GameStop

Explore the challenges faced by GameStop in a rapidly changing gaming landscape, including declining profitability, disrupted industry norms, and shifting market dynamics. Delve into the company's strengths, weaknesses, opportunities, and threats, along with potential strategies for revitalization.

• GameStop
• Strategic Analysis
• Disrupted Industry
• Gaming Retail
• Market Dynamics

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1. GameStop PRESENTED BY HEC CONSULTING PRESENTED BY HEC CONSULTING PRESENTED TO PRESENTED TO ADITYA BAID BARNS AND NOBLE BOARD LORETTA CHAN EMILIE L.CAYER NEHA SHARMA

2. Agenda 1. Analysis 2. Alternatives 3. Recommendation 4. Implementation 5. Financials 6. Risks 7. Conclusion Analysis Alternatives Recommendation Implementation Conclusion

3. Can GameStop be a viable company in a disrupted industry?

4. What are the key issues? Declining profitability of the company (sales, margins, profits, store sales and stock declining) Disrupted gaming industry Change in delivery channels and policies from gaming giants (e.g. Sony only allow digital download through their channel) Decline of physical retail landscape (store traffic) Analysis Alternatives Recommendation Implementation Conclusion

5. What is the current landscape for GameStop? Internal Analysis STRENGTHS WEAKNESSES Engaged customer base with data information Robust marketing program Game Informer Magazine (6.6B paid subscribers) Power Up Rewards (39.6M members of which 16.2M are consumers and 5.6M are paying members) Varied offering that answer the customer needs (e.g. consoles, collectibles, new and pre-owned games) E-commerce channels International presence (5830 locations worldwide and 1984 locations) Declining sales margins and operating losses resulting in declining stock price No big data analysis and segmentation to leverage customer engagement Unable to negotiate with any major platforms or publishers to change the protective policy (very little bargaining power) No presence in the major and growing online streaming communities GameStop has high and engaged consumer base but keeps on being faced with declining sales margins and operating losses Analysis Alternatives Recommendation Implementation Conclusion

6. What is the current landscape of the gaming industry that could affect GameStop? External Analysis OPPORTUNITIES THREATS Console systems remains a robust market (fastest-growing segment in 2020 and global market value of $US47.9B) Growth in gaming market size of 9.6% year on year (estimated at $US18B for new video game and $US25-32B for digital game content) Shift to online sales and decline in malls due to digital products (25% will close in the next 5 years in US according to recent study) Major gaming giants prohibiting retailers from selling digital download codes (eg. Sony for PS platform) Increase competition from industry giants in digital and retail channels (BestBuy, Target, Walmart, Kmart, Origin, Uplay, Steam, Gamefly and Amazon) The market size growth is faced with high threats such as protective policies and increased competition from giants Analysis Alternatives Recommendation Implementation Conclusion

7. What is the competitive landscape ? Brick and mortar competitors Online competitors Walmart ($US 123B revenue) Amazon Best Buy ($US 42B revenue) Origin Target ($US 75B revenue) Uplay ($US 5B revenue) Compare to GameSpot, these retail giants and online competitors all have an advantage of offering high product diversity (household products, computer products, etc.) Kmart ($US 25B revenue) Gamefly Analysis Alternatives Recommendation Implementation Conclusion

8. What is the industry landscape ? Medium Threat of new entrants High High High Threat of substitutes Buyer power Competition High Extremely competitive industry with game development companies having a high power advantage over retailers Supplier power Analysis Alternatives Recommendation Implementation Conclusion

9. What are the options ? 1. Diversify offering by adding revenue stream (e.g. acquiring a mobile gaming company) 2. Redesign business model A. Take advantage of the store square footage (e.g. VR gaming area and e-sport team) B. Change to a subscription game model 3. Restructuring the business and sell Analysis Alternatives Recommendation Implementation Conclusion

