GameStop's New Strategy Looks Familiar; Time to Buy or Time to Run?

GameStop is closing 120-130 of its video game stores and expanding tech-focused stores selling mobile phones and electronics. This mirrors RadioShack's failing strategy, and with competition from stores like Best Buy, GameStop will have a tough time succeeding.

May 1, 2014 at 5:15PM

GameStop (NYSE:GME), the chain of video game stores, recently announced a significant shift in strategy. The company is planning on closing between 120 and 130 of its video games stores, of which there are more than 6,000 worldwide, while aggressively expanding the footprint of tech-orientated stores that were acquired over the past few years. This strategy, called "GameStop 3.0" by management, is a reaction to the threats facing GameStop's business, namely the rise of digital distribution and increased competition in the used-game market from Wal-Mart.

Mobile devices are the main focus, and GameStop plans to build 200-250 of its Spring Mobile stores in fiscal 2014. Spring Mobile sells AT&T products exclusively, and it already had 164 locations throughout the United States as of the end of fiscal 2013. GameStop also operates stores selling the Cricket brand of wireless phones and plans. Cricket is owned by AT&T, and GameStop plans to open 100-150 Cricket locations in 2014.

GameStop also owns Simply Mac, a retailer that sells and repairs Apple products, and the company plans to open 20-25 new locations in 2014. Simply Mac plans to focus on smaller markets where Apple's own retail stores are less prevalent, and the company expects to have 93 locations by 2015, up from 23 locations today.

This sounds familiar...
This focus on mobile devices and plans sounds a lot like RadioShack's (NYSE:RSHCQ) strategy. In an effort to remain relevant to consumers, RadioShack shifted focus a few years back to selling mobile phones and plans. It didn't go well. RadioShack recently was forced to close 1,000 stores as sales fell off a cliff, and the company is at risk of going bankrupt within a few years if it can't reverse its losses.

There are simply too many different companies selling mobile phones and plans. There are the stores run by the mobile carriers, Apple stores, RadioShack, Best Buy, Wal-Mart, and various online options. It's an extremely competitive market, and with Spring Mobile only selling AT&T phones and plans, it's only exposed to a fraction of that market.

Best Buy, for example, sells phones and plans for all of the carriers, and it has mini-stores from Samsung and Apple within many of its locations. Best Buy accounts for about 31% of the U.S. specialty-electronics retail market, according to Euromonitor International, and part of the reason is because it offers such a broad selection of products.

RadioShack has shown that turning a profit by selling mobile phones and plans is not easy, and there's no real reason to believe that GameStop will be successful. During the company's investor day presentation, its loyalty program, PowerUp Rewards, was emphasized as a key advantage to winning market share in these new areas. But the loyalty program is based around video games, and I severely doubt that gamers loyal to GameStop will start buying phones from the company as well.

Simply Mac has the most potential to succeed, given that Apple restricts its own retail stores to areas where a high return on investment can be achieved. The problem is that margins are extremely low. GameStop expects a mature Simply Mac store to contribute $80,000 to $120,000 in store-level profit on $2 million to $3 million in revenue. That's a 4% margin, far below the 10% margin achieved by mature GameStop stores.

I suspect that GameStop's core business is going to deteriorate fast enough that these new businesses won't be able to compensate. GameStop relies on used-game sales to generate a significant portion of its profits, but it's unclear exactly what will happen to this market as digital distribution becomes more prevalent.

There should still be a market for used games, especially for older consoles and among those who buy games with the intent to sell them back. But digital distribution could greatly decrease the number of used games in circulation. Wal-Mart's new efforts to enter the used-game market are also an issue, especially since the retailer is offering more money than GameStop for used games and plans to undercut GameStop on price once it starts reselling them.

The bottom line
GameStop's strategy of selling mobile phones and plans through Spring Mobile and Cricket seems very similar to the failed strategy of RadioShack, and intense competition leads me to believe that failure is more likely than success. I don't think GameStop's 23 million loyalty-program members will help outside of the core GameStop brand, and that leaves the company with no competitive advantage in markets where there are already too many competitors. You have to give GameStop credit for doing something, but GameStop 3.0 doesn't look like the solution to the company's problems.

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Timothy Green owns shares of Best Buy. The Motley Fool owns shares of 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.

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