With more people stuck indoors and craving entertainment thanks to
lockdowns across the country, you'd think that video game retailer
GameStop would be thriving.
But the coronavirus pandemic has decimated the already struggling chain.
GameStop's core business is selling new and used software and hardware to
video game enthusiasts.
But the video game retail chain has fallen on hard times.
Even before the coronavirus started, gamers had already begun to shift
from buying packaged software at brick and mortar stores to downloading
games directly to their consoles.
Apple and Amazon have shaken up the status quo too.
Attracting consumers with new streaming services that don't require
physical consoles, making it easier than ever to game.
It's been clear that the company's had having problems for a long time.
There's been basically a 15-year trend away from packaged video game
distribution to digital game distribution.
GameStop has been feeling the pressure.
As of 2013, GameStop same-store sales declined in three of the last 40
years. COVID-19 has only added to the company's woes.
In the second quarter of 2020, same-store sales fell by more than 12
percent from the prior year, with a majority of locations open to
limited customer access or curbside delivery.
But it isn't all bad news for GameStop
With does shut down, its second quarter 2020 global online sales
increased more than 800 percent from the year prior.
In October 2020, GameStop entered into a multiyear agreement with
Microsoft to expand its physical and digital video game options and
upgrade its stores.
And the company is eagerly awaiting the launch of the next generation of
consoles from Microsoft and Sony, the PlayStation 5 and the Xbox Series
X, expected to arrive in late 2020.
The question is, with an onslaught of new competitors and a digital world
taking shape around it, can GameStop survive?
GameStop got its start in the early 1980s as a small educational software
retailer in Dallas, Texas, called Babbage's.
But the company soon pivoted to selling entertainment software, putting
it on the path to becoming one of the nation's go to emporiums for all
things gaming. By 1993, the company was making more than 60 percent of
its revenue from entertainment software, and it had 300 stores across
the country. The following year, Babbage's merged with Software Etc.
And in 1999, the company was sold to Barnes and Noble for $215 million.
A year later, the company was renamed GameStop
Part of GameStop's early success back in the 90s—video games not always
easy to find. When I started reporting on games, you would generally go
to the local computer shop to buy your games and you'd go in there and
they'd be selling word processors and printers and all that
And there'd be a little corner somewhere where they would be selling some
PC games and maybe some console games.
And, you know, that's changed over the years.
In 2000, GameStop attracted even more gamers to the store by launching a
buy-sell trade program, allowing customers to trade in their old video
games to buy new ones for players.
The appeal was huge.
Suddenly, old games became gift cards for future purchases.
You could go in there and you would be surrounded by this world of video
games. They would be selling you a video game, magazine, there'd be
somebody on the TV screen talking about games.
And if you were into that and if you felt as if gaming culture was your
thing, it was kind of a nice moment, a place of belonging.
In February 2002, GameStop went public on the New York Stock Exchange at
$18 a share. And in 2004, Barnes Noble spun off its majority stake in the
company for about $110 million.
In 2005, GameStop acquired rival Electronics Boutique Games for $1.4
billion dollars, expanding its international footprint and making the
company the world's largest video game retailer, with over 4,400 stores
worldwide. On December 24th, 2007, the stock closed at an all time high
of $63, more than double the amount from a year earlier.
And the company had a market cap of almost $10 billion.
And its physical footprint kept growing.
By 2012, GameStop had more than 6,600 stores in 15 countries
But the company wanted to diversify even more.
And so it went on a buying spree.
In 2013, GameStop acquired Simply Mac, the largest certified reseller of
Apple products and Spring Mobile, the fastest growing AT&T authorized
retailer of wireless services.
By 2018, GameStop opened more than 1200 AT&T Wireless stores.
I think the things we've done to improve our performance is we've created
two new billion dollar businesses inside our stores and those are
digital and collectibles.
And then outside our stores, we've got this great technology brands
business, which is our AT&T and Apple partnerships.
But even with all the new acquisitions, by 2018, sales remained flat and
the company was struggling to maintain customer loyalty.
The market for physical games was declining, too, with the advent of
online services from Xbox, PlayStation and Nintendo, which were offering
downloadable digital versions of their games.
As of August 2020, GameStop's market cap had fallen to about a half a
billion dollars, and the company's stock price closed at $9.
39 on October 2nd, 2020.
