With Wal-Mart (NYSE:WMT) stepping up its game trade-in program and the video game business softening despite the launch of a new generation of consoles, GameStop (NYSE:GME) has launched a new initiative designed to improve the retail experience for its customers and ultimately transform the company into something more than a bricks-and-mortar retail chain.
Instead of just bringing in a consultant or relying on its own expertise, GameStop is partnering with technology companies and universities to find ways to "better address the needs of today's empowered consumer," according to a release. The initiative, dubbed the GameStop Technology Institute, includes the retailer, IBM (NYSE:IBM), and the Center for Retailing Studies at Texas A&M University's Mays Business School. By joining forces with these industry leaders, GameStop will leverage GTI to explore and "build best-in-class research and development processes to create and implement within its global retail locations the next generation of new, innovative business applications," the company said.
"Now more than ever, GameStop's internal rate of change must continue to exceed the rate of change occurring within the retail environments in which we compete," said GameStop CEO Paul Raines. "The launch of GTI represents GameStop's commitment to cultivate innovation within the retail industry, as well as lead the charge in discovering new technology advancements to drive positive customer experiences."
Or to put it in simple language, things are changing really fast in the retail world -- specifically in gaming -- and GameStop needs help or it will be left behind.
How bad are things for GameStop?
GameStop's reported fourth-quarter sales rose 3.4% to $3.68 billion, as it posted a $220 million profit. That's worse then analysts expected and it's disappointing given that the holiday season included new consoles from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT). The company will close 2% of its 6,400 stores and it plans to shut down Spawn Labs, a research and development division that was working on a cloud-based games service.
"While cloud-based delivery of video games is innovative and potentially revolutionary, the gaming consumer has not yet demonstrated that it is ready to adopt this type of service to the level that a sustainable business can be created around it," GameStop's VP of investor relations Matt Hodges told Geekwire.
Closing Spawn Labs makes sense if you consider that one of the goals of the GTI is to help the company figure out how it can become more than just stores. That may ultimately mean some sort of streaming service, but if you're going to create a partnership to explore what your next moves will be beyond retail you probably should not be charging ahead with an idea that may not be right.
The competitive landscape
GameStop has to change because its competitors are changing, as is the behavior of its customers. The company's biggest short-term concern should be that Wal-Mart has essentially mimicked GameStop's trade-in program for games. Wal-Mart hasn't said what rates it will offer for used games but theoretically Wal-Mart could pay more and use game sales as a loss leader to force customers away from GameStop. Even if that does not happen the ubiquity of Wal-Mart means that the retail giant will likely siphon away some game trade-ins.
In an article I wrote on the Wal-Mart move I reported that GameStop earned $2.4 billion of its roughly $9 billion in total revenue in 2012 from the used market, according to the company's most recent annual report. Of that, customers applied 70% of trades to the purchases of new products. The company refurbished over 12 million games, along with over 1 million hardware units. That's a lot of potential business that Wal-Mart can swoop in and take.
GameStop also has to be concerned about the growth of casual gaming -- playing games on phones and tablets -- which has likely contributed to the relatively slow start of the current generation of consoles. Even consoles themselves are a growing competitor as customers can download some game content for them directly, which takes GameStop entirely out of the loop.
"We're more watchful for how much of the old console market has moved onto the mobile and PC gaming platform and what's the trend in the console market itself as Xbox and PlayStation strengthen their digital market over time," Morningstar analyst Liang Feng told Reuters.
GameStop knows it faces competition for its most lucrative customers and that direct sales that take place on a device -- be it a console, a phone, or a tablet -- threaten its business. It's creating GTI to figure out how to stay relevant and maintain a customer base.
Can GTI save GameStop?
GameStop knows it needs to be more than a retailer and more than a video game store, or it risks becoming Blockbuster Video.
"As GameStop continues to transform its business beyond video gaming and into the technology space, we formed GTI to address our growing need for new innovation as a specialty retailer," said Jeff Donaldson, who will chair the direction and efforts of the institute as the senior vice president of GTI.
Few if any retailers have been able to entirely change their focuses. Blockbuster did not survive the end of the physical rental era and Borders died because it could not figure out how to adapt to the rise of digital books. Both Radio Shack and Barnes & Noble are struggling in the changing retail world as are many other bricks-and-mortar stores. GameStop however has taken a bold step to address its problems before its position becomes dire. Video game sales may go away entirely if Microsoft and Sony can figure out how to eliminate the physical discs needed for most console games. That may happen but it has not happened yet so GameStop has time.
GTI has a nearly impossible mission in front of it -- moving a large retailer in an entirely new direction that ultimately may not involve any of the things that are major parts of the company now. Will the company have a reason to have a huge physical presence? Can GameStop sell something that online retailers and non-specialists can't?
There are no simple answers but GameStop has a better chance of surviving by addressing its problems and looking for bold solutions than it would if it just continued with business as usual.
Daniel Kline is long Microsoft. The Motley Fool recommends Morningstar. The Motley Fool owns shares of Barnes & Noble, GameStop, International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.