Is GAME right to bank on Belong?

Perhaps not since the collapse of Woolworths back in 2008 has the UK High Street endured such a torrid time. In the games industry, we've witnessed the collapse of Toys R Us, Maplin, and real trouble for Grainger Games (the second biggest video game chain in the UK).

"The retail marketplace is a tough place to be at the moment. There's not generally a good news story around," acknowledges GAME CEO Martyn Gibbs, speaking to GamesIndustry.biz after the release of its latest financial results.

"We are working, as you know, in a very differentiated industry. We've had Nintendo Switch, and we're beginning to see some real growth elements, especially around that console and the format comparison of Xbox One and PlayStation 4 versus Xbox 360 and PS3. We are differentiated from the rest of retail. We have cash. We have all of the stores' leases coming up for renewal, so we don't need to do any CVAs [company voluntary agreements] or anything like that. Retail is a tough place, but we're in a pretty good position within that."

Gibbs' confidence comes amid a string of rare good news stories for GAME. There's been the investment from Sports Direct, the sale of Multiplay Digital (the successful tech business that GAME operated) to Unity for £19 million, and a year of revenue growth driven by the success of Call of Duty: WWII and Nintendo Switch.

"The retail marketplace is a tough place to be at the moment. There's not generally a good news story around"

However, scratch beneath the surface and there were some worrying statistics for the 26 weeks ending January 27. Revenue may be up, but profits took a fierce drop last year on the back of lower margin products. Pre-owned, once GAME's most important category due to the high margin on second-hand goods, declined by almost 10 per cent in revenue terms. And GAME's console market share fell 3 per cent in the UK and 1 per cent in Spain.

Gibbs' response to these issues had something in common. He feels that GAME will overcome all these retail challenges through the development and growth of its in-store Belong arenas - for those that haven't read a thing about GAME over the past year, these in-store areas feature powerful PCs that gamers can play on for a price.

Take for instance the issue around second-hand sales. Gibbs told us that the drop is the result of poor software sales a year ago, and that he expects things to improve when the big titles arrive this Q4. "We think we are going to see improved trading volumes, which will aid and support our pre-owned performance," he says.

Yet when we asked if we can expect pre-owned sales to rise again, Gibbs didn't commit to a prediction. Instead stating that he'll treat that market "with TLC" and that the firm is really, "focused on other business activities. Things like Pay-to-Play, Belong, food and drink, PC and accessories... a far broader spectrum of high-margin products." All products that are connected to the Belong brand.

Then there's market share. GAME is suffering a market share dip due to the rise in online and digital sales - areas where GAME isn't quite so strong. So what's the solution? You guessed it.

"Where we have Belong, we see a far improved retail performance as well," he explains. "So the sooner that we can add more Belongs, then we will add market share within those locations. We are positioning ourselves now to make sure we're aiding and supporting over the next three to five years, rather than market share in one half. That said, we are working closely with all our supplier partners with exclusives and so on. We just launched Far Cry 5 and we have exclusives on that title.

"We will still be very focused on market share, but we think the best way to build that will be on the back of Belong."

It may sound like GAME is putting all its eggs into one Belong-shaped basket, but this has been a long-term dream for GAME. It's been over five years since Martyn Gibbs first uttered the phrase "we want to build the most valuable community of gamers", and that's still the strategy now. And it's been five years since Gibbs and I first discussed the future of games retail, about how his stores might become places to experience games, not just buy them.

"We will still be very focused on market share, but we think the best way to build that will be on the back of Belong"

Indeed, back in 2013, key personnel from Gamerbase (a HMV-owned brand of gaming venues, similar to Belong, which first opened over a decade ago and has since closed) joined GAME to develop such a project. Belong has always been in GAME's long-term vision.

It's taken time. It's hard to carve up stores and add more experiential elements when you've got Microsoft and Sony demanding every inch of that valuable store estate. But at the close of 2016 GAME went for it, and launched its first Belong outlets.

Yet it was the best of times, it was the worst of times. That bold new era for GAME arrived alongside one of its most disappointing Christmas periods in years. Key games under-performed, most notably Call of Duty, and GAME found itself in profit warning territory. The company's share price fell sharply, there were legitimate concerns over the chain's future, and it seemed as if the Belong dream was over just as it had started.

Two things then happened at just the right time. First, there was the Nintendo Switch. It sold out immediately, but with stock only trickling through confidence began to falter. And with GAME's share price at an all-time low, Sports Direct made its move.

The sports retailer snapped up over a quarter of GAME. Shares stabilised and confidence began to return. Initially, Sports Direct's share grab was opportunistic, but that changed over time. "It developed," Gibbs says. "We both got to understand the opportunities that lay within each business. It takes a little bit of time to understand each other."

And get to know each other they did. Sports Direct fell in love with the Belong idea. It splashed £3.2 million on gaining 50 per cent of the Belong IP in February, and made significant capital available to see Belong rolled-out not just in GAME shops, but in Sports Direct department stores, too.

