and cultural hub of gaming" is doomed from the start. In 2010, GameStop already opened a "store of the future", which has no value to the company except sugar-coating shareholders. All it does is it makes shareholders feel like management thinks about the future.
(CCO Frank Hamlin in an IGN interview, Source: IGN)
'The first thing you notice is how much more spacious GameStop social feels than a normal GameStop, because of the neat way we assorted it.'
- Frank Hamlin, Chief Customer Officer, GameStop
This comment by the company's CCO made me raise my eyebrows. It is obvious that this store is much bigger than most GameStop stores because it actually is bigger. How realistic is it to build a video game arena in a normal GameStop located in your average mall?
GameStop is trying to invent the wheel, but it is not driving a car, it is sailing a boat, which is right now going towards a cliff. And I don't see how organizing tabletop events is going to help the company's bottom line.
The reality is that GameStop's existing business was very profitable, and it is now nearing its shelf life. Buying and selling second-hand video games made the company tons of money, gaming arenas and sofas are not going to create that kind of value.
I want to end on a positive note. There is one kind of remodelled store I do think works with the existing GameStop chain of stores, and that is the retro GameStop. This is a shop that caters to a specific niche group willing to pay more than normal GameStop clients. Retro stores do what GameStop does best - buy second-hand consoles and games, and sell them for a hefty margin afterwards. These stores require little remodelling, and so, are relatively low-risk. But unfortunately, not every single GameStop can be remodelled into a retro shop - it caters to a small market.
It is good that management is trying to innovate and create new store concepts that may create value for shareholders, but they need to remain realistic. And the reality is that GameStop's business model does not bode well with the current approach, and unless management wants to implement gigantic changes, these plans will remain dreams.
GAME Digital had a similar approach with little success - the social concept sounded great, but the company started losing money either way. It is very unlikely GameStop could do it better.
Instead, management should maximize shareholder return on the short term. GameStop is an old cigar butt with one more puff in it. If the company is managed properly, as proposed by Michael Burry, it could be very lucrative to shareholders at current stock prices. These experimental stores seem great but won't do much good.
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