Knights Investment Group

GameStop Acquisition Report

Prepared by Alexander Pompee Research Consultant

Report Distributed April 20, 2013

Prepared for The Knights Investment Group

GameStop Acquisition Report

Abstract The Knights Investment Group (KIG) is interested in acquiring a profitable franchise to expand their entertainment division. This report examines the feasibility of acquiring the popular franchise GameStop. The purpose of this report is to recommend whether GameStop will be a good franchise to acquire for KIG. This report is broken down into two primary components of analysis. The first component of the report is an extended SWOT analysis. The SWOT analysis covers the strengths, weaknesses, opportunities, and threats for GameStop. The strengths section covers the internal strengths of GameStop. The weakness section covers the internal weaknesses of GameStop. The opportunities section covers the external strengths of the franchise. The weakness section covers the external threats of GameStop. As a whole, the SWOT analysis was a form of methodology used to understand GameStop in terms of structure, longevity, influence, marketability, weaknesses, and room for improvement. The second component of the report is an analysis of GameStop trend of revenue over the course of the past five years. The trend of revenue was a form of methodology used to analyze GameStops outlook in terms of revenue and operation. The primary source of information came from GameStops 2011 Annual Report. The secondary sources were websites such as 24/7 Wall St, Glassdoor and CustomerServiceScoreboard.com. After analyzing the information obtained from the SWOT Analysis and the Report, a recommendation was made on GameStop. GameStop proved to be an effective business that is poised for large growth in the future. GameStop fits the profile of the company KIG wanted to acquire. It is recommended that KIG acquires GameStop.

GameStop Acquisition Report

TABLE OF CONTENTS ABSTRACT ........................................................................................................................ 2 EXECUTIVE SUMMARY ................................................................................................ 4 INTRODUCTION .............................................................................................................. 5 About Knights Investment Group ................................................................................... 5 About GameStop ............................................................................................................ 6 STRENGTHS OF GAMESTOP ......................................................................................... 7 Brand Recognition .......................................................................................................... 7 Marketing ....................................................................................................................... 7 Market Leader ................................................................................................................. 7 Social Media .................................................................................................................. 7 Pricing Power .................................................................................................................. 8 Expansion ....................................................................................................................... 8 WEAKNESSES OF GAMESTOP ..................................................................................... 8 Employee Relations ........................................................................................................ 8 Customer Service ............................................................................................................ 8 OPPORTUNITIES FOR GAMESTOP .............................................................................. 9 Constantly Evolving Industry ......................................................................................... 9 Growing Market ............................................................................................................. 9 E-Commerce ................................................................................................................... 9 THREATS TO GAMESTOP ............................................................................................ 10 Indirect Competition ..................................................................................................... 10 Digital Distribution ...................................................................................................... 10 SUMMARY OF THE SWOT........................................................................................... 10 ANALYSIS OF GAMESTOPS TREND OF REVENUE ......................................... 11-12 ANALYSIS OF METHODOLOGY................................................................................. 13 CONCLUSION/RECOMMENDATION ......................................................................... 14 WORKS CITED ............................................................................................................... 15

GameStop Acquisition Report

Executive Summary This report examines the feasibility of acquiring the video game franchise GameStop Inc. The purpose of this report is to provide the Knights Investment Group (KIG) with a thorough analysis of GameStop. The analysis will have two components. The primary component of the analysis is a SWOT analysis of GameStop as a franchise. The SWOT analysis breaks down GameStop in terms of strength and weaknesses, both internally & externally. Strengths of GameStop: Brand recognition, market leader, marketing, market leader, social media, pricing power, and expansion Weaknesses: Employee relations, customer service Opportunities: Constantly evolving industry, growing market, e-commerce Threats: Indirect competition, digital distribution