10. 1.Diversify offering by adding revenue stream (e.g. acquiring a mobile gaming company) What this could offer: Diversifying offering will not solve the profitability issues GameSpot has and high risks of diluting their current asset Acquire a gaming mobile company Use current subscribers base to sell them the games Key Issues Not solving short term profitability problem Console gamers and mobile gamers are a completely different target Consumers might leave the company Analysis Alternatives Recommendation Implementation Conclusion

11. 2. Redesign business model A. Take advantage of the store square footage (e.g. VR gaming area and e-sport team) What this could offer: Spending capital on underperforming assets with high risk of disruption Redesign store areas to another purpose (VR gaming area and e-sport team) Leverage GameSpot memberships Room with cameras and livestream to twitch Key Issues Huge capital investments required VR and e-sports could be a trend Fast change in technology that would make square footage unnecessary to play any games Analysis Alternatives Recommendation Implementation Conclusion

12. 2. Redesign business model B. Change to a subscription game model What this could offer: Model easily replicable by game creators and competition already offering the model in a more efficient way For a subscription fee, gamers get game delivered to their house Data collection on gameplay to sell to game makers Key Issues Nothing stopping gaming companies for providing this solution No exclusivity in games and strong existing competition No competition to any digital gaming Completely new logistic operation that needs to be developed Analysis Alternatives Recommendation Implementation Conclusion

13. 3. Restructure GameStops business and sell Key Strengths What this is: Close down unprofitable stores out of the current 5,830 stores to improve profitability Capture investment gains in time Can be completed in 2 years time Reach out to PE buyers with good turnaround experience to purchase the company entirely What this could offer: Exit quickly to capture gains and avoid long- run losses Current investors can cash out the investment in GameStop which record a downward trend to make other investments Analysis Alternatives Recommendation Implementation Conclusion

14. What are the criteria ? Achievability in the next 2-3 years Financially viable to implement Profitability Analysis Alternatives Recommendation Implementation Conclusion

15. Options against criteria Achievability in the next 2-3 years Financially viable to implement Alternatives| Criteria Profitability Diversify offering by adding revenue stream (e.g. acquiring a mobile gaming company) Medium Increase revenue stream Does not resolve current revenue issues Medium Low High cost and high risk Redesign business model Low Low Medium High cost of implementation High cost and high risk Restructure the business and sell High High Medium Ability to recover assets Reduction of loss Analysis Alternatives Recommendation Implementation Conclusion

16. Can GameStop be a viable company in a disrupted industry? Achievability in the next 2-3 years Financially viable to implement Alternatives| Criteria Profitability Diversify offering by adding revenue stream (e.g. acquiring a mobile gaming company) Medium Increase revenue stream Does not resolve current revenue issues Medium Low High cost and high risk Redesign business model Low Low Medium High cost of implementation High cost and high risk Restructure the business and sell High High Medium Ability to recover assets Reduction of loss No immediate solution solves the profitability issues GameStop has encountered and only selling will prevent an even more important loss. We recommend restructuring and selling as the best option. Analysis Alternatives Recommendation Implementation Conclusion

17. Implementation Step 1: Restructure GameStop s business i. Hire strategy consultants to perform strategic analysis on GameStop s business outlook and profitability ii. Identify and close down stores in countries/regions that are unprofitable to reduce costs and increase profitability: i. Understand the lease terms to estimate the timing for closing each store ii. Understand the staff hired by each store and possibility to relocate to other stores iii. Understand how the closure will improve the company s financial forecasts iv. Note: We need the information of each country/region for further analysis iii. Comply with the regulatory requirements under the US listing rules Analysis Alternatives Recommendation Implementation Conclusion

18. Implementation Step 1: Restructure GameStop s business Resource checklist i. Hire restructuring consultants to coordinate the consolidation ii. Hire HR consultants to advise on staff compensation and execute employment termination for store closing iii. Hire PR consultants to communicate the news to the market and public, but do not disclose the intent of sales before completing the closing of stores Analysis Alternatives Recommendation Implementation Conclusion

