GameStop's New CEO Will Have His Hands Full

GameStop (NYSE: GME) has hired George Sherman as its new CEO, and he's promising to dramatically transform the retailer from simply being a place you go to buy or trade-in video games to one where you can immerse yourself in the gaming experience.

"I bring significant experience working with other retailers that have undergone large, successful transformations," Sherman said in a release announcing his appointment, suggesting he intends to initiate similar changes at GameStop. It's a lofty goal and a necessary one if the video game retailer is to survive. But it's a target that seems to be very difficult to reach.

Changing how we think about GameStop

The executive, who has held various senior positions at Advance Auto Parts, Best Buy, Target, and Home Depot, has the unenviable task of reshaping a company that has seen its industry transform itself. GameStop has essentially been stuck in an analog world that has gone digital.

A report by the website VentureBeat says GameStop is angling to become a "cultural experience" that can build on its history and expertise in gaming. As part of an initiative that's been dubbed GameStop 2.0, the retailer intends to deploy TVs to give gamers a place to try out a title before buying it. Instead of having posters on the wall promoting a title, GameStop will immerse customers in the milieu by putting the game in their hands and (it hopes) convincing them to buy it.

It will also apparently include more membership programs that enhance the retailer's existing PowerUp Rewards loyalty program that lets members earn points for every dollar they spend. For paying "pro" members, there are augmented benefits like discounts on game titles and a subscription to Game Informer magazine. GameStop's rewards program boasts 37 million members, some 6.3 million of whom are paying $15 a year, indicating almost $95 million in annually recurring revenue from the service.

Tight quarters

It's a good base to start from, but the number of paying members has been stuck at around 6 million for the past five years and is down from around 8 million members at its peak.

Sherman is also going to have difficulty reimagining GameStop stores because they are small, around 1,700 square feet on average, and already incorporate areas to let gamers try out games. Adding more space to allow gamers to lounge around and play games will be difficult without increasing a store's physical footprint. Further, beyond its efforts to make trying games in its stores easier, Gamestop will still need to reinvigorate its membership growth and game sales.

The advent of online gameplay and downloadable games has put GameStop in the predicament of considering whether it should sell itself. It came away from a strategic analysis deciding to remain a stand-alone company and develop these initiatives on its own, which Sherman is now tasked with implementing. But online gaming is only getting bigger.

Being left behind

Alphabet's (NASDAQ: GOOG)(NASDAQ: GOOGL) Google just announced it will be launching Stadia, a new digital, on-demand video game streaming service that will allow individuals to play any game on any connected device. It will be able to stream games in 4K HDR at 60 frames per second, and it doesn't require you to update the game or download it. Because the games reside in Google's cloud, you just log on and play. It's a powerful business model to compete against, one that Microsoft, Nintendo, and Sony have already staked out, and one which is rumored to be considering, too.

GameStop has been relegated to being the Blockbuster Video to this new "Netflix of gaming" model, forcing it to close down stores as the digital marketplace ate into its business. It closed 131 video game stores in 2017 and another 58 through the first three quarters of 2018.

It still has almost 3,800 stores in the U.S. (and almost another 2,000 internationally), giving it a footprint to try out some of these ideas. But 80% of the leases on GameStop stores expire between the end of January this year and 2021, so we're likely to see a large number of additional closures in the near future.

The key investment takeaway

As more technology companies like Google and Amazon enter the gaming world, it makes it more difficult for GameStop to remain relevant. So its new CEO still has the same old problems that aren't easily resolved.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of GameStop and has the following options: short April 2019 $13 calls on GameStop. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.