The second component of the analysis is GameStops trend of revenue. Using GameStops 2011 annual report, GameStop revenue and amount of stores in operation were reviewed. GameStop displayed a positive trend in revenue growth. GameStop total revenue has increased yearly since 2008. According to the GameStops 2011 Annual Report, GameStop earned $9,550 billion in revenue in 2011, up $774 million since 2008. In terms of shares, GameStops earnings per share were $2.87. In terms of revenue and earnings per share, GameStop has been steadily increasing (2011, pg. 5). Two big facts that stood out from the report were the fact that GameStop received a large amount of revenue from used games and closed a significant portion of stores. In 2011, GameStop made $2,602.02 billion in revenue from used games sales alone. This is shown to be an upward trend. In 2010, GameStop earned $2,496.8 billion. In 2011, the total revenue increased $132.22 million. GameStop lowered their operating expense by closing down their least profitable stores. As evidenced by the graph from GameStops 2011 Annual Report, GameStop lowered their total store count by 33. This was a factor in the large increase in GameStops revenue (2011, pg. 5). The method of analysis was content from primary and secondary sources. The primary source was GameStops 2011 Annual Report. The 2011 Annual Report provided information such as revenue, earnings per share, used games sales, total stores in operation. The secondary sources were 24/7 Wall St, Glassdoor and CustomerServiceScoreboard.com. The secondary sources provided an external outlook of GameStop. After analyzing the information obtained about GameStop. A recommendation was made about the franchise. It is recommended that the Knights Investment Group acquire GameStop to expand their entertainment division.

GameStop Acquisition Report

Introduction This report examines the feasibility of acquiring the video game franchise, GameStop. The purpose of this report is to provide the Knights Investment Group (KIG) with a thorough analysis of GameStop. The analysis will have two components. The primary component of the analysis is a SWOT analysis of GameStop as a franchise. The second component of the analysis is GameStops trend of revenue. The analysis will aid the KIG in making a final decision about acquiring the franchise. Recommendations will be given to KIG on whether to invest in GameStop. Also included in this report is an abstract, an executive summary, background information about GameStop, an assessment of the companys future performance, a description of the analysis methodology, and recommendation will be provided. About the Knights Investment Group
Knights Investment Group

The Knights Investment Group KIG was founded on October 25, 1999. KIG is a specialized private investment management firm. KIG acquires, develops and operates entertainment franchises all over the United States. KIG owns $30.5 billion in assets in industries such as entertainment, sports, restaurant, and hospitality. KIG plans to expand their entertainment division. They are looking to acquire an established franchise that has room to grow in the next ten years. KIG is looking into acquiring video game and software retailer, GameStop, to add to their entertainment division.

GameStop Acquisition Report

About GameStop

Figure 1 Courtesy of Inquisitr.com GameStop is the world's largest video game retailer. According to GameStop, GameStop began as a store called Babbage in 1996. After a series of mergers, the now defunct Funco changed its name to GameStop in 2002 (2011). According to GameStop.com, currently, GameStop has over 6,000 stores located throughout the United States and 17 countries worldwide. GameStop is the owner of companies: EBgames, MovieStop, Micromania, Kongrgate, Gameinformer, Impulse, and Jolt Online Gaming (2013). GameStop has established itself as a brand as well as a household name. GameStop has emerged as a market leader in the video game industry. GameStop has a distinctive business model. GameStop buys and sells both used and new video game software, hardware, and accessories. A unique feature of GameStop is the trade in program, which allows consumer to sell their used games to GameStop. GameStop then sells the used games for a much lower price than new games. This has served as a profitable business model for GameStop. It also provided them with a large with repeat customer base.

GameStop sells a variety items such as: New and preowned video game software New and preowned consoles New and preowned video game accessories New and preowned electronics

GameStop generates most of its revenue from selling software for consoles such as the Xbox 360, PlayStation 3, Nintendo 3DS, and Nintendo Wii.

