To win, GameStop (as other retailers) shoud invest both in store and online
Wall Street was captivated by the GameStop drama this week. By Wednesday its stock was up 1,700% in January alone, climbing further before temporary trading restrictions halted the rise (at least for now).
Not surprising, much of the media attention was on the stand-off between small-time investors and Big Finance. After all, this seems to mark the moment when social media-fuelled amateurs were able to rattle capital markets, an institution that seemed immune to revolutions that change other pillars of the global establishment.
But is GameStop capable of fulfilling the enthusiastic investors’ hopes? Does it have a winning strategy?
Exploring GameStop’s strategic option affords us with an opportunity to tackle an issue that many established retailers face: digital transformation. While startups can fully embark on digital opportunities, retailers also have to figure out what do to with their existing brick-and-mortar empires. And here is a little spoiler: GameStop is not on the right track.
Strategic Option #1: Reduce Brick-And-Mortar And Grow Digital
Remember Blockbusters? In 2004 then CEO John Antioco planned to invest heavily in an online platform. He was ousted by activist investor Carl Icahn who disagreed. Sticking to the old business model, Blockbusters took only five years to slither into bankruptcy.
When George E. Sherman was appointed as GameStop’s new CEO in April 2019, he was keen to avoid a similar fate. He embarked on a two-fold strategy: cost reduction in the old brick-and-mortar business and expansion of the digital platform. Holiday sales in 2020 suggest that he is on the right track. As the company decreased its store base by 11%, comparable store sales increased by 4.8% and e-commerce sales by 309%.
With the addition of Chewy founder Ryan Cohen and two of his associates to GameStop’s board we can expect the acceleration of the journey towards digital.
On the surface, such a transition seems to embrace the overwhelming logic that the future is digital without ignoring the existence of a large legacy business. There is only one problem: the digital space is highly contested already. And while GameStop might be able to hold its own against other online retailers, it is harder to see how it can prevail against console producers. Gamers can stream directly from PlayStation, Xbox, and Nintendo Switch. The appeal to own a game that can be resold is slowly evaporating as convenience wins the day.
Chewy prevailed against Amazon as it put customer obsession to the fore (they were the first to embrace pet-parents). The hope is that Cohen will sprinkle some of this magic over GameStop. In the short-to-medium term this might work but in the long-run it is hard to see how this helps in the competition with console manufacturers. Don’t forget, pet-food cannot be streamed.
For a brick-and-mortar business treating the old core business as undesirable baggage is risky. Particularly as Big Tech is waiting in the digital world already.
Strategic Option #2: Concentrate On Profitable Niche
The second option for retailers up against fierce online competition is a retreat to a profitable niche. This is not the same as Blockbusters’ doubling down on the old business model, but a deliberate decision to become a smaller company leveraging the old core capabilities for a very specific customer segment.
In an article looking at response options to emerging new technologies Ron Adner from Dartmouth College and Daniel Snow from Harvard Business School suggest companies can opt for a “retreat strategy”. The emergence of a new technology might reveal demand is best served by the old technology. For example, in the 1970s Swiss watchmakers were initially struggling against cheaper and more accurate Japanese competitors using quartz technology. But the new technology offered a previously hidden opportunity with customers who preferred mechanical watches regardless of their accuracy. Producers of mechanical watches made the mechanism more obvious and adjusted their marketing.
By applying a “retreat strategy”, GameStop could decide to leverage its expertise as a brick-and-mortar retailer. Efforts to turn digital would be reduced. Instead the company emphasizes the shopping experience, drawing a smaller but dedicated customer segment. This would not be without precedence in retail. Record shops have seen a revival in recent years. In the US, the sales of vinyl records have grown for 15 consecutive years.
The vinyl revival, however, also shows the limits of such a strategy: 27.5 million LPs were sold in 2020. The world’s most streamed artist Bad Bunny, a Puerto Rican rapper, alone claims 8.3 billion streams.
In 2020 digital game sales outpaced physical sales for the first time. While this was driven by the pandemic, it is likely to mark a long-term trend. GameStop is a mass-market player with a reputation for good deals. Taking these two things together, a concentration on brick-and-mortar is not the most promising option either.
Strategic Option #3: Invest in Brick-And-Mortar And Digital
GameStop is right to invest in digital but wrong to cut cost in brick-and-mortar. A look at Target’s impressive turn-around shows why. In 2017 it decided to undertake hundreds of extensive store renovations, open new locations in urban areas, raise pay for many of its employees while at the same time overhauling e-commerce. In the age of Amazon it seemed unwise to invest in stores. But Target understood that it is not a tech company and should not behave like one.
The spruced-up stores attracted younger and more affluent customers than JC Penny or Walmart. They are also fully integrated in the new digital strategy as they double as a warehouse. In 80% of all online sales they play a role. As COO John J. Mulligan notes, you can save 40% of handling costs when you deliver to a customer from the store and up to 90% when the item is picked up in the store. Some of those collecting from the store will make more purchases. Integrating digital and physical can obviously be a winning strategy!
Business scholars have long discussed the benefits of ambidexterity, the ability to exploit old strengths and explore new opportunities. Initially, many believed that there is a trade-off between the two activities. More recently, however, a growing number point out that some of the most successful companies find ways to accommodate both. As Loizos Heracleous, from the Warwick Business School, points out in his new book, they need to adopt a Janus strategy, referring to the Roman God’s ability to survey several directions at the same time. Target is a great example of a retailer understanding that digitalization is not necessarily at the expense of physical stores. Both can be achieved simultaneously.
GameStop might consider this approach. In his 2019 letter to shareholders CEO George E. Sherman identifies “Become the social/cultural hub for gaming” as one of the company’s strategic pillars. As he elaborates, this includes an improvement of store experience and reliance on knowledgeable associates. The focus on cost-cutting and store closures speak a different language.
Wall Street initially did not like Target’s $7 billion investment— that made up more than the previous two year’s combined net profit. But two years after the announcement, sales were 8.7% higher—a remarkable achievement in a low-margin business.
For established retailers integrating stores and digital offer the most promising option.
