For GameStop (GME 0.10%), nothing good can come of Five Below (FIVE -0.07%) entering the esports market. The tween and teen retailer announced it will be building a handful of new stores next year that are connected to Localhost gaming centers -- and if the first round is successful, there will be as many as 70 more gaming-connected stores being built over the next few years.

As attracting gamers to its stores by creating its own gaming centers is how GameStop is planning to survive, the infiltration of Five Below into the market could be a death knell for the video game specialist.

Girls playing video games at a Localhost site

Image source: Nerd Street Gamers.

Tempting tomorrow's gamers

Five Below already made an investment in Nerd Street Gamers, an infrastructure company that builds facilities called Localhosts that let gamers use pro-level equipment to play in live, in-person events. Now, as part of that investment, it will build stores connected to the gaming arenas. Nerd Street Gamers raised $12 million in a round of financing led by Five Below, and was joined by existing investors Comcast, SeventySix Capital, Elevate Capital, and angel investor George Miller.

Five Below owns the tween and teen demographic, thanks to its gimmick of selling merchandise that costs $5 or less. It has seen revenue grow at a 23% compounded annual rate since 2014, and over the past two years that's accelerated to a 25% annual rate.

The retailer had over 800 stores at the end of the second quarter, and it expects to end 2019 with around 900 stores -- well on its way to eventually having as many as 2,500 locations across the country. Connecting dozens of the stores to gaming centers could accelerate revenue growth too, which has to be hard on GameStop.

Trying to remain relevant

The faltering video game retailer is heading in the opposite direction of Five Below, closing stores as it tries to get to a size that allows it to profitably service its shrinking customer base. But along with reducing its physical footprint, GameStop is also remodeling its stores to make them more welcoming to gamers.

While the retailer has always had space available for customers to try out the newest games, the latest iteration of its stores' layout includes banks of flat-screen TVs where gamers can hang out and play. The idea is to make GameStop a destination and an immersive experience itself, but the industry may be advancing faster than the retailer can change.

GameStop's second-quarter earnings report last month was dismal. Hardware sales plunged 41%, software sales were down 5%, and accessories dropped almost 10%. Although some of that has to do with the end of the current console cycle, new gaming systems won't be coming out till late next year, and Microsoft and Sony are building new all-digital consoles that eliminate the need for any physical media. GameStop has had to acquiesce and agree to sell these consoles even though they ultimately undermine its existence.

A bleak future amid esports rise

As it turns out, Five Below may deliver the killing blow instead. The new Localhost facilities it and Nerd Street are developing will be 3,000-square-foot spaces, about double the size of an average GameStop store. And because they will be decked out with the latest professional-level equipment, they'll be a magnet for the tweens and teens shopping next door at a Five Below store -- and vice versa. Nerd Street also said it plans to build 50 larger regional and university-based facilities.

Esports is a giant, growing opportunity, and there may be plenty of room for numerous players to provide space for gamers to gather. While Five Below has an idea to have 70 stores built over the next few years, GameStop, even with its store closures, still operates over 5,700 stores around the world.

Even so, just like digital gaming delivered over the internet cast a pall over GameStop's future, a competitor opening dozens of gaming facilities that have the potential to lure the next generation of gamers makes it even harder to see how the video game retailer survives.