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Goldman Sachs downgrades Game shares to 'sell'

Investment firm says slow move to digital means retailer will under perform

Investment analysts at Goldman Sachs have downgraded the shares of the Game group from 'neutral' to 'sell', lowering earning forecasts for 2012 and 2013 in the process.

Primary reasons for the reassessment were given as increased competition in the digital market from publishers, as well as a misjudged refocusing of the group's traditional bricks and mortar retailer arm.

"The group's direct competition in online pricing is causing gross margin erosion, while we view the strategy to improve store content, layout and staffing as negative to profitability in the near term," read a release from Goldman Sachs.

"Longer term, we expect the rate of increase in digital downloads direct from publishers to be a threat to mint software sales, the pre-owned market and Game's movement to gain market share in digital content. Consequently our EBIT forecasts have come down by 16 per cent in 2012 and 28 per cent in 2013."

The downgrade will come as a disappointment to Game, which has made much of recent plans to pursue the digital market, beginning with a strategic refocus in February after a reduction in Christmas sales at the end of 2010.

That strategy refocus included a promise to triple the company's digital sales to £300 million by 2013, partly by increasing the attach rate of customers who bought boxed product at Game stores via the promotion of a reward card scheme. Customers, CEO Ian Shepherd believes, would return to Game's online presence to buy DLC and other digital products having purchased the original game in-store.

"That's the point at which we'll be starting to genuinely play in the online and digital space to the same extent we currently play as a successful business in the retail space," said Shepherd at the time.

"Having a great retail space will catapult us into a leading position in digital and downloaded content. What it's doing is bringing the multichannel opportunity to the fore because it's using the trade in engine generated by the store estate to create a competitive position online which a standalone online retailer cannot do."

The chain endured some scandal earlier this week when it was revealed that a company-wide edict had instructed staff to purchase 3DS units from Tesco for re-sale as used hardware in Game stores.

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