"The customer profile is pretty well perfect for us," Gibbs explains. "I don't think there is any other retailer in the UK that we could partner with that gives us the right customer mix. It's about the size of their units and the scale by which we can enact Belong, but also the customer type, and us being able to give the Sports Direct customer a very different experience.

"We're not just going to move aside a couple of fixtures and put some gaming stations in the middle of t-shirts and stuff. These will be proper Belong arenas, similar to what you've seen already. We will still have walls up, we will still have delineation between the GAME brand, the Belong brand and the Sports Direct brand."

"I don't think there is any other retailer in the UK that we could partner with that gives us the right customer mix"

GAME giving up half of its Belong business may sound like a loss, but Gibbs believes Sports Direct gives the concept a real opportunity to flourish.

"When we look at what we need from a Belong perspective... we are growing the proposition rapidly," he explains. "We have 19 locations and 334 gaming stations now. We are seeing the pay-to-play utilisation is very high at peak times. Milton Keynes yesterday... it had held two parties and couldn't actually fit anyone else in. We are hitting utilisation points, which is a great place for us to be. But we need bigger arenas.

"So rather than stopping at the 12- and 24-seat arenas, we expanded to 36 seats. On a Saturday, that is full as well. So we are looking to increase the station count. We need the right property portfolio to do it, we need the right cash resources to do it. And when we think about the [software] line-up we've got during the second half of this calendar year, we need to make sure we have all the appropriate facilities without having to slowdown the Belong roll-out.

"Now in partnership with Sports Direct, we get space, we get access to property deals and we get to enact our property strategy. In our store estate at the moment, in around 84 per cent we pay the landlords more than 50 per cent of the profit. That is quite normal for retail. But it just goes to show that the deal we've done with Sports Direct we believe to be an exceptionally strong one for us."

Sports Direct's involvement in Belong extends to finance and property, with GAME continuing to handle the Belong operation. Interestingly, that operation is having to slowdown slightly as the Belong ambition widens.

"There's going to be a delay in the arena roll out," Gibbs says. "If we'd have carried on in the way that we previously thought, I would have been sat on about another ten arenas that were all too small. As we started to increase the capacity of Kingston and Bristol, it was blatantly apparent that we needed more space for more desks and gaming stations. At that point, we needed to look at a very differentiated set of properties that we need.

"So we did the right thing in not carrying on opening arenas that are too small, and went out to find arenas that are the right size. At the same time, we were doing the collaboration agreement with Sports Direct, so what we didn't want to do was start opening arenas when we can get a better deal with Sports Direct."

It's not just Sports Direct. Where Sports Direct doesn't have a property (or isn't the landlord), and if GAME is also missing a shop, then Gibbs' team will look at other options. Including, possibly, opening Belongs within leisure centres.

"I think Nintendo Labo is Nintendo genius. Everything I've seen about the proposition looks exceptionally strong"

The development of Belong is all very exciting, but while the concept remains in its infancy - and the profitability is yet to arrive - GAME's core business remains selling boxed games and hardware. And the next few months won't be easy. Compared with last year - which featured a number of high profile launches and a certain new Nintendo console - the start of 2018 is frankly disappointing. Gibbs acknowledges this, although he's excited about the prospect of Nintendo Labo next month.

"The guys get bored of me talking about it," he tells us. "I think it's Nintendo genius. Everything I've seen about the proposition looks exceptionally strong. It's going to take some explaining and retail is going to have to work hard for Nintendo to get the proposition across. It will be about getting it into people's hands. But I think it's another disruptive approach that Nintendo is taking, and we're really excited about it."

Aside from the unknown Nintendo factor, it's going to be a tough few months for video games on the High Street. Yet come the Christmas period things look set to ramp up significantly. There's Super Smash Bros. for Switch, a new Tomb Raider in September, and Call of Duty is arriving earlier than usual - presumably so it can dodge a showdown with Red Dead Redemption 2, which is shaping up to be the biggest game launch of the generation.

"I am usually the worst person for saying 'for goodness sake, would publishers just launch a game every week, rather than 52 games in one week'. But I think regards Red Dead, and the size and magnitude of the product, we would rather be launching something that big in September or October time, rather than in May," Gibbs says.

"We saw it with GTA when that moved from May to September, that the appetite for that product just grew and grew. I think the same will happen with Red Dead. I think Call of Duty coming forward is really smart on two fronts. It keeps it well, well away from Black Friday, and it gives us the opportunity to see what we can do with Call of Duty - particularly one the size of Black Ops - in a better window for us."

Combine that with the prospect of new consoles in 2019, and suddenly GAME has found itself in a position that was frankly unimaginable 12 months ago. As the UK High Street continues to burn down around it, GAME is daring to look to the future with some hope and ambition. All those buzz phrases about becoming a 'community hub' have now manifested into a tangible thing that we can understand.

Belong is a risk. A huge one. It's still unproven even after 15 months. The plan to open 100 of them over the next three years is going to be a massive task and one full of danger and uncertainty.

But as GAME knows better than most, playing it safe is simply not an option anymore.