GameStop Acquisition Report

Strengths of GameStop Brand Recognition GameStop has established itself as a strong household brand name. GameStop operates over 6,000 store chains worldwide. GameStop has a store in 17 countries. GameStop is easily recognized by the casual consumer and is a perennial choice when it comes to video game vendors. In addition, GameStop has a strong following on social media. This has enabled GameStop to become a market leader in the video game industry. Consumers turn to GameStop when they think video games. As a result, GameStop has a fan base of repeat customers. Marketing GameStop has a sizable effect on the video game industry. Consumers seek GameStop when they want to sell games, find information on new software releases, or read reviews. Large publishers such as EA, Activision, Konami, and Namco have collaborated with GameStop in order to promote new video game releases though commercials, banners, and merchandise. GameStop has run promotions that include pre order bonuses, commercial spots, video game guides, midnight launches, and videogame tournaments. Market Leader GameStop is unique because it is a franchise that specializes in selling video games and video game accessories. There are very few stores that have the same model. As a result, there are very few direct competitors of GameStop. Direct competitors are business who offer the same products and target the same consumers. GameStop has established strong business to business relationships with developers and hardware manufactures for marketing deals. This enables GameStop to have a large control of the video game market. Social Media GameStop has a large presence on Social Media. GameStop has a large following on both their Facebook and Twitter pages. GameStop has large engagement with their fans. Consumers are consistently liking, sharing, and retweeting posts from GameStop on their social networks. This allows GameStop to build relationships with all the stakeholders in their organization. GameStop in their social media utilizes interaction in their social media posts. Typical GameStop post include polls, video game trivia, thought provoking questions, and news on upcoming releases. Their social media also acts as a great marketing medium to highlight upcoming game release, run promotions, supplement advertising campaigns, and refer customers to their website, GameStop.com. Each of their social media pages promote new game releases, post exclusive deals, and create an environment of two way communication.

GameStop Acquisition Report

Pricing Power The price of new games and hardware is universal outside of discounts and bonuses. Competitors typically have the same set price for new game and hardware. GameStop has the power control the price of their used merchandise. For example, if a new game is $60, they can sell the used version for $55. When they sell a game used game they receive 100% of the profit, rather than partial profit. They also have a brand of then generic hardware that they manufacture as alternates to brand name hardware. Expansion GameStop, while primarily a video game retailer, is incorporating electronic hardware into their stores. According to Megan Farokhmanesh, Since 2011, GameStop has bought and sold tablets and mobile devices, in addition to its regular game trades (2013). GameStop is expanding their line of consumer goods to add another layer of sales strategy. This also address some of GameStops indirect competitors such as Bust Buy and RadioShack by offering both video games and electronics. Weaknesses of GameStop Employee Relations One of GameStops biggest internal problems is their employee relations. On the HR review website, Glassdoor.com, GameStop received a 2.7 out of 5 based on 672 reviews. Common complaints from employees were unrealistic sales goals, extensive overtime, and poor scheduling (2013). This has contributed to a high turnover rate for GameStop. In 2012, 24/7 Wall Street voted GameStop the worst #10 on their Americas Worst Company to Work For List (2012). This can hinder GameStop in the future as they continue to expand globally. Customer Service GameStop has a poor reputation for customer service. On CustomerServiceScoreboard.com, GameStop received 221 negative comments out of 240 Common complaints were lack of compensation for misplaced orders, extensive wait time on the service hotline, and misleading sales prices. Customers complain about the amount of sales pitches sales reps give customers. Customers also complain about GameStop inflating the price of their used games (2013).

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GameStop Acquisition Report

Opportunities for GameStop Constantly Evolving Industry GameStop operates in an industry of constant change and evolution. GameStop generates most of its revenue through software and hardware sales. Every decade there is a new cycle of video game consoles, called console generation. The previous console generation consisted of the Nintendo Wii, Xbox 360, PlayStation 3, Nintendo DS, and PlayStation Portable. We are now transitioning to a new console generation that consists of the Nintendo WiiU, PS4, PlayStation Vita, Nintendo 3DS, and Microsofts future console. This provides GameStop with consistent product to sale. With the emergence of 3D technology, motion control, and High Definition television, GameStop can sell accessories to sell for each console. This also opens an opportunity to sell their own generic version of popular accessories such as controllers, video cables, memory cards, etc. Growing Market As previously mentioned, the emergence of new technology is having a significant impact on the video game industry. This new technology promoting interactive gaming is opening the market to casual gamers. This technology caters to people looking for interactive gaming, fitness, multimedia streaming, and social media. This influx of customers will cause a spike in sales of hardware and software, which will result in GameStop moving more hardware. E-commerce There has been a growing market for online distribution. Game developers are starting to utilize downloadable content. Casual gamers are using video game consoles to download music, movies, and games. GameStop has taken advantage of online distribution trend through their website, Gamestop.com. GameStop.com offers direct downloads for PC games, online codes to download console content directly, and pre order bonuses. The GameStop Power Up rewards program has attracted traffic to the GameStop website. The Power Up Rewards program is an incentive programs that allows customers to translate their purchases into points. These points can be used to redeem merchandise off of GameStops website. According to GameStops 2011 Annual Report, In the U.S., we launched a mobile e-commerce site and an iPhone app, both giving customers the ability to purchase online and pick up in store via the popular PickUp@Store program. The popular PickUp@Store program allows a customer to pay for a GameStop item online and pick it up at a local store chain (2011, pg. 10).

