FINANCE TODAY | ISSUE NO.13
REPORTS HINT GAMESTOP PLANS TO COMPETE WITH AMAZON
There was a period of time where GameStop was the go-to store for all things gaming-related. Mention of GameStop has been scarce in recent history since the company fell victim to obsolescence halfway through the past decade, once digital game sales took the industry by storm. It has surprisingly managed to stay afloat these past few years by selling clothes, toys, and other gaming merchandise. While GameStop has respectably prolonged their existence by expanding its product breadth, being a video game retailer that barely sells video games has not helped to improve its financial health much at all. Drastic changes must be made in order to save the gaming merchant. It seems as if GameStop is gearing up to make these changes and take a major risk in order to save the brand. In what may be one of the most unexpected stories this year, reports have surfaced that a new investor who purchased 10% of GameStop’s stock has plans for the company to become a competitor to e-commerce giant Amazon. Reports of the new investor caused the company’s share price to jump 19.4% as the market opened on September 22.
THE PROPOSED STRATEGY
The stake in GameStop was purchased by Ryan Cohen, co-founder of pet supply retailer Chewy.com, who plans to transform the company into a true competitor to Amazon. Cohen’s proposed strategy includes further expanding the company’s product breadth, improving the speed of its distribution, and closing all GameStop stores that are not currently profitable. Analysts have been quick to indicate one major flaw in Cohen’s proposed strategy. That is, the leaked details of his strategy seem eerily similar to the current strategy being implemented by GameStop CEO George Sherman. Sherman announced to investors that the company was going to cut costs, with plans to close 400 to 450 stores this fiscal year (Cohan, 2020). Sherman is pushing to implement an omnichannel model for customers to purchase and receive products, as well as offering same-day delivery. Looking at the details of Cohen’s plans that have been leaked, it takes little effort to identify the striking similarities between his proposed plan and Sherman’s current strategy. With very little differentiation in strategy, it is unlikely that GameStop will see any type of financial gain or turnaround, as their current strategy has done little to help the dying brand.
WILL GAMESTOP STAND A CHANCE GOING HEAD-TO-HEAD WITH AMAZON?
Strategy aside, the general consensus among analysts is that GameStop will have minimal success in becoming a major threat to Amazon in the future. The main reason obviously being GameStop’s poor financial health. The company has seen a consistent decline in share price over the past 5 years, falling from a high of US$40 in 2015 to US$9 as of September 24th. While it saw a jump in price this week as a result of the aforementioned announcement, faltering investor confidence has caused the price to once again drop to normal levels. Regardless, the company has historically been able to maintain a net profit margin between 0.5-5%, which falls in the average range for retailers. This was until 2019 when their net profit margin dipped into the negatives at an astonishing -9.87%. As of February 2020, the company’s net profit margin still sits below zero at -7.18%.
Typically, companies with lower net profit margins will have a low-margin, high-volume sales strategy in order to alleviate this issue. This strategy is unlikely to work for GameStop in the age of digital downloads. The company’s sales are currently on a downward trend and this isn’t likely to change anytime soon. On September 10, the company reported to investors that total sales declined by 26.7% to US$942 million during its most recent quarter. The company simultaneously lost US$111 million on its bottom line (Cohan, 2020). GameStop CEO George Sherman expects the imminent release of the next generation gaming consoles to help the company recover its losses. Even with the boost in sales from the next generation of consoles, overall revenues are still predicted to drop 14% (Cohan, 2020). GameStop is currently in no financial position to take on Amazon and should focus their efforts on becoming profitable once again before attempting to battle the e-commerce behemoth head-to-head.
In addition to their poor financial health, the fact that Amazon is a much larger corporation than GameStop must be taken into consideration. Amazon has a market cap of US$1.5 trillion, which is roughly 2,631 times more than GameStop’s US$570 million market cap (Cohan, 2020). Even companies that are much larger than GameStop, such as Walmart, have had significant difficulty competing with Amazon. Below is a graph which helps to visualize the difference in scale between Amazon, Walmart and GameStop.
NOTE: GameStop is significantly smaller than both companies to the point which it does not appear on the graph, regardless of scale.
Walmart is considered to have the highest potential to compete against Amazon in the future, yet they are much smaller in scale. Even a company as large and well-known as Walmart pales in comparison to that of Amazon. GameStop in comparison to both appears insignificant, as their market cap has yet to reach the billion-dollar mark. Amazon’s massive scale provides them with greater opportunities for volume discounts from suppliers and the potential to expand their distribution and logistics systems to provide customers with even quicker delivery times. In order for GameStop to have any sort of fighting chance against Amazon, the company must provide a better product line, lower prices and faster delivery times. This is a feat that GameStop is incapable of accomplishing under their current financial circumstances. In conclusion, GameStop’s announcement to become a true competitor to Amazon holds little significance, as they all-around lack the ability to compete on a scale that rivals that of Amazon. While the future certainly doesn’t look bright, this hail mary could very well be GameStop’s last chance to save itself from finally biting the bullet and going under.
Cohan, P. (2020, September 23). Don’t Bet That GameStop Can Compete With Amazon. Retrieved September 24, 2020, from https://www.forbes.com/sites/petercohan/2020/09/23/dont-bet-that-gamestop-can-compete-with-amazon/