Entertainment retail is up for grabs

Who's going to buy GameStop?

GameStop won’t make it until the end of the year

I’ve been hearing different sides of the argument in the past weeks, but these are no normal circumstances. Retail is getting decimated and cash rich firms are buying locations cheaply. With JCPenny’s stock jumping +19% today on the news that it’s about to get bought out, and Amazon’s impending purchase of AMC, can we make inferences about GameStop?

The longer the pandemic lasts, the smaller the chances of GameStop’s survival become.

Succinctly, (1) its share price has dropped from $55 in November 2013 to ~$4 today and cut dividends in 2019 to “give itself more financial flexibility” and repair its balance sheet, (2) it has suffered a string of reorgs that amounted to very little, (3) its ability to take advantage of digitalization has been limited and continues to threaten it, and (4) now that we’re at the end of the current hardware cycle which invariably means that fewer consumers are buying consoles as they await the new devices later this year.

All of that is forgivable, of course. It’s just a company trying to do the right thing for its shareholders and employees (well, kind of). The coup de grâce is not going to be a single insulated incident. Rather it will be the culmination of a slow but massive shift toward digital distribution that is now accelerating because of Covid-19.

Across the board, entertainment retail is having a much harder time than grocery stores. According to one book shop owner, “People don’t come to bookshops with a list all ready to buy, they come to browse, that’s the pleasure . . . So what happens if now people can’t stay two hours?” An important part of what made GameStop successful was its role as a ubiquitous hangout for gamers. It’s where you go check out new titles, try out new hardware, snag a sale from the second-hand bin, etc. Now that consumers are no longer able to do that, foot traffic naturally declines and with it sales.

The attempt to compensate for a lack of physical sales with online sales is an obvious answer. One of its retail partners told me that online sales are up “3,000%.” That’s impressive, certainly. But is it enough? And, more importantly, is it sustainable? Online sales cannot fully compensate for offline losses. In much the same way, butchers and wine distributors can only partially replace their loss of sales to restaurants by selling directly to consumers.

Where does that leave it?

In business, death is just another life stage. It is unlikely that GameStop will disappear in the literal sense. For one, the brand remains strong. So perhaps it can emulate Sega and get out of the physical business altogether and just become an online retailer like Diapers.com Even so I’m not certain that it currently has the in-house skillset to pull off a 100% ecommerce strategy but GameStop’s brand continues to be valuable. For now.

Another idea is for one of the major platform holders to buy a piece of the retail network. With 6,600 stores globally, Microsoft, Nintendo, and Sony would each establish an analogue moat around their business. By comparison, Apple’s retail division is one of its strongest strategic assets and its obsessive control over this vertical integration has allowed it to become a luxury brand in an industry populated by commoditized consumer gear. Having a flagship store is cool; having a fully stocked Nintendo/PlayStation/Xbox outlet in every major city and direct access to a consumer audience is cooler.

Of course, it may just be cheaper still to have the company go bankrupt and buy it for parts afterwards. But considering that GameStop is currently worth around $258MM, eligible firms like Amazon (with a market cap $1.1T), Microsoft ($1.34T) or Sony ($79bn) lose and gain about that much in share price value on a daily basis.

Personally, I’d like to see it survive. Much like the cancelations of key industry events, it would be a loss if we can no longer visit these secular temples.

But I can’t stand watching it suffer.