Saturday, October 31, 2009

Best Buy should buy GameStop!

Bear with me, this one will have numbers…

Best Buy: Let’s save ourselves a lot of time effort and money and just buy GameStop.

I know that we have been considering jumping into the used video games market for a long while; here are two of the first URLS that came up on a Google search for best buy tests used games:

There are a lot of reasons why I feel that we should be looking at this company for acquisition. GameStop is a power house in used games, it has over 6000 locations, two e-commerce sites, well-known brands, a magazine, a source for old games.

Let’s look at the model they have for used games and why we should be interested. In the first quarter of 2008 used video game products represented $415M or 23.9% of their gross. This year as video game sales dipped 2.8 percent, GameStop did $545M in the first quarter, a gain of 31%. In all of 2008 GameStop sold $2.02 Billion in used games with a gross profit of $974.5M, which is 48% margin, this is huge considering the profit margin on new video game products is close to 12%. GameStop drives a large amount of its profit through used games, and we are obviously interested in this market and have done some testing to see how we can get into the resale business. We have rolled out our own trade-in program, but it isn’t as immediate as GameStop’s model and may not be able to attract the same customers due to the instant gratification they are used to. I would say that by acquiring GameStop it would make it a thousand times easier for us to transition into the used games market.

Next, let’s talk about the sheer number of locations. GameStop currently boast’s over 6100 locations; this is a huge number of locations on par with of Wal-Mart’s 8,159 worldwide locations. They operate in 17 countries, which is huge in terms of our quest for global domination as it gives us a foothold in many more countries than we currently have a presence. This would give us 7 times the number of physical locations we have currently meaning we can then bring our brand messages to more customers.

GameStop currently operates and was ranked 243, ranked at 2043, and ranked 69 in the US via at the time of writing. ( was over 300,000.) By acquiring GameStop we would add two very powerful gaming based e-commerce sites to our arsenal.

GameStop, EB games, Electronics’ boutique are very well known brand for gamers. Most gamers perceive that the staff is typically passionate and knowledgeable in the areas of video game hardware, software, new releases, etc. This comes from being in this specialty market for over two decades, an employee used game check-out program, and being a sponsor of MLG (major league gaming). It is hard to compete with their long term devotion to video games. Although Best Buy has sold video games for a very long time, the average hardcore gamer doesn’t see us in the same light, they don’t consider our employees an equal expert in knowledge of video games. This lack of knowledge in games comes from the fact that a new game comes out about once a week, and at GameStop the employees are typically allowed to bring home “used” games, which sometimes include the new games that they take out of the case to create their hollow/dummy displays. Also, due to the new op model there are less Gamers working in Gaming, where the department is being covered by DI, Car-Fi, and PC enthusiasts. (Labor being the biggest SG&A controllable drives me nuts and I will likely comment on it in a future blog.)

GameStop also uses its huge amount of locations as the primary advertiser of its magazine -Game Informer. Game Informer reaches 3 million subscribers each month, and is rank 4th in magazines reaching males 18-34. Game Informer is a great way for GameStop to keep its customers current on both video games and offers in store. It is essentially a monthly ad that customers subsidize. By acquiring GameStop we would then gain this publication and be able to utilize it to bring our brand messages to 3 million customers per month. These subscribers also happen to be our bread and butter customers that we impress with our current strategies and inventory.

Another large benefit that GameStop offers to its customers is the availability of older games. By selling used games this gives GameStop the ability to offer games that are upwards of 10 years old. Our current Latest and Greatest model means that as games get over a year old they are normally phased out, unless they are very popular and then with luck might make it to the second year past their release. By acquiring GameStop we would have the ability to give the customers a larger “out dated” selection.

