How GameStop Could Save GAME

GAME's troubles are well-documented. Saddled with debt and struggling in the face of online retail, the once mighty High Street specialist is now in the humbled position of pleading with publishing partners for credit and favours.

Sony's recent Vita launch may have taken place at GAME's flagship store in London, but scratch the surface and the faith is only wafer thin. Stickers attached to hardware in its stores which read "Property of Sony Computer Entertainment" show a partner that's protecting its stock as a number one priority. Together with the right contract it's a measure to ensure that, should the retailer get into more financial trouble, the supplier retains ownership of the product until sold, warding off anyone who tries to physically take it away.

If the company cuts those stores in which it's doubling up it becomes more attractive to GameStop by trimming the fat.

The UK needs GAME to stay in business. GAME and Gamestation are the shop windows for the UK games retail business, regardless of where the consumer eventually spends their money. Without them a whole world of advertising and marketing opportunities are lost to publishers. If GAME collapses, not only do thousands of shop, HQ and warehouse staff lose their jobs, but you should also expect a serious round of redundancies at every publisher with an office in the UK and further afield, as marketing and sales staff are left with nothing to market or sell in what used to be the busiest region in Europe.

But where does the company go from here? One possibility is that the US retail giant GameStop steps in to acquire the business. At this point it's undoubtedly keeping a close eye on the day-to-day runnings, and it may be a question of 'if' not 'when' the retailer moves for an acquisition. But does it make the move before the situation gets worse, or will it prefer to sift through a company in disarray, picking up the profitable parts at a knock-down price?

The good

GAME's UK, Spanish and Portuguese businesses are where the money is. For the first half of the year ended July 2011, The GAME Group recorded £558 million in sales, £310 million of which came from the UK, with a further £108.9 million coming from Spain and Portugal.

The Iberian business amounts to 290 stores and is a profitable market for boxed console games. In the UK, the company has noted that it intends to reduce the number of stores it operates to 550 by the end of 2013, but crucially highlights that due to short leases on property it can accelerate that closure program if necessary. It's often pointed out that with both GAME and Gamestation brands it's not unusual to find two or more stores in the same town or city within walking distance on the High Street. If the company cuts those stores in which it's doubling up (despite its claim that they are two separate brands serving different customers) it becomes more attractive to GameStop by trimming the fat.

The bad

Last month GAME said it was considering its options with regards to the overseas business, and it clearly needs to take radical action in other regions.

For the same six-month period, sales in France were £57.3 million, while Scandinavia and the Czech Republic brought in £17.3 million and £4.1 million, respectively. These are not attractive businesses to any potential suitor (GameStop already has a physical prescence in France and the Nordic regions), so it remains to be seen if The Game Group could sell these off to make the rest of the business stronger. The Australian arm, which amounts to more than 90 shops, generated £26.2 million in sales. There are no short leases in these regions and no short-term solution to dealing with legacy outlets inherited with a wider acquisition, so these will remain a burden in the long term. The firm needs to take drastic action here, closing down or selling off stores in a declining retail environment.

The grey knight

Is GameStop in a position to acquire another business? It's been vocal that it intends to improve and grow its online business in the UK, but despite that it would clearly benefit from physical stores in a location where it barely has any significant presence. There's certainly no visibility on the High Street, but with an acquisition of GAME stores it takes out the competition and at the same time places itself in front of millions of consumers who still want to walk through doors, browse and buy physical products. The argument against says the overall business is evolving towards digital and online sales, but that's only being led by savvy consumers and a younger generation - there are thousands more, including gift-buyers, who are happy to shop the old-fashioned way.

More importantly it's in a position of strength compared to its UK rival. The company cleared all debt over Christmas and paid out to investors, as it brought in over $3 billion worth of sales during the holiday quarter. It acquired Spawn Labs last year, but intends to use its technology to enhance the more traditional business - 'slinging' console game content to the user's portable devices for an extra fee. Even if this doesn't come to fruition, it's a good example of an old-school retailer using new tech to enhance its role of serving hardware and software to video game consumers. The Game Group has revealed no such forward-thinking plans, even struggling last year when its own website went down for days without a fix, cutting off online sales for the company.

Can GameStop come to the rescue before more serious problems hit The Game Group? Does it need to, or does it sit and wait to pick through the carcass of a broken business? That's something I'm sure is being asked on a daily basis at GameStop headquarters in Texas. The longer it waits, the better the deal it can make. In the meantime The Game Group needs to get its International business under control, ruthlessly cutting the unnecessary elements in a bid to bolster its strengths.

All of this is of course theoretical. If The Game Group is in a position to sell, it will announce such a move to the stock market. But the number one games retailer in the world acquiring a company that owns such a high percentage of the retail market in the UK makes absolute sense for both parties. With a smaller but still influential footprint on the UK High Street, The Game Group would be in a much better position to realise its potential despite considerable difficulties. And it makes sense for the UK games business as a whole, which is looking for some form of stability as it goes into a fourth year of decline.