GameStop ($GME) sells video games. They stock lots of game, comic, and nerd culture-related products, but the company makes most of their money selling video games and game consoles. While other big box chains focus on selling video games and TVs, computers, and assorted electronics, GameStop is the largest chain specializing in the sale of video games and related products.
The video game industry is a particularly lucrative industry to be in. Exact numbers aren’t currently available, but it is predicted that the global video game industry did $91 billion in business last year, according to VentureBeat. That’s well more than double the expected $38 billion in the world’s box office revenue. GameStop makes up a sizable portion of this amount, as they’re in a fantastic position as the video game retailer.
Unfortunately, GameStop is having trouble getting video games into the hands of the game-playing public. The company’s holiday revenues are down at a time when they needed them to break records. Gamers are flocking to other stores and other means to get their gaming fixes. This is causing investors and gamers alike to ask an important question: how is a video game store supposed to exist when they can’t sell video games?
Video game fans buy their games differently these days.
Video game players have purchased games directly through their console for the better part of a decade. These digital games, however, are rarely discounted, unlike their physical counterparts sold in stores like GameStop. Nonetheless, the convenience of buying a game directly through your console without going to a store is more convenient and often worth the extra cost than going to a physical store like GameStop.
It’s also a lot easier (and often cheaper) to buy games online. Best Buy ($BBY) and Amazon ($AMZN) both have robust online stores that ship games to you for free on their release date. Both stores also sell games at 20% discounts upon release if you subscribe to their premium services (Gamer’s Club Unlocked and Prime, respectively). This lets shoppers pay $49.99 plus tax from their couches instead of walking into a GameStop and paying $59.99 plus tax.
GameStop makes their money through used games, merchandise, and little else.
GameStop sells new video game consoles and games, but they make a large chunk of their revenue from their sales of used games and consoles. GameStop stores buy used products back, give them a significant markup, and sell them to another customer. One hundred percent of all used game sales go to GameStop, whereas new products only make the company a small amount per item.
GameStop doesn’t just sell games. They also sell collectible figures, t-shirts, accessories, and everything adorned with video game and comic book characters. After purchasing ThinkGeek in 2015, GameStop started giving these items more shelf space. This was to diversify their product offerings, as the company realized they couldn’t just sell video games anymore and was in a good position to cater to their unique customer base.
Unfortunately, GameStop is caught in the middle of a bad retail market.
Retail stores aren’t doing so hot right now, and GameStop is a video game retailer. The company’s sales dwindled during the 2016 holiday season, a time when they expect to perform better. This was caused by retailers like Amazon, Best Buy, and Walmart ($WAL) offering more appealing deals on consoles and games for less money. Those stores can afford to take a hit on video game revenues with rock-bottom sales because they potentially cause customers to spend more money elsewhere in their stores. GameStop, however, only sells games, and can’t really discount them all that much.
Game sales during the company’s fourth quarter were down 19.3% compared to the previous holiday season. Console sales were down 29.1% compared to holiday 2015. This came at a time when Sony and Microsoft launched new products like the Xbox One S, the PlayStation VR, and the PlayStation Pro. A steep decline in sales of popular series like Call of Duty didn’t help things, either.
GameStop is closing hundreds of stores in response to bad holiday sales.
The company expects to close around 150 of their 7,500 stores worldwide. This means the loss of thousands of jobs, which is often (sadly) good news for investors (as it means a decline of overhead and money spent in the future). Yet GameStop’s investors are less than enthused about the company’s sales and consolidation plan. After announcing these closures, the company’s stock declined by 13%.
Should you invest in GameStop? Retailers are hurting badly in the current market, and GameStop is not immune to this. If the company doesn’t do something to compete with Best Buy and Amazon’s 20% deal or competitors’ Black Friday sales, they could see further declines. If you’re of the belief that the company will get smart and compete with major chains while also adding to their product lineup, do your research before you invest. If you think they’re on the way to be the next Blockbuster, you might want to invest elsewhere.