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PLAYING TO WIN

Neighborhood stores cornerstone of GameStop’s nationwide expansion

BY JESSICA ROE

The GameStop at Broadway and 8th Street in New York City features no neon or other eye-catching displays. With its simple red-and-white sign, the store is an unassuming spot in a row of street-level retail. The 1,200-square-foot space is equally utilitarian on the inside, with new and used video games displayed on racks that facilitate self-service. The youthful staff — to all outward appearances, mainly 20-somethings — encourage browsing and welcome questions that allow them to show off their knowledge of such games as Final Fantasy X-2, Grand Theft Auto and Madden NFL Football.

But behind its modest storefronts, GameStop has an intensive expansion strategy at work that it says will help the chain increase market share and remain the country’s largest video game software and hardware specialty retailer, ahead of such competitors as Blockbuster, Electronics Boutique, Target and Wal-Mart.

GameStop made an ambitious move forward last year, opening at least 275 new stores, substantially all of them located in strip centers, and shelling out an estimated $60 million in capital expenses — $15 million more than the company originally projected, according to a Securities and Exchange Commission filing.

But that push was only the beginning, says Marc Summey, vice president of real estate at GameStop, which is 60 percent owned by Barnes & Noble.

“For 2004 we anticipate being equally aggressive in our store-opening program,” Summey said.

Virtually all the growth will continue to take place in strip centers in cities and suburbs nationwide. GameStop started the year with more than 1,500 stores, he says. Of that number, about 1,000 are located in strip centers and more than 500 are in malls. Fifteen of the stores are in the Republic of Ireland.

GameStop sold half a billion dollars’ worth of merchandise over the recent holiday season.

GameStop’s demographics are a determining factor in its commitment to strip centers; because its core customers are between 8 and 30 years of age, accessibility is vital to fostering regular traffic.

“We’re the kind of store that kids can ride their bikes to,” said Sheri Kastner, a GameStop director of real estate who covers the Eastern region from Maine to Virginia and into Southern Ohio.

The strip center stores further cater to the chain’s primary consumers by featuring both new and used video games and, in selected stores, PC entertainment software. At these neighborhood units GameStop runs a trade-in program allowing customers to turn in their old games for credit toward the purchase of new ones.

“We do a good business in the buying, selling and trading of used video games, enhanced by the flexibility strips provide for marketing,” said Summey. “That generates a lot of repeat business. So we’ve brought the store to the customer’s neighborhood. It makes it more convenient for the consumer who buys, trades and sells.” Customers are a lot more comfortable coming into a strip center with a bag of 10 used games than they would feel in a mall, he adds.

Electronics Boutique and Blockbuster are trying to emulate GameStop’s strip center strategy. Electronics Boutique is slowly migrating into strip centers, while Blockbuster has introduced GameRush, a store-within-a-store concept meant to simulate the same small-store experience. But so far GameStop has cornered the neighborhood-store concept in 49 states and is looking to do the same in the 50th — Wyoming.

When choosing sites, GameStop doesn’t limit itself to grocery-anchored properties or big-box centers. The chain is also open to power and lifestyle centers, both of which provide the same kind of accessible neighborhood settings that are at the core of its strategy, Summey says. Generally, GameStop seeks centers that can provide a minimum 20-foot-wide storefront, good visibility and strong traffic.

The average GameStop unit measures 1,500 square feet, but Summey says the chain is starting to increase that to 1,700 or 1,800 square feet, in response to the expanding $28 billion video game business, which is offering more products than ever and has started reaching a broader, older demographic. Last year GameStop even opened a 4,000-square-foot store in McAllen, Texas, and a 3,500-square-foot outlet in Waterbury, Conn. Summey doesn’t anticipate a flurry of “superstores,” but the company will open them when the demand arises, he says.

Though its expansion focus is on strip centers, the retailer isn’t ignoring its mall stores. GameStops in such places as Greenbriar Mall, Virginia Beach, Va., also have a loyal customer base that comes in often to buy the new video game hardware and software and accessories stocked there.

“GameStop is an excellent traffic generator and provides very good cross-shopping,” said David W. Hull, a senior vice president of leasing at Jones Lang LaSalle, which manages 10 malls in the Southeast that have GameStop as a tenant.

GameStop is working to revamp some of its mall locations. Having recently renewed the lease on its 1,400-square-foot store in the Staten Island (N.Y.) Mall, located between the J.C. Penney anchor store and center court, the company plans to remodel, says James M. Easley, a Rouse Co. vice president and general manager.

GameStop stores have averaged 1,500 square feet, but that is increasing to 1,800 to accommodate the burgeoning $28 billion video game business. Two superstores twice that size have opened too.

GameStop has been refining its mall store environments for more than a year, adding more space for top-selling titles and making it easier for shoppers to locate titles for themselves. That effort will continue as leases at other malls are renewed.

The store updates are part of a rebranding effort that has been under way at existing mall and strip stores since GameStop became a leading video game retailer following a series of acquisitions Barnes & Noble made in 1999 and 2000. Those deals merged GameStop with video game and software names Babbage’s, Funcoland and Software Etc. Then, in February 2002, Grapevine, Texas-based GameStop began trading on the New York Stock Exchange.

Despite the fact that analysts say the video game industry is midway through its latest economic cycle, Anthony Gikas, senior research analyst at U.S. Bancorp Piper Jaffray, rates GameStop a solid performer. Sales and revenue figures were unavailable at press time, but the company’s preliminary results for the 2003 holiday season (not accounting for expenses) indicate that total sales for the nine-week period reached $508.6 million.

For the third quarter, GameStop posted revenues of $326 million, $19 million more than Gikas had projected, possibly a function of the trade-in programs in the chain’s new-store rollouts.

“Newly opened strip center stores are performing better than expected, driving revenue growth and expanded gross margins,” Gikas wrote in a recent research note. “Strong gross margins of 30 percent … imply that used software sales were stronger than expectations,” he wrote. His estimate had been 26.4 percent.

With another 275 stores in the pipeline for this year, GameStop says it expects to be in prime position for 2005, when the next generation of game systems hits the market and the industry starts a new up cycle.

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