Why GameStop is Closing Over 120 Stores

The end of the physical video game is coming. GameStop  (NYSE: GME  ) has launched a plan to prepare for the digital future while refocusing its retail efforts on business segments likely to still require physical stores.

GameStop CEO Paul Raines explained the initiative -- dubbed GameStop 3.0 -- at the company's annual investor day Thursday, where he announced plans to close 120 to 130 of its over 6,500 GameStop locations while adding stores focused on selling products that are still purchased in traditional brick-and-mortar stores. GameStop 3.0 is "a new phase of the company's lifespan that will see it aggressively expand its footprint into gaming-adjacent tech fields," Raines told the investor day audience.

The new stores will include 200 to 250 of the company's Spring Mobile stores, which exclusively sell AT&T  (NYSE: T  ) products. The company will also add 20 to 25 of its Simply Mac stores, which sell and service Apple (NASDAQ: AAPL  ) products, and 100 to 150 locations dedicated to selling Cricket, a pre-paid wireless brand franchised by AT&T. According to Raines, GameStop is currently "the third-largest and fastest-growing AT&T retailer in the U.S." 

While 120 to 130 stores is a tiny percentage of the overall company, the moves show Raines at least understands that the business is changing. Specifically, physical games are giving way to digital downloads, which will eventually make the business model of retail stores peddling games as well as buying and selling used games no longer viable.  

A change is coming to the video game space

The need for physical game titles has diminished as mobile gaming on smartphones and tablets has grown in popularity. There were rumors before the current generation of gaming consoles were introduced that they may not use discs or another physical game medium. That turned out to not be true -- both Sony's  (NYSE: SNE  )  PlayStation 4 and Microsoft's  (NASDAQ: MSFT  )  Xbox One use disc-based games, but both also can offer some games via digital download, which eliminates the need to visit a store like GameStop.

Microsoft offers nearly all of its games in a digital-only version. The company has not pushed the service exactly, but it has also not hidden it, promoting digital downloads on a page on the Xbox One website

All Xbox One Games will have a digital version unless there is a required physical peripheral (e.g. Skylanders Swap Force).... Download your favorite Xbox One games from Xbox Live the same day they are available at retail – all in the comfort and convenience of your home. The digital version can be downloaded directly to your Xbox and you can even start playing before the full game download is complete. Have peace of mind that you'll never lose your disc and can access or buy it any time of the day.

Sony also offers a similar download option for all its titles, which previously took hours before people could actually play the game, but now has a "preload" feature which, like Microsoft's, allows people to start playing almost immediately while the game downloads. My Fool colleague Sam Mattera wrote about this a few days ago: Sony's PlayStation 4 Could Signal the End of GameStop.

Slow downloads forcing impatient gamers to buy physical copies through retailers was one of the last reasons GameStop customers had to actually go to stores to purchase games. Removing that problem not only takes GameStop out of the retail loop it removes the company from the resale market as well.

GameStop is making the move to digital

In addition to building out brands not based on selling video games and gaming products, GameStop has also been making efforts to become a digital player in its own right.

GameStop made most of the $9.04 billion it took in for 2013 selling new and used video games, but sales in those categories declined 2.8% for new games and 4.1% in used titles. Non-store-based digital sales increased 15.1% to $724.4 million. 

In general while it's less than 15% of overall revenues, the company did make progress in its efforts to move away from reliance on selling physical video games even before the idea of GameStop 3.0 was made public.

"Our emerging digital and mobile businesses, which did not exist three years ago, surpassed $1 billion of revenue," Raines said in a GameStop press release.  "As we push forward into 2014, both the reenergized video game category and our new Technology Brands business unit provide us with solid growth opportunities in the consumer electronics and wireless markets."

GameStop isn't there yet but the company is not Blockbuster Video clinging to a dying business model long past the time when everyone knows it's not going to work.

Will GameStop have enough time?

With over 6,500 stores dedicated to its current dying model, GameStop has to move quickly as the chain is clearly being cut out of the loop when it comes to video game sales. Moving heavily into digital and launching stores that sell products customers still want to handle before buying makes sense, but the company has to accelerate its pace as the death of the physical video game business is likely to accelerate as more people buy the new generation of consoles and become comfortable with the idea of not physically owning games.

GameStop is being proactive. The company has clearly learned its lesson from the death of the record store chains and the move to digital books, which has already claimed Borders and has caused big problems for Barnes & Noble (NYSE: BKS  ) , but the company needs to pick up the pace. The way GameStop makes most of its money now is disappearing and closing 120 to 130 stores should be the tip of the iceberg in Raines' efforts to reposition his company.

The end is coming. For GameStop it's a race to see if the company can get out of the business of buying and selling physical video games before that stops being a business at all.