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GameStop Acquisition Report

Threats to GameStop Indirect Competition While GameStop has few direct competitors, they are under constant threat from indirect competitors. Indirect competitors include department stores, online retailers, and electronic boutiques who sell video games. The indirect competitors have steadily been increasing their efforts to distribute video games. Businesses like Amazon and Best Buy have their own trade in programs. Companies like Blockbuster, Redbox, and Gamefly offer services that let consumers rent games. Websites like Craigslist and EBay act as indirect due to consumers buying and selling used games. GameStop is addressing their competitors by increasing focus on their website, creating incentive programs, and buying & selling electronics. Digital Distribution Digital distribution is growing in the video game industry. Console manufactures like Nintendo, Microsoft, and PlayStation have their own marketplaces where they sell movies, music, and video games. Developers are starting to release their games exclusively through online console marketplaces. With an increase in online purchases, users are downloading more video games via online distribution services rather than picking up physical copies of the game. According to James Callan, Industry sales of physical game products are declining amid a consumer shift toward mobile play on smartphones and tablets (2013). As a result GameStop needs to tweak their store model to include digital distribution. Summary of the SWOT GameStop has done a great job branding itself. They have a strong presence on Social Media. They are adding a focus to online sales with their website. GameStop benefits from an industry that is constantly evolving, which provides GameStops with new mediums to attract and attain customers. GameStop benefits from an emerging market of casual gamers who are using Game consoles as interactive multimedia systems. GameStop does not suffer from direct competition, but faces the emerging threat of indirect competitors that are starting to add more focus to video game sales. GameStop is addressing it by utilizing their online website, selling new merchandise, and creating incentive programs. Based on the research on GameStops reputation externally, GameStop is a popular franchise worldwide. However, they suffer from setbacks such as a poor perception of customer service and employee relations. GameStop needs to focus on improving their internal relations as a whole. Customers have reported long wait times, misplaced orders, and misleading prices. Employees have complained about unrealistic sales goals, poor scheduling, and extensive overtime. This can be addressed with workshops on customer service, better scheduling of hours, more employees on customer service hotlines, and conducting more market research on sales and customers.
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GameStop Acquisition Report

Analysis of GameStops Trend of Revenue Below is a graph pulled from the GameStops 2011 Annual Report.

Figure 2 Source: GameStops 2011 Annual Report GameStop total revenue has increased yearly since 2008. According to figure 2 from GameStops 2011Annual Report, GameStop earned $9,550 billion in revenue in 2011, up $774 million since 2008. In terms of shares, GameStops earnings per share were $2.87. In terms of revenue and earnings per share, GameStop has been steadily increasing (2011). This can be attributed to two factors. GameStop has an increase in used game sales. Plus, GameStop has reduced operational cost by closing down low profit stores. According to GameStops 2011 Annual Report, We will continue to rationalize our international store base, closing stores that are underperforming and opening new stores where financially viable.

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GameStop Acquisition Report

Figure 3 Source: GameStop 2011 Annual Report Figure 3 from GameStops 2011 Annual Report shows the preowned sales and store count for GameStop from 2008 to 2011 (pg. 5, 2011).As evidenced by the graph from figure 3 from GameStops 2011 Annual Report, GameStop made $2,602.02 billion in revenue from used games sales alone. This is shown to be an upward trend. In 2010, GameStop earned $2,496.8 billion. In 2011, the total revenue increased $132.22 million. GameStop lowered their operating expense by closing down their least profitable stores. GameStop lowered their total store count by 33. This contributed to an overall increase in GameStops revenue (pg. 5, 2011.)

