GameStop: Competing in a Crowded Arena

The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.

Lagging Behind

The world’s leading video game retailer, GameStop, traces its roots back to 1984—the same year the classic puzzle game Tetris was created. Gaming then was not yet a ubiquitous phenomenon and the company initially floundered under a series of unsuccessful owners. This changed when GameStop was spun off as its own entity in the early 2000s: the company capitalized upon the widespread gaming trend and experienced immense growth, catapulting revenues from less than $1 billion to more than $9 billion in a mere decade.

Despite the value of the global video game industry having ballooned to $135 billion in 2018, unit sales of video game consoles have declined 48 per cent over the past 10 years, from 89 million in 2008 to 46 million in 2018. The shift is largely attributable to the evolving gaming landscape, wherein the emergence of gaming alternatives like online free-to-play and mobile games is displacing traditional console video gaming.

As a result, GameStop has seen its growth stagnate. With no material increase in revenues since 2010, the company closed the doors on more than 150 of its GameStop-branded stores. The company has desperately sought a buyer in the private equity market to lead a strategic turnaround but has since abandoned these efforts. Faced with the rising popularity of alternate gaming models, the pressures of e-commerce channels, and no permanent CEO at its helm, GameStop finds itself struggling to adapt.

Out of Its League

More than 50 per cent of GameStop’s revenue is derived from the purchase of physical hardware and software games. Sales of these products have declined recently as PC games have risen in popularity: physical game sales have fallen from 80 per cent of all U.S. computer and video games in 2009 to a mere 21 per cent in 2017. Although some customers are still attached to purchasing from their local video game store, overall consumer purchasing behaviours have changed significantly. More customers now value the convenience of purchasing through online channels while additional incentives—including discounts and flash sales—add to the attractiveness of digital purchasing. Sony, owner of the PlayStation 4 (PS4) gaming console, revealed that 32 per cent of its PS4 video game software sales took place digitally in 2017, increasing from 27 per cent in the prior year.

Furthermore, the proliferation of mobile devices over the last decade has proven effective at capturing first-time gamers, with mobile games expected to account for 51 per cent of the overall gaming market by 2020. Most of these games are free-to-play, with revenues arising from advertisements and in-game microtransactions where consumers spend real currency to acquire an advantage that improves gameplay. Such free-to-play models remove the need for pay-to-play retailers like GameStop from the value chain. In 2018, free-to-play games totalled $88 billion in revenues across all platforms while traditional PC and console pay-to-play gaming revenues came in at $16 billion. Gone are the days where gamers congregated in a basement over one screen split four ways; the industry value chain has been completely transformed.

Perhaps the most threatening trend to GameStop is the explosion in popularity of eSports, video game tournaments featuring professional-level competitive gamers. Much like in a traditional sports tournament, in an eSports tournament, professional players compete headto-head for victory and prizes while audiences of casual players watch for entertainment. Such tournaments can draw huge crowds: League of Legends, a popular online game, recently held its World Championships in South Korea and attracted more than 200 million viewers. The eSports industry is projected to reach $1.5 billion by 2020 and with hundreds of millions of sponsorship dollars flowing in, eSports is seen as “the next big thing” in gaming.

Player 2 Has Entered…

The last decade has seen a tremendous rise in social and immersive gaming experiences. These include virtual reality (VR) lounges, board game cafés, and internet cafés. In 2016, more than 5,000 board game cafés were opened in the U.S. alone. This proves that consumers no longer see gaming and entertainment as just an at-home experience, but are willing to pay to play at a dedicated venue.

One particularly successful business capitalizing upon this trend is Meltdown International. The company’s franchised eSports bars are set up like a typical bar with an added gaming flair: eSports tournaments are livestreamed and gaming equipment is scattered around the bar. This value proposition has proven successful as the franchise has expanded into nine different countries as of March 2019. In contrast, GameStop’s bare-bones store design emulates that of a pure retailer, lacking a dedicated social engagement space to appeal to consumers.

Levelling Up the GameStop Brand

To survive, GameStop needs to evolve its brand from a simple console and game retailer to become the home of an interactive, social gaming community. GameStop should seek to develop several large physical spaces in urban areas into full-service, experiential gaming and social lounges, under the name “GameStop XP.” By introducing console and PC gaming as a premium experience, GameStop can transition into an entertainment facility that hosts online games, console games, VR, and live events, all under one roof.

Elevating GameStop’s brick-and-mortar storefront model with a dedicated tournament space and high-performance gaming setups will appeal to gamers of all experience levels. Whether gaming veterans looking to compete at in-house tournaments or amateurs testing out a game instore, GameStop can become the go-to social space for members of the gaming community.

GameStop’s Edge on the Tier List

This modern twist on the traditional LAN (Local Area Network) café model has seen a resurgence in popularity with the rise of eSports. Catering to this trend, modern gaming cafés are replacing serious gamers’ premium PC setups. Gamers are not only attracted to the high-quality setup that outperforms their devices at home, but to the social experience of playing with their friends live and meeting others in the gaming community. These gaming cafés have already proven successful in urban hubs such as New York, with several hybrid gaming cafés earning high foot traffic and positive customer reviews.