So those were the reasons that we should be looking at the company, but there are a hand full of benefits we gain that may or may not be obvious. Let’s walk through a few of them:

First and most obvious is the Trade-In program. This is one of the big reasons why I even considered this as a viable idea for the future of our company. The part that might not be obvious is the logistical advantage we gain by acquiring a company that is very good at this; we have a place to move our games. Regardless of where it is being traded in, we can move the titles between Best Buy and GameStop. Most customers right now don’t know that we have a trade-in program or that we sell used games via Dealtree, but millions of customers already know that GameStop buys and sells used games. This means that we would be able to skip a lot of advertising dollars letting people know that we do this at Best Buy, and if we aren’t selling a lot of titles from one store we would be able to move them to another via our established DDC shuttle routes and a then shuttle from BBY DDC to GS DDC.

Next, more locations means more customers. This has been the growth model for GameStop for a long time (Wal-Mart as well). The more locations they can open, the more customers they will reach. We aren’t served with this model due to the way the Best Buy operating model works, but with the GameStop acquisition we would be able to spread the message of why Best Buy through 6100 new locations. We would be able to sign customers up for Reward Zone, sign up customers up for Best Buy Card/Reward Zone Master Card, give information on Geek Squad Black Tie Protection (and offer the plan with GameStop purchases), offer scheduling for Geek Squad in-home services (along with GS pre-setup consoles), etc … Via over 6100 new locations.

Another great gain would be a well established Brand for our gaming department. Instead of just Gaming, we would have GameStop in every one of our locations as well. We could utilize this very much the way the Geek Squad brand has galvanized services vs. the “black shirt” techs we had previously. This would make our Gaming department more marketable as a whole and help us make up ground with our gaming customers.

We would also have one less competitor in retail gaming. Again this is obvious, but it is worth calling out. By acquiring GameStop we will eliminate one of our biggest competitors in this field. This will also give us the ability to crush our other competitors. How do Wal-Mart, Target, K-mart compare to our current gaming department? The easy answer is that they don’t. They can’t offer half of what we offer; they are farther behind us than we are behind GameStop in terms of ability and benefit to the customer. By making this acquisition we would further strengthen our ability to serve customers in the area of gaming.

Two words: Profit Margin. Last Year GameStop drove 2 billion dollars in gross margin. That is absolutely huge from a company that did 8 billion in gross sales. This means their profit margin was 25.7% where we drove about 9.5 billion margin on 40 billion in sales leaving us with about 23.8% margin. This doesn’t seem like it would have a huge impact on our numbers (if we 2.2+9.5/40+8=24.375) as we would have only gained 0.575% margin that half a percent is still 2 (TWO) BILLION DOLLARS!

There are probably hundreds of benefits, small and large, but I am long winded as it is and am moving on with the goal of making a conclusion of this piece.

Here is a brief and assuredly inaccurate (pulled info from the interwebs) list of business we have acquired: Audio visions for 7 million, Magnolia for 87 million, Speakeasy for 97 million, Napster for 121 million, Five Star for 184million, Future Shop for 377 million, Pacific Sales for 410 million, Musicland for 685 million (then sold for just its liabilities), and 50% of The Carphone warehouse for 2.2 billion. Also, GameStop spent 1.44 Billion acquiring EB Games not too long ago.

Can we do it? As of Aug 09, GameStop was only sitting on about 250 million in debit with projections of making 500 million in free cash by the end of the year. Currently GME (GameStop’s symbol) is sitting around $24.30, with around 90% of their 164.68 million shares owned, we could swoop in and take 10% of the company for about 400 million dollars, then we could start taking chunks as often as possible to affect a hostile takeover, or we could just offer to buy the company for 4-6 billion dollars. I know that their director just sold off about 2.3 million shares a few weeks ago; they may be in the market to sell or if their stock price drops enough maybe we can scoop up enough to have controlling interest.

This obviously is just a thinking exercise and not a true business plan which would require a lot more research on the matter than I have at my disposal. Let me know what you think, either through comments on this page, or via @MichaelASander on Twitter.

1 comment:

  1. I'd like to see Best Buy look into a Goozex-like offering first. See the "how it works" site here:

    Less inventory overhead means it'd be easier to jump into, but also could be used to bring in that same inventory should we move to a Gamestop-like store offering.