According to analysts, by the late 2010s, stores were also starting to
feel worn and tired.
And anybody who goes into a GameStop kind of knows that the shops seem a
little bit shabbier these days, I hear that a lot—that they kind of
like...they look as if they're going down market all the time.
In March 2013, the company named George Sherman as its CEO.
Sherman was the fifth CEO in less than two years.
The company just screwed up royally by diversifying and diversifying into
stuff that made no sense at all.
They they made the decision in 2014 to get into cellular phone
stores. And so they and they literally spent about $280 million bucks
buying a bunch of cell phone stores that were AT&T branded, and then
they went ahead and borrowed another $500 million later to do it again.
And they went from zero to 1,500 cell phone stores at a cost of more
than a billion dollars.
In 2019, GameStop sold both Spring Mobile and Simply Mac.
Ultimately, the businesses made little sense for the company's business
model, but the damage had already been done.
2013 proved to be a pivotal year for the gaming industry.
On November 15th, 2013, Sony unveiled its highly anticipated next
generation console, the PlayStation 4, hoping to breathe new life into
the brand. A week later, looking to expand its realm beyond the PC,
Microsoft debuted the Xbox One.
Both devices were a hit, with Sony's PlayStation 4, selling more than
100 million devices as of January 2020.
But it might have been GameStop that had the most at stake.
Next generation console releases are a big moneymaker for GameStop, and
the PlayStation 4 and Xbox One were no exception.
GameStop saw new video game hardware sales increased by almost 30 percent
in fiscal year 2013 from the prior year.
But the 2013 PlayStation and Xbox launch also have longer term
implications for GameStop.
While both units had faster processors and came with DVD drives, they
also had a heavy focus on digital downloads and offered cloud storage,
cutting out the need for retailers like GameStop.
So digital downloads appeal to convenience oriented customers who
want the game, but they don't necessarily care about the package and
convenience as in if if the game comes out like Call of Duty at midnight
on Friday, which is the Thursday night at midnight, then, my God, you
can start playing it at 12:01 because it's downloaded in the background,
you know, six hours earlier.
And they just activate it at the time.
They might download three days or so it didn't matter.
And if you're a digital customer, the publisher likes you more because
you're not trading the game in.
And so I think they've just been caught up again in something that's
happened to media across the board.
It's nothing, again, not to disparage the company.
It's just a broader structural fact that it's less expensive and more
convenient to do it digitally as long as you have a broadband connection
at home. The trend has only accelerated in recent years, with some
publishers reporting that digital game sales now outpace physical game
sales in some quarters of the industry, and eating further into GameStop
margins. In fiscal year 2019, GameStop reported net sales of new and
used games was $3 billion dollars, about 16 percent less compared to the
sales of just new video games in fiscal year 2013.
And is not just digital downloads for consoles that are impacting
GameStop's business model.
Some of the most popular games like Minecraft and Fortnight can run on
your phone without a console.
Internet and tech heavyweights have made moves into the space in recent
years as well. In March 2019, Google announced a new streaming service
called Stadia. The $9.99 a month subscription allows enthusiasts to play
high end video games without purchasing pricey computers or consoles.
In May 2020, Amazon launched its first big budget game for the
PC—Crucible. The free-to-play shooter game was the company's first high
profile game since Amazon Game Studios started in 2012.
Though it's worth noting that after mixed reviews, the game was taken out
of release and moved into closed beta, where a development team will
attempt to improve the game.
And Apple and Facebook are diving into.
In September 2019, Apple created a gaming subscription service called
Apple Arcade for $4.99 a month.
And since the end of 2019, Facebook is acquired to virtual reality video
game companies. The video game industry in the U.S.
is roughly $60 billion dollar market, according to IBIS World, and about
75 percent of Americans have at least one video game player in their
households. The brick and mortar video game market is intensely
competitive. You have big box retailers like WalMart and Target,
electronics stores like Best Buy, and of course, niche players like
GameStop. And since about the mid 2010s, the space has seen an influx of
new competitors from online heavyweights like Amazon, Google, Apple and
direct sellers like Sony, Microsoft and Nintendo.
GameStop has been feeling the pressure.
GamesStop had net sales of $6.4 billion in 2019, down 20 percent from
2015. Digital downloads have not only impacted GameStop ability to sell
new video games, but it's also disrupted another important segment of
its business: preowned video game sales.