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Read/Post Comments (24) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 28, 2014, at 3:22 PM, mobrocket wrote:

    U will be missed gamestop

    I got $40 for my infamous game which helped finance my next game...

  • Report this Comment On April 28, 2014, at 3:31 PM, scruffymatt wrote:

    What is going to be the point of Gamestop if/when all video games are distributed digitally. I can't trade a digital copy of a game, atleast I certainly don't see developers/console makers allowing this. And if Gamestop sells the games digitally they are going to want a piece of that sale to make a profit, but that means it should be cheaper to buy directly from the developer/console maker so why would I ever use Gamestop?

  • Report this Comment On April 28, 2014, at 3:58 PM, Logicftw wrote:

    I wouldn't touch Gamestop stock with a 10 foot pole. They've alienated many customers like myself with dubious business practices over the years such as selling games unwrapped and without the inserts as "new". Also, there is nothing like receiving a pittance in trade-in value for a game recently purchased for $60.

    Unlike other retail establishments, they've done nothing to earn my loyalty or my money.I avoid GameStop like the plague. There are other much better alternatives out there.

  • Report this Comment On April 28, 2014, at 4:31 PM, liebevision wrote:

    There is a TON of buisness in older games, for consoles dating back to the 8 bit era. Expanding into phones and tablets makes no sense. They are late to that party and that market is already saturated with retailers. Why would you go there instead of a walmart, best buy, or apple store? Why on earth would I go into a gamespot apple store and not an apple apple store instead?

    And as games get larger and larger, and ISPs begin throttling and capping data, having a place to get games on physical media is going to be important. Anyone who thinks downloading 20+GB games and streaming tons of video is the future is just ignorant of the reality of the war on the internet that ISPs are currently waging. The internet bubble is going to pop, sooner rather than later. I've already had to cut the netflix cord as it used up too much of my data allowance, and I've switched FROM digital downloading to physical media because it just eats too much into my cap. And there is NO ISP in my area that does not have one, and I live in a major metropolitan area.

  • Report this Comment On April 28, 2014, at 4:38 PM, Droppo wrote:

    The move to all digital games is being forced. It's not a natural evolution of the industry. People high up in the business have decided this is the wave of the future and have made decisions to make sure it happens sooner so they can be on the front end of it when it does. The same thing is happening in digital music trying to be forced on us as the only choice. There are millions of people who don't WANT to download a game or a song. They want to feel like they own something. Something they can hold in their hands and say this is what I purchased. There is room in the industry for BOTH sides of this. Let the people who want to download a game have their fun, but don't take away what millions of other people still want too. Just because it has been decided that it will happen some day...

  • Report this Comment On April 28, 2014, at 4:57 PM, DScott750 wrote:

    As I've thought, the era of the disk video games is coming to an end. In the next 15-20 years all games will be nothing but Downloadable to ones system, or phone.

  • Report this Comment On April 28, 2014, at 5:30 PM, bendriver wrote:

    @ liebevision

    Wait for google fiber then...Google is far less restrictive than anyone else and offering gigabit internet connections...

  • Report this Comment On April 28, 2014, at 5:51 PM, duane90 wrote:

    ok digital download is good, but for someone like me i would want a cd because i don't want to take up all the space on the hard drive. so how do you add more games to xbox one when they don't let you get a bigger hard drive.

  • Report this Comment On April 28, 2014, at 9:22 PM, crymsonkyng wrote:

    we are in an era of data caps and ISP throttling. Digital is NOT the future

  • Report this Comment On April 28, 2014, at 9:46 PM, Icarus2014 wrote:

    Gamestop days are numbered they continue to have high turn over in stores and field management. The work environment and work loads for employees and managers is self destructive. They continue to cut store staff hours and thus no customer service....rack and stack mentality. Furthermore many do not realize a good percentage of games traded are for cash. This is due to people giving up on consoles and going to phone gaming. The other is the dark secret is gamestiop hides is the amount of stolen games and merchandise that is traded to stores for cash. No serial numbers on games. When consoles are traded they do not keep records of traded serial numbers......gamestop is a black market haven of stolen merchandise...only buy new

  • Report this Comment On April 29, 2014, at 12:16 AM, PsiKick wrote:

    They're closing stores? Why? There are only 3 within 7 miles of me, sheesh, there used to be 4. Makes no sense.

  • Report this Comment On April 29, 2014, at 12:18 AM, PsiKick wrote:

    They're closing stores? Why? There are only 3 within 7 miles of me, sheesh, there used to be 4. Makes no sense.

  • Report this Comment On April 29, 2014, at 12:27 AM, Asmodeus1971 wrote:

    We have two stores here back to back to each other in neighboring shopping centers, plus one in the mall and two on the military bases. All of these are within a five mile radius.

