New Playstation, New Xbox One Are Coming, and Gamestop Wins

GameStop (GME), having survived a brutal nine quarters without much in the way of new video-game products on aging platforms, is about to power up on two new video-game consoles and two major releases from popular franchises.

The Texas-based retailer expects a major boost from the fourth iteration of Sony’s (SNE) Playstation, due in mid-November, and Microsoft’s (MSFT) new Xbox One, expected to hit shelves around the same time. Before the next-generation devices arrive, there’s likely to be a final retail hurrah for new games on the old machines as the hit franchises Grand Theft Auto 5 and Battlefield 4 hit the shelves over the next two months.

“There are no other retailers on the planet that are prepared for this kind of opportunity,” GameStop Chief Executive Officer Paul Raines bragged to investors about the coming of the new consoles. The company expects profit in the coming quarter to be up to 45 percent than its haul in the year-earlier period. If history is any guide, GameStop is in for a wild ride.

The last Xbox iteration, released in November 2005, came as rocket-fuel for GameStop. The company’s market value had already grown by almost 50 percent by the time Playstation 3 was released a year later; in the following 12 months its share price doubled. The company appears to be in an even better position to take advantage of the gaming cycle this time around. Its share of the video-game retail market has grown from about 15 percent to roughly a quarter, according to Piper Jaffray analyst Michael Olson. The number of stores worldwide has grown by nearly half since the debut of the last Xbox, with more than 2,100 new locations opening, primarily in North America, from 2005 to 2012 for a total that tops now 6,500.

GameStop made those gains by carefully cultivating a community of hardcore gamers. In 2010, GameStop launched its “PowerUp” loyalty rewards program, which now has about 25 million members. That vocal GameStop constituency proved a powerful force in blocking manufacturers from switching to download-only sales or any other changes that might limit the massive second-hand market for games, which remains GameStop’s great strength. Customers are more willing to buy a new game at full price if they know they can sell it back and recoup at least some of their investment.

What’s more, GameStop has deepened its ties with game publishers, allowing it to lock up inventory in advance, collect cooperative advertising dollars, and orchestrate release parties at its brick-and-mortar stores. The company has also said it will get bigger console allocations from both Microsoft and Sony this time around, which can prove a major driver of foot traffic in the early days, when inventories are scarce.

The big console launches also promise a flurry of trade-in activity as consumers swap old games and hardware and exchange new purchases they aren’t keen on. GameStop collects almost 40 percent of its revenue by selling used games and gear, a business with a powerful 47 percent gross profit margin. That’s roughly double what the company  squeezes out of selling new gaming hardware and software. In 2007, just after the Playstation 3 hit shelves, GameStop’s pre-owned business surged by 20 percent.

“We compete on the value dimension,” Raines recently told investors. “We compete based off trades. We don’t compete based off discounting.”

In other words, GameStop is going to get video-game fanatics without having to mark down merchandise. Amazon (AMZN), Target (TGT) and other big electronics retailers may not have that kind of power.


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