In contrast to gaming cafés, which are often owned and operated by small or individual operators, GameStop has the advantage of using its nationally-recognized brand to implement this initiative. Furthermore, GameStop can partner with collegiate eSports clubs, which have emerged at more than 125 campuses across North America in the last decade. These clubs are constantly hosting tryouts, practices, and tournaments, and sometimes see their players move on to the professional leagues. By positioning its stores in urban areas close to colleges and universities, GameStop can access another source of customers and rapidly increase brand awareness through in-house events.

Cashing in the Gold

Beyond fees paid at the door, this experiential model can help drive profitability to other segments while addressing GameStop’s biggest challenge of gaining foot traffic. This hybrid business model allows for significant cross-selling of GameStop’s traditional games and console products. For example, gamers who appreciate the sound quality of the gaming headset used in the GameStop XP lounge could immediately buy one on-site. Furthermore, GameStop can strategically boost collectible product sales by catering its selection to reflect characters from the most popular eSports games being played in-store.

Most importantly, this new model can help GameStop improve the effectiveness of its existing PowerUp Rewards system. The current membership program allows customers to earn points that can be used towards coupons and sweepstakes. To better complement the new gaming lounges, the rewards program can offer multiple tiers of monthly memberships, which provide various hours of access and benefits within the GameStop XP stores. Furthermore, the gaming lounge provides another opportunity for customers to earn points, as points can be offered in addition to physical prizes at weekly tournaments and events. By charging a monthly membership premium, GameStop can gain an additional source of stable cash flows while incentivizing more frequent customer visits to help increase traditional game sales.

Laying Down the Game Plan

In addition to downsizing the in-store inventory space, the new GameStop experience will include the following additions to existing stores: a viewing lounge, gaming space, and VR experience.

Smaller Retail Space

GameStop should downsize its inventory of games to reduce the amount of space dedicated to retail sales. However, it should continue to sell a variety of merchandise, gaming accessories, and hardware for customers to purchase after their visit. Adding to the experience, a variety of consoles and video games should be distributed throughout the lounge to expose gamers to GameStop’s products and to promote inventory sales.

Viewing Lounge

The viewing lounge would provide a space to broadcast inhouse tournaments and live-stream major competitions, with light snacks and refreshments offered. An open concept would promote an interactive environment for gamers to socialize and cheer on the competitors. For this segment, GameStop should seek out partnerships with collegiate eSports clubs to host the clubs’ existing tournaments and obtain event booking revenues for the space. These partnerships would be appealing to these clubs as GameStop would provide a high-quality tournament venue along with game setup and technical expertise. In addition to external tournaments, the space could be used for professional player meet-and-greets, GameStop-run tournaments, and other events.

Gaming Space A gaming area should be made accessible for customers who pay a one-time entry fee or who have a membership pass. This area would be complete with high-performance gaming equipment including consoles, specialized keyboards, wireless headsets, and high-resolution monitors. This area could be used for regular play by customers, for in-house tournaments, and as a rental space for external clubs’ tournaments. To ensure the space is best designed to suit customers’ needs, GameStop should consult a range of gaming professionals and eSports clubs during the planning process.

VR Experience

To diversify the activities offered at GameStop, a VR gaming lounge should be added. The technology is still relatively expensive and has low penetration in gaming households, creating an attractive value proposition for game enthusiasts. Similar to how entertainment centre The Rec Room operates its premium VR area, GameStop can charge an additional premium to guests wishing to experience this technology.

Existing Brick-and-Mortar Locations

Alongside the rollout of GameStop XP stores, existing brickand-mortar locations could be renovated to parallel the new experiences offered at GameStop XP while retaining the original GameStop branding. This allows GameStop to preserve its brand legacy while simultaneously bridging the shift towards experiential gaming. Because current GameStop locations are constrained by size, with the average store being 1,700 square feet, a lighter set of services would be installed. The stores would operate a hybrid model, incorporating both shelves of physical merchandise and services like VR gaming and a small number of PCs. These experiences would provide passersby with a sample of the full suite of options available at GameStop XP. Given that many GameStop locations are situated in shopping malls and high-traffic retail locations, these stores would serve as powerful marketing tools with the potential to drive significant new audiences to GameStop XP.

The End Game

GameStop should prioritize an initial roll-out of 10 stores across major North American cities that have historically seen a significant amount of gaming and eSports activity, such as Los Angeles, San Francisco, New York City, Seattle, and Toronto. In addition, stores should ideally be in close proximity to local colleges and universities to both establish partnerships with collegiate eSports clubs and cater to young adults between the ages of 16 to 34 who make up 73 per cent of the consumer demographic in the eSports industry.

Over time, GameStop should launch more experiential stores and transition into a full-fledged entertainment company. With the data from initial stores in hand, GameStop can cater its offerings to each new region it enters. For example, this pilot data may reveal that GameStop should offer more consoles or party games in suburban areas while customers at stores near colleges may want to see more PCs.

The timing for a strategic overhaul could not be better for GameStop. With the completion of a $700-million divestiture of one of its business divisions in January 2019, the company has the financial resources needed to reinvest into its future. Through the launch of GameStop XP, the company can capitalize on the immense growth opportunity in eSports while lifting its brand from an outdated physical distributor of traditional console games to an all-inclusive experience designed for all gamers.