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…