Why GameStop is Closing Over 120 Stores

The video game retailer has to stop being a video game retailer if it hopes to survive.

Apr 28, 2014 at 12:08PM

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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Daniel Kline is long Microsoft. He still buys music on CD. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, Barnes & Noble, GameStop, 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.

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