19. Implementation Step 2: Sell GameStop i. Perform sell-side due diligence to identify potential deal breakers. Based on the issues identified, make applicable improvements ii. Reach out to potential PE buyers who would perform buy-side due diligence iii. For buyers displaying interests, negotiate pricing based on financial forecasts and the valuation of assets of GameStop iv. Obtain approval from minority investors for selling the sales. Conclude the sales and purchase agreement Analysis Alternatives Recommendation Implementation Conclusion

20. Implementation Step 2: Sell GameStop Resource checklist i. Hire sell-side advisors to coordinate on the transactions (e.g., manage data room and monitor the progress of all advisors) and communicate with potential buyers ii. Hire legal advisors to perform legal due diligence and handle all compliance requirements (i.e., gaining approval from the US listing authorities and disclose information under the listing rules) iii. Hire financial advisors to perform financial due diligence and assist in deal price valuation Analysis Alternatives Recommendation Implementation Conclusion

21. Implementation timeline Item 2020 2021 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Repackage the business Hire consultants and perform strategic analysis on GameStop Hire consultants to assist in store closing Identify and close down stores in countries/regions that are unprofitable Sell the business Hire advisors to assist in the selling Perform sell-side due diligence Reach out to potential PE buyers and monitor buy- side due diligence Negotiate pricing Obtain approval from minority investors and conclude the sales and purchase agreement Analysis Alternatives Recommendation Implementation Conclusion

22. Finance Current situation GameStop s financial outcome in 2018 was generally unsatisfactory: i. Decrease in net sales by 3.1% ii. Decrease in net income by 2,039.5% iii. Sharp decreased in net sales of pre-owned and value video game products by 13.2% iv. Improving cash position (US$1.6 billion in 2018) due to increase in account payables and goodwill impairment Analysis Alternatives Recommendation Implementation Conclusion

23. Finance Goals of re-structuring the business Key financial rations 2018 Target post- restructuring (base year) EBITDA margin Net income margin 5.06% -8.12% 10.00% 1.00% Analysis Alternatives Recommendation Implementation Conclusion

24. Finance How to cash out the investment with our plan This is a preliminary analysis and you need to hire valuators for further detailed analysis: i. Stop the bleeding in 2020 by closing unprofitable stores which leads to positive financial profitability forecast from 2021 ii. Good EBITDA of GameStop means a good position in deal valuation iii. Give consideration to the value of key assets (i.e., subscriber information of GameStop) iv. Benchmark with previous similar transactions to determine pricing Analysis Alternatives Recommendation Implementation Conclusion

25. Finance Implementation costs 1. Fully financeable by your current cash position of US$ 1.6 billion Item Key costs Costs (in US$ million) Repackage the business Hire consultants and perform strategic analysis on GameStop Hire consultants to assist in store closing Identify and close down stores in countries/regions that are unprofitable Consulting fee 0.5 Consulting fee Compensation to staff and fees for deregistration 2.5 Variable (depending on the no. and size of stores closed) Sell the business Hire advisors to assist in the selling Perform sell-side due diligence Negotiate pricing Consulting fee Consulting fee Consulting fee 3.0 2.0 0.5 Analysis Alternatives Recommendation Implementation Conclusion

26. Risks Risks Impact Probability of occurring How to avoid? How to mitigate? Low valuation of the company due to bad publicity Consolidate business and manage PR Plan to sell in units to get better options High Medium Shareholder not agreeing to sell Leverage $US 1.6B cash in hand to build incentive Communicate business failures in dying business industries (e.g. Blockbusters) High High Getting a lower selling price than expected Build the value and increase the price and then, sell Negotiate with high potential acquisition company globally High Medium Analysis Alternatives Recommendation Implementation Conclusion

27. Selling is the only viable solution Recovering assets and getting a premium out of the sale (suscribers) External and internal communication are key Nearly impossible to turn around the business Need to increase the valuation of the company Analysis Alternatives Recommendation Implementation Conclusion

28. Thank you Questions ? PRESENTED BY HEC CONSULTING PRESENTED BY HEC CONSULTING ADITYA BAID LORETTA CHAN EMILIE L.CAYER NEHA SHARMA