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GameStop drama has captivated Wall Street but company is not on right track to fulfill investors' hopes

Posted by Warwick Business School at 01 February 2021, 15:00 CET |
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Christian Stadler, Professor of Strategic Leadership at Warwick Business School and author of the book Enduring Success on the world's outstanding corporations, said:

"Wall Street has been captivated by the GameStop drama and the stand off between small investors and Big Finance. It marks the moment when social media-fuelled amateurs were able to rattle capital markets, an institution that seemed immune to the revolutions that changed other pillars of the global establishment.

"But in order to fulfill enthusiastic investors' hopes, GameStop needs a winning strategy and there are warning signs that the company is not on the right track.

"When George E. Sherman was appointed as new CEO in 2019 he said he aimed to make the company the "social and cultural hub for gaming", improving store experience and relying on knowledgeable associates. Instead he embarked on a strategy that would reduce costs in the old bricks-and-mortar business and expand its digital platform.

"On the surface such a transition seems to embrace the overwhelming logic that the future is digital and holiday sales last year suggest the firm is on the right track.

"However, the digital space is already highly contested. While GameStop might be able to hold its own against other online retailers, it is harder to see how it can prevail against console producers. The appeal of owning a game that can be resold is slowly evaporating now gamers can stream directly from PlayStation, Xbox, and Nintendo Switch at their convenience

"For a bricks-and-mortar company to treat its old, core business as undesirable baggage is risky when it is moving into such a competitive market.

"A better strategy for GameStop would be to invest in digital without cutting costs in bricks-and-mortar and integrate the two. Target is a prime example of the benefits this can yield. It understood it was not a tech company and shot not try to behave like one.

"Instead, it undertook hundreds of extensive store renovations and opened new locations as well as overhauling its e-commerce businesses. Wall Street did not like the investment at first, but two years later, sales were nearly nine per cent higher, a remarkable achievement in a low-margin business."

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