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GAME IPO Does Not Spell Resurgence Of Media Product Stores

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In March, 2012, GAME entered administrations and was subsequently purchased by the Private Equity firm, OpCapita, the following week.  Nearly two years on and GAME might be up for an IPO, so what has changed to make this the nearly bankrupt retailer an exciting investment opportunity worth potentially £300 million?  Following the acquisition, certain strategic streamlining measures have taken place which may have optimized the business and the launch of the Xbox One and PS4 at the end of last year have certainly reinvigorated sales for video games across the board.  However, media product stores, the retailing channel that GAME falls under, is still a shrinking channel and the new console releases show now sign of changing the cyclical nature of video games.  Therefore, perhaps GAME does not offer an interesting long term investment opportunity, but rather now would be the best time for an IPO when its value could be at its highest, as it is set to decline in the future.

World Static and Hand-held Consoles Value Growth (% rsp) 1998-2012

Source: Euromonitor International

The video games market has historically been cyclical with the release of new video games hardware creating peaks in the market, which are then followed by peaks in the software market as new games get released.  The peaks have historically lasted around 2-3 years before a decline in the market takes place.  Although initial results are promising from the sales of the new Xbox One and PS4 that went on sale in December 2013, there is no reason for the cyclical nature of the industry to stop.  Furthermore, with the emergence of digital gaming and its growing popularity, some sales that would historically have been attributed to consoles and their games are expected to drift to smartphone and tablets purchases along with games that can be played on these new devices.  This means that the value of a media product store such as GAME will potentially be at its highest when consoles are released, such as now.  But following the cyclical nature of the business, compounded by the growth of digital gaming, we can anticipate that this valuation will be short term and less pronounced than previous years.

Share of Media Product Stores in Video Games Value Sales, %, Rsp, 2007-2012, Selected Markets

Source: Euromonitor International

Changes in the distribution landscape have strongly affected media product stores. The trend against media product stores is happening on two flanks. First, the expansion of internet retailing and digital downloads has meant that more video games are being purchased online, effectively side-stepping the need to visit bricks and mortar stores.  Secondly, many grocery retailers have boosted their presence in video games retailing by opening dedicated video games sections in stores. For example, in the UK, Tesco, Asda, Sainsbury’s and Morrisons all have video games sections.

Since GAME went into administration, various damage limitation measures have taken place such as store closures and mass redundancies.  These measures will certainly aid GAME in exposing it to less risk in a relatively volatile industry, but these measure on their own are not enough to project a resurgence of the business.  Market pressures remain on the retailing and manufacturing side against media product stores and so this timely IPO news is more a warning of a speedy and opportune exodus from GAME, rather than a turnaround for the business.

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