What do you do when you fall off the horse? Get rid of that stupid horse and get a better one that you ride to fame and glory. At least, that's what you do if you're GameStop (NYSE:GME). Earlier this week, the company announced that it's going to be closing around 120 of its locations and opening between 300 and 400 stores under its other brands.
Apart from its eponymous brand, GameStop also owns a mobile chain called Spring Mobile, a different prepaid mobile brand called Cricket, and a small set of third-party Apple retail and repair stores called Simply Mac. Under its plan for fiscal 2014, all of those secondary brands will at least double their location counts.
Diversification as a path to growth
Before you start worrying that GameStop is giving up on the idea of video games -- or maybe before you get excited about that idea -- let's put things in perspective. Right now, the company runs a little over 200 non-GameStop stores from the other three brands -- it operates over 6,000 GameStop locations. Even with the closings and the openings, the business will be heavily weighted toward video games.
GameStop's goal is nevertheless ambitious. In its presentation on the shift, the company said it plans to have annual revenue from the other brands -- deemed "technology brands" -- grow from $63 million in fiscal 2013 to $1 billion in 2016. That's a lot of growth, and it would mean the tech brands would account for close to 10% of total revenue.
That growth also means tech brands are going to account for a disproportionate chunk of costs. In 2014, for instance, GameStop is going to put almost a quarter of its capital expenditures toward the smaller tech brands.
Competing with Best Buy
Maybe this is an example of imitation being the sincerest form of flattery. If so, then GameStop must be a big fan of Best Buy (NYSE:BBY). Best Buy has seen the writing on the wall and has diversified its offering in response. The company now manages over 400 Best Buy Mobile stand-alone stores and has been expanding its store-within-a-store concepts, including its Windows and Samsung mini-stores. It now runs over 2,000 of those little guys, combined.
The move by both companies toward mobile brings two things to light. First, online retail continues to change the world, making traditional retailers push for new ways to sell. Adding targeted businesses within its locations has given Best Buy customers a reason to actually come into the store -- focusing on a single range of products is a trend that's only going to increase.
Second, mobile is taking over all of technology. Best Buy and GameStop aren't mobile businesses, but now they need to become mobile businesses. Music, movies, games, and actual work are being done on the go, and no amount of hoping to sell a kid a used copy of Fast & Furious: Showdown is going to make mobile go away.
The bottom line
GameStop's embrace of non-used-games focused businesses is good news for the company. Digital delivery and the rise of the casual gamer means GameStop's core business is shifting under its feet. It can and should try to change with the times, but diversifying into new businesses also makes sense as a hedge.
In addition to buffering its core business, the tech brands should also help even out revenue no matter how popular consoles are at any given time. When the last generation of consoles was on its last legs, GameStop suffered as business dried up with gamers waiting for the next generation to hit the shelves. Hopefully, an increase in mobile and Apple product sales will help it weather the next storm that rolls in, whatever it might be.
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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and GameStop. 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.