Part of GameStop's popularity in the gaming community was thanks to its
unique buy-sell trade program.
The company makes a big chunk of money when gamers sell old video games
and use the credit to buy new games or equipment.
The second hand games business is the thing that they made all of their
money from. And what you had to say 10 years ago was a 15, 16-year-old
going in there with their old games, trading them in and buying a new
game. They weren't getting a particularly good deal because that's just
the way that GameStop operated.
But they were getting a better deal then if the game just sat there
gathering dust at home.
With consumers buying games digitally or signing up for subscription
services, there's nothing really to trade in or resell.
In fiscal year 2018, GameStop reported sales of preowned video game
products with one point eight dollars billion, 20 percent less than
fiscal year 2013.
GameStop did provide the figure for 2019
So GameStop had to pivot, in 2014, the company expanded its collectibles
business, selling toys like the $1,400 Ghostbuster vehicle or the $500
Avengers End Game Hulk statue.
In 2019, the company had collectible net sales of $737 million dollars,
almost 900 percent higher than 2014.
Every time I go into a store and see one, I buy one.
So collectibles makes sense to me.
Now, I don't know if they're going to sell the $5,000 dollar Millennium
Falcon, you know, ship that's like Gigantor, but they've got lots and
lots and lots of cool stuff.
And it's good margin.
It's about a billion dollar business.
So it's a meaningful contributor to their profits.
And the thing is, you know, they don't really sell handheld games
anymore. So they got out of the Gameboy and DS business.
CNBC reached out to GameStop, but they did not respond to our request for
an interview. With people stuck at home during the coronavirus pandemic,
gamers are expected to spend almost $16O billion in 2020, 9% more than
the prior year, according to Newzoo, a gaming market researcher.
In a bid to boost sales in 2019, GameStop introduced new store concepts
and created space in stores for competitive sessions to attract gamers.
While those upgrades are unlikely to help out much during the pandemic,
the company's August 2019 relaunch of its online marketplace has
Despite the dramatic drop in sales since the start of the pandemic, its
e-commerce platform has been firing on all cylinders.
In the second quarter of 2020, global online sales increased over 800
percent from the prior year.
Experimenting with the store design.
If they can get people to come in and hang, that's great.
But the bread and butter of the businesses they're going to thrive with
is new consoles because the console manufacturers have to sell them, so
somebody has to retail them.
And they've got to thrive when new software comes out, every time new
software comes out, whether it's cyberpunk or FIFA or Call of Duty or
Assassin's Creed or whatever it is, people are going to go to GameStop,
that's a destination.
And while those e-commerce games might not have a big impact on
GameStop's overall bottom line, what might help drive sales is the
launch of the next generation of consoles from Microsoft and Sony.
In late 2020, Sony and Microsoft are planning to launch their next
generation devices, the PlayStation 5 and the Xbox Series X.
Both systems have the option for digital downloads, as well as the
ability to play physical discs.
Previous releases have been a financial windfall for GameStop.
During the launch of Sony's PlayStation 3 in November 2006, GameStop
reported fourth quarter sales increased 30 percent from the year prior.
But new consoles don't always guarantee a big boost in revenue.
In the fourth quarter of 2013, sales at GameStop rose three point four
percent from a year prior following the November launch of Sony's
PlayStation 4 and Microsoft's Xbox One.
Some analysts think that 2020s major console releases won't do much to
bail out GameStop.
I don't think that the coming of PlayStation 5 or the Xbox Series X is
going to do enough to boost their chances in the market.
And what I'm seeing in terms of them laying off their some of their
district managers and kind of cutting their costs in that area, that
sends a strong signal that quite a lot of their stores are going to
close over the next six to nine months
According to analyst, what might benefit GameStop is its legion of fans
who prefer buying the physical copy of a video game to the digital
version, allowing them to trade in their old copy.
According to a 2018 Nielsen report, the vast majority of Xbox and
PlayStation gamers prefer physical package video games over digital
downloads. There's a common theme on Wall Street that any company
that can be made obsolete by digital distribution should be obsolete and
will be obsolete. And yet, realistically, the game business is a little
different because of that trade in value.
And so as long as there's physical, there will be trade-ins.
As long as they are trade-ins there is a big chunk of the population who
looks at every game disc as a twenty dollar bill and they don't let that
go for nothing.