GameStop's '09 Rebound Deepens Its Denial of the Digital Threat

After seeing sales and profits jump in 2009 and raising its earnings forecast for this year, videogame retailer GameStop (GME) announced plans to spend $75 million opening 400 new stores this year. Given the speed at which digital-download adoption is progressing, the company appears to be in deep denial about the speed with which its industry is moving out of the mall and onto the Internet. That's too bad, because if it took action now, GameStop could position itself to be a successful player in the digital future, likely just a few years away. The 6,400-unit game chain could still avoid the fate of Blockbuster, which failed to take early action as videos went digital, and now teeters on the brink of bankruptcy.

GameStop has been piling up cash, and estimates it'll have $900 million by the end of the this year. Sales of used games have been a cash cow, and repeated efforts by Best Buy (BBY) to horn in on that business have floundered so far. Instead of opening hundreds more stores, GameStop could use some of its cash stash to buy out leases, gradually culling its store roster to leave only the most-profitable units in high-traffic locations.

A quick glance through GameStop's store locator shows it has too many U.S. stores too close together, particularly as digital downloads take hold. For instance, in rural Silverdale, Wash. (pop. 16,000 or so), there are two stores within a few miles of each other -- both of which are also just about a dozen miles from yet another store in the even smaller town of Poulsbo.

With a leaner store base, GameStop could work to make the remaining stores destinations for hardcore gamers by hosting gaming tournaments, the way mom-and-pop videogame stores have for decades. Having events would create a reason to come to the store and buy in person that would make the stores viable into the future. The company needs to realize that one day, the latest hot game release won't cause lines outside their stores, just an Internet traffic jam.

Photo via Flickr user nywriter21