Landseer's Graham Says Reddit Isn't 'Sole Driver' of GameStop
(Bloomberg Opinion) -- Don’t count out GameStop. Really. While the prevailing consensus says that the frenzy surrounding the video-game seller’s stock is purely speculative and that the eventual demise of the brick-and-mortar retailer is a foregone conclusion, some positive developments are brightening the outlook for its business transformation. And with a little magic from Amazon.com Inc. founder Jeff Bezos’s playbook, a real turnaround is a distinct possibility, one that has the potential to make GameStop Corp. an e-commerce powerhouse for gaming, PC hardware and consumer electronics.
The key figure in GameStop’s comeback story is Ryan Cohen, formerly the co-founder and CEO of online pet-supply retailer Chewy Inc. Since buying a large stake in GameStop last summer, the internet entrepreneur has become increasingly involved in shaping the company’s future. In November, Cohen went activist on his investment by sending an eviscerating letter to GameStop’s board in which he criticized management’s performance and the lack of progress in embracing digital initiatives. His public pressure is paying dividends: In early January, GameStop said it had entered an agreement with Cohen’s investment arm, RC Ventures, under which it added three new directors — including Cohen — to its board. And just last week, the company announced a trio of impressive hires: Matt Francis, previously an engineering leader at Amazon Web Services, as its chief technology officer; Kelli Durkin, a former Chewy executive, as senior vice president of customer care; and Josh Krueger, who had prior senior roles at Amazon and Walmart Inc., as vice president of fulfillment.
The hires are a big deal and a signal that Cohen has taken the reins and is driving the company’s strategy. The technical and e-commerce-oriented backgrounds of the new additions show how GameStop is drawing from a different talent pool — leagues better for where it is going than the staff CEO George Sherman was able to attract in the past. The disparity is understandable, given Sherman’s decades of traditional retail experience compared with Cohen’s technology-driven background. The shift in focus is what the company needs to give its turnaround a chance.
There is reason to be optimistic about GameStop’s prospects, given Cohen’s track record. He launched Chewy in 2011, and his leadership was a key force in helping the upstart successfully compete against Amazon and Walmart. Six years later, after helping Chewy reach more than US$1 billion in annual sales and win a leading share of the online pet space, Cohen sold the company to PetSmart Inc. for US$3.35 billion. A couple of years after that, Chewy went public and is now worth about US$45 billion.
To beat Amazon at its own game, Cohen employed Bezos’s business philosophy. This is important because he will most likely use the same approach with GameStop. In a 2018 interview with the Miami Herald, Cohen shared vivid anecdotes exemplifying the three main characteristics the Amazon founder is known for — relentlessness, incredible focus and customer obsession — recalling that he did not give up after getting rejected by more than 100 investors in trying to find funding for Chewy. He also talked about the importance of being the best-in-class expert in the pet category, similar to Amazon’s focus in its early days of bookselling. Cohen’s belief in the importance of making customers happy also channels Bezos. “I’m obsessive about making sure we always deliver an amazing experience for our customers, so I’m always thinking about ways to delight them even more,” Cohen said. It could have been a quote from Bezos.
This type of thinking is what GameStop needs to flourish in the digital economy. The outlines of Cohen’s plan, which he shared in his November letter, is a smart one. It entails paring down the company’s store exposure, selling overseas operations and building out its e-commerce capabilities. I expect GameStop’s website will soon offer a wider selection of gaming products, better pricing, faster shipping and much better service. But there’s more it can do.
Beyond the basics, GameStop also needs to find new areas of growth. With the launch of the latest gaming consoles from Sony Corp. and Microsoft Corp., the company has a few years of breathing room during which it can depend on pent-up demand for the new hardware. This tailwind won’t last forever, though, so I recommend the retailer aggressively expand into the PC gaming market — an area where it has a small footprint. It would be a natural fit. Because of the impressive performance of the latest lineup of graphics cards from Nvidia Corp. and Advanced Micro Devices Inc., consumers are clamoring to spend thousands of dollars outfitting their PC gaming systems. The market is quite lucrative. According to IDC, the PC gaming accessory market — including mice, keyboards, headsets and controllers — is estimated to be US$6.3 billion for 2021. Nvidia alone sold US$6.8 billion of gaming graphics products over the past year. Given its relationships with gamers, GameStop should be able to thrive in the PC gaming market and take business away from other PC-focused retailers such as Newegg and Micro Center.
GameStop’s core attributes shouldn’t be glossed over either. It has a well-known brand in the fast-growing industry of video games themselves and has more than 50 million consumers in its PowerUp Rewards loyalty program through which it can market new offerings. If GameStop can emerge as the e-commerce category leader for gaming and consumer electronics, the financial upside would be large. As mentioned earlier, Cohen’s previous company, Chewy, is now worth US$45 billion; other e-commerce standouts include consumer electronics retailer Best Buy Co. at US$31 billion and online furniture retailer Wayfair Inc. at US$29 billion. In all three cases, investors have shown they will give an internet retailer a high valuation if it can show strong sales growth and satisfy customers. This gives GameStop something to aspire to.
It won’t be any easy road or quick transition to a digitally focused business model. Any changes put in place by GameStop’s new executive team — from building out fulfillment centers to improving delivery times, upgrading the website and expanding into new markets — will take several quarters at a minimum to bear fruit. And in the meantime, GameStop’s stock price may be in for more volatility before eventually settling down once speculators move on to the next shiny object, as is likely to happen. But a bet on GameStop comes down to a bet on Cohen. In business, management’s ability to execute is perhaps the most important determinant of success. One should never underestimate the power of a truly competent and passionate entrepreneur. Cohen has won at the e-commerce game before and has now brought in his team to make it happen at GameStop. If successful, the GameStop story may end up being a whole lot more interesting than the Gamestonk saga.