The Euro Vision: Number-Crunching GAME's Gamestation Deal

And so the great games retailer consolidation merry-go-around continues apace. But what's significant about the purchase of the UK's second largest specialist games retailer, Gamestation, by GAME, Europe's largest specialist games retailer, isn't the £74 million ($147 million) price tag or the fact it was GAME that eventually made the deal. After all, Gamestation's parent Blockbuster said it was looking to sell off non-core assets and focus on its North American film business back in 2005. Wedbush analyst Michael Pachter went so far as to predict a $70 million acquisition by US games retailer GameStop, as it looked to accelerate its international expansion. "We believe that Blockbuster is motivated to sell its Gamestation stores, and think that the company would consider selling the stores for around 50 per cent of sales, or around an estimated USD 70 million," he commented back in the summer of 2006. Actually, according to the figures released by GAME, Gamestation's sales for FY2006 were £204 million (around $380 million in historical exchange rate terms), making the pricetag of around a third of sales a reasonably good deal for GAME, at least in terms of Pachter's reckoning. Still, Gamestation's profit before tax was only £2.1 million ($4.0 million, historically), so while the deal looks good in terms of boosting the combined group's revenues over £1 billion for FY2007-08 - and total number of stores to over 1,000 - it will reduce GAME's overall profits in the short term. In its press release, GAME says it doesn't expect the deal to create earning synergies until a "full year post completion," i.e. FY2008-09. By the second full year, savings of around £7 million ($14 million) are expected, although this will be cancelled out by restructuring costs, including IT and logistics, of around £8 million ($16 million), which will be spread over the next two years. Going Store To Store Thanks to the release of these figures, and the knowledge that GAME has 834 stores and Gamestation 217, we can break them down and make some interesting, if crude, per store comparisons. GAME's just released (unaudited) figures for FY2006-07 saw revenues of £801 million ($1.61bn), and profits before tax of £29.5 million ($58.7 million). This works out at £960,000 ($1.9 million) in revenue per store, and £35,000 ($70,000) in profits before tax per store. Gamestation's per store figures (albeit for an earlier, and less profitable year in the console cycle) works out at a very similar revenue per store figure of £940,000 ($1.87 million) and around £1,000 ($1,900) of profit before tax per store. This is significant in the sense that GAME has spent a reasonable chunk of money buying a chain that, on the face of it, doesn't seem to offer much potential growth upside compared to the stores it already has. In this context, and with existing debts of around £27 million ($54 million), the additional burden of £74 million ($147 million) could be seen as some risky business, even considering the low level of interest rates and the general expansive pace of the games market. Indeed, in an interview with online financial website Cantos, GAME's deputy CEO and group finance director, David Thomas, revealed the company's existing £90 million ($179 million) debt facility will have to be replaced by a new £175 million ($349 million) facility, consisting of a £105 million ($209 million) three year term facility and a £70 million ($139 million) revolving credit facility. This obviously means GAME will have to pay back more than £105 million over the next three years. The Need To Bulk Up Despite this, there are two reasons the acquisition works for GAME, at least in the short term. The first is purely defensive - to stop anyone else, such as GameSpot, entering its patch. The second is more strategic and underpins the state of the entire bricks-and-mortar retail market: consolidation is something retailers have to do. Big chains only expect to hit their longterm financial targets if they constantly expand the number of stores they're selling from. Even Wal-Mart continues to open new stores in the US. For that reason, GAME has an insatiable appetite for buying up other specialist game retailers with French companies Addon and Scoregames, Spanish retailer CentroMAIL, failed UK online outfits Barry's World and Gameplay, plus small Australian chain The Game Wizards all acquired during the past six years. Ironically, the problem is particularly tricky for specialists retailers. When they don't have many stores, they tend to have cachet with the real enthusiasts, who can be locked into their chain with loyalty cards and other offers. This is one reason Gamestation is a good fit for GAME, which has developed from its once edgy Electronics Boutique days to become the friendly mass-market face for more occasional customers such as mums who want a Sonic or Mario game for their kids. Gamestation's success however has been thanks to its somewhat crude advertising which appeals to teenaged hardcore fans, who buy the most games at the highest prices. Combined with the company's focus on pre-owned sales (which is even more intense than GAME's), this should mean Gamestation stores potentially offer higher profit margins than the equivalent GAME stores, despite their similar revenues per store ratings. In contrast, trying to boost margins within existing stores is a much tricker proposition, especially in a market such as games, where retailers have little control over the sourcing and pricing of the things they sell. The constant competition from online retailers, especially those based in low sales tax countries, compounds the problem, while the entry of the likes of Sony, Microsoft and Nintendo into direct console distribution could be final kick in the teeth for retailer profitability. Lessons From The U.S. But that's a long way off for GAME's executives. In the meantime, their inboxes will be full with integrating the two chains together. It shouldn't be that difficult a task however. The recent example of GameSpot's 'merger' with Electronics Boutique in the U.S., saw the combined 4,000 store company manage to push up comparable stores sales by 12 percent for FY2006, thanks to the various nextgen console launches. It also finished the year with over $650 million in cash, although long-term debt on the $1.4 billion deal remains $855 million. What’s harder, even for such retail behemoths, is boosting sales efficiencies. GameSpot's net profit margin (net income/revenue), has dropped from 4 percent in FY2004 to 3 percent in FY2007. Generally, bigger isn't more efficient, and that will be the much tougher challenge for GAME in the medium term. And, in that sense, by buying Gamestation, it's won a battle in war where you can’t be victorious just by buying your competitors. [Jon Jordan is a freelance games journalist and photographer, based in Manchester, UK. He's worked his GAME loyalty card up to a credit level of £12.50.]