  • Report this Comment On April 29, 2014, at 12:29 AM, chrismireya wrote:

    Six months ago, Sony fanboys were whining about how Microsoft and the Xbox One was going to destroy Gamestop (because of their planned policies for downloading and installing games via the Xbox One). Now, Gamestop is going to collapse anyway because of digital downloads from both Sony and Microsoft.

    Go figure. It is time to move into the second decade of the 21st Century.

  • Report this Comment On April 29, 2014, at 12:38 AM, RandomOptimist wrote:

    Thats ok........ Gamestop sucks anyways, their business model has always sucked and they always gave absolutely nothing for games and systems. They never sell older titles from previous systems which is foolish because I always see people buying PS2 and even SNES games like nothing now adays. And do not go saying there is no market for that because thereis. Why else are there hundreds upon hundreds of games from a NES and SNES sold on the Super Nintendo

  • Report this Comment On April 29, 2014, at 12:58 AM, ZeroLopez wrote:

    That's where I go for buying used games for my kids, preoreder new games... Man... one day it will go but I got to save $ to buy all the older games i wish I had

  • Report this Comment On April 29, 2014, at 1:33 AM, budh420 wrote:

    they are finally closing stores because when they bought EB GAMES they had more stores then I live next to Newport Beach CA in Costa Mesa and I just checked and have 19 stores within 10 miles you really need that you dont

  • Report this Comment On April 29, 2014, at 4:44 AM, Interventizio wrote:

    They are proactive I'll give them that. The question is if there is room for them to diversify. I doubt that.

  • Report this Comment On April 29, 2014, at 8:05 AM, Ebby720 wrote:

    These had to be poor performers or they are morons for listening to these idiots writing articles....I will never stop buying disc from someone, depending on who has the best add ons....Amazon gets them to me with my already Prime on the same night they are released....but I already paid for that...Gamestop charges more.....either way, I want to trade in mine or the kids....downloads I use for DLC or maybe something small for the kids or me, certainly no $60 game that I will get stuck with If I don't like it or won't play again.

  • Report this Comment On April 29, 2014, at 8:23 AM, dcisthecity wrote:

    gamestop is just giving more business to ebay/amazon. millions are not concern about digital downloading. I love going to a gamestop and buying a game. if they stop selling physical disc, I will be shopping at amazon/ebay.

  • Report this Comment On April 29, 2014, at 12:09 PM, jonfromny wrote:

    Hey Gamestop, want to bring back customer loyalty in a big way? How about giving more than pennies to the dollar on older sports games; especially to be used as credit towards a newer one. I have three sports games for the PS3 that are approximately four years old, and at most Gamestop will give me about $1.50 to be used towards the purchase of a new $60 game.

    You'd think the Game manufacturers like EA and Sony would encourage this. Realistically speaking, how many people go out and buy a new version of their favorite football, baseball, or hockey game each year - just to get updated rosters and not much else?

  • Report this Comment On April 29, 2014, at 3:49 PM, Soakee wrote:

    I think the folks at GameStop have to be blind not to see what's coming. I do agree that they don't pay enough to buy used games, but as a business person I see the business case behind it. I see a need for for some bootleggers to figure out a way to copy and sell downloaded games in the future (when discs go away). When discs go away, I'll take up another (probably more expensive) hobby. Phone gaming? Are you serious? Let's see, I can play a rudimentary game on a tiny screen that I need reading glasses to see clearly, or play a serious game on 82 inches of digital glory with 7.1 surround sound. Gee, which one to choose?

  • Report this Comment On April 30, 2014, at 12:06 AM, vigilante1411 wrote:

    So.. GameStop is getting out, yet Walmart is getting in.

  • Report this Comment On April 30, 2014, at 11:49 AM, grnarchr wrote:

    I love gamestop, but see now they have competition with other businesses since they will be selling products for att and apple. Most people go to corporate stores because they are more knowledgeable. Gamestop will do well in places where there are no corporate stores. There are some things that a corporate store has that a non-corporates doesn't. This way there is hardly any competition and people will be forced to buy instead of traveling 2 hours away for corporate. I would rather have a disk than digital because if something were to happen to the console, the digital is gone. I know I will still have the game with a disk. My husband and I love getting game bundles because of the cool stuff that comes with it. Statues, flags, medals, comics. That is the reason we buy and we save a lot also. My husband bought a bundle that came with a rc plane just because he wanted the plane. We don't care about the game, just the plane. Our son plays the game. At amazon, the same bundle will cost $500-$600 while in gamestop, it could cost 2. The people always up the prices and hardly any deals depending on what is bought and shipping.

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Daniel B. Kline

Daniel B. Kline is an accomplished writer and editor who has worked for the Microsoft's Finance app and The Boston Globe, where he wrote for the paper and ran the business desk. His latest book "Worst Ideas Ever" (Skyhorse) can be purchased at bookstores everywhere.

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