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GameStop Acquisition Report

Analysis of Methodology There were a variety of methods used to analyze GameStop. One method was to conduct a SWOT analysis on GameStop. The SWOT analysis was used to evaluate GameStop internally and externally. The SWOT provided information on GameStops strengths inside and outside of the industry, as well as weaknesses. Another method of analysis was referring to GameStops 2011 Annual Report. GameStops Annual Report contained information such as GameStops goals for their fiscal year, data on revenue, statistics on growth, and benchmarks for their future. The formal report served as a primary source of information. That information came directly from GameStop. There were a few websites that served as secondary sources. These websites provided an outside look at GameStop. Glassdoor.com was used to evaluate the perception of GameStops internal relations from an employees perspective. 24/7 Wall Street provided an article that provided qualitative and quantitative evidence about GameStops reputation about handling their employees. Customerserviceboard.com was used to gauge feedback on GameStops customer. These were all outside sources. An important source that was utilized was GameStops Social Media. Content from GameStops social served as an effective method to evaluate GameStop. Content analysis of Facebook posts, Twitter tweets, and YouTube videos were conducted during research. A key element that was focused on was GameStops tone when communicating with their audience. GameStop constructed their messages in various ways to appeal to multiple audiences. Another element that stood out was feedback from the consumers of GameStops post on social networks. Post were scanned for positive, negative and neutral comments. This was effective because this was all content GameStop created. Collectively, each method of analysis added crucial information on GameStop in terms of structure, perception, and financial viability.

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GameStop Acquisition Report

Conclusion/Recommendation GameStop has a unique business structure that is hard to replicate. This results in very few direct competitors rivaling GameStop. The GameStop trade in program has been a large success for GameStop. GameStops revenue form preowned game sales have increased exponentially over the course of the last five years. Based on GameStops increasing revenue, GameStop proves to be a formidable business financially. GameStop has taken an initiative to address the emerging threat of online distribution. As more developers are opting to release their games through online marketplaces, GameStop has used GameStop.com to release game. They are also using their Rewards program to give customers incentive to use the online website. Indirect competitors like Amazon, Best Buy, and Radio Shack have been increasing their emphasis on selling games. GameStop has addressed the problem by adding new programs like the PickUp@Store program which lets customers order games and console online and ship it to a local store. They also created incentive programs like Power Up rewards to maintain their client base. They have also utilized social media to direct customers to their website. After analyzing the information from the SWOT analysis, annual report, and secondary sources, GameStop would be a great asset for the Knights Investment Group. GameStop is increasing in terms of revenue and market coverage. They have lowered their operating cost by closing down low profit stores. They have addressed their future threats by expanding their merchandise, adapting to digital transactions, and creating incentive programs. KIG is looking for a growing franchise that will add depth to their entertainment division. GameStop fits the requirement based on their sales patterns and business strategies. GameStop shows few signs of slowing down. With the transition to the new console generation GameStop will have more merchandise, bigger contracts with developers, and a new audience of interactive consumers. It is recommended that KIG acquires the franchise GameStop for their entertainment division.

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GameStop Acquisition Report

Works Cited 24/7 Wall St. (2012). Americas Worst Companies to Work For. Retrieved April 20, 2013, from http://247wallst.com/2012/08/10/americas-worst-companies-to-work-for/2/ Callan, J. (2013). GameStop Profit Tops Estimates on Mobile, Digital Games. Retrieved April 20, 2013, from http://www.bloomberg.com/news/2013-03-28/gamestop-drops-afterforecasting-earnings-below-estimates.html CustomerServiceScoreboard.com. (2013). GameStop Customer Service. Retrieved April 20, 2013, from http://www.customerservicescoreboard.com/GameStop Farokhmanesh, M. (2013). GameStops push for more phone and tablet trade-ins driven by consumer feedback. Retrieved April 20, 2013, from http://www.polygon.com/2013/4/13/4211266/gamestop-trade-in-program-will-continueto-grow-as-needed GameStop. (2013). About Us. Retrieved April 20, 2013, from http://www.gamestop.com/gs/help/About_Us.aspx GameStop. (2011). 2011. Annual Report. Retrieved April 20, 2013 from http://phx.corporateir.net/phoenix.zhtml?c=130125&p=irol-reportsannual GameStop. (2011). Company History. Retrieved April 21, 2013, from http://news.gamestop.com/about_us/company_history GlassDoor. (2013). GameStop Reviews. Retrieved April 20, 2013, from http://www.glassdoor.com/Reviews/GameStop-Reviews-E1162.htm

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