Understanding the GameStop Saga — Part One: The Brick-and-Mortar Meltdown
In January 2021, GameStop saw its stock price whiplash from around $17 to $500 caused by a short-squeeze engineered by a group of small amateur investors on a popular discussion forum. Other names, so called meme stocks, also saw violent price action during this period. The unusual high price and volatility is tapering off but continues to this day. The short-squeeze caused substantial losses to Wall Street firms on the other side of the trade. The episode sent shockwaves through the financial and investment world and left many scratching their heads looking for explanations. Congress was called upon to investigate allegations of collusion and corruption.
Are markets broken? Is there fraud and manipulation going on? Who are the good guys and who are the bad guys in this story? Why did this happen and how?
The purpose of this article series is to shed some light into the GameStop saga. However, its significance goes far beyond any of these meme stocks — they are just incidental. We will lay out the main parts to the puzzle which can help us understand what this is all about.
Let’s dig into it.
PART I: Brick-and-Mortar Meltdown
But first let us rewind a bit.
Established in 1984, Blockbuster — a movie rental store — quickly dominated the 90’s and early 2000’s, through the rise and fall of VHS then DVD’s, as people started enjoying movie nights at home. At its peak in 2004 the company operated 9,000 stores across the US before suffering a brisk decline culminating in bankruptcy in 2010.
Along the way, Blockbuster made a host of mistakes including charging exorbitant late fees and passing out the chance to acquire a tiny new competitor. Rising from its shadow in 1997, Netflix leveraged online ordering to deliver movies by mail to become the company it is today.
But more than any managerial pitfall, the causes of the Blockbuster’s demise were structural. On the one hand, Blockbuster was incurring high fixed costs of owning and maintaining physical stores as well as the employee overhead to operate them. On the other hand, new technological innovations and changing consumer trends made the whole physical movie rental business model obsolete: Cable, pay-per-view and high-speed internet streaming changed the market dramatically. Recently, with movie theatres closed due to the lockdowns, Disney studios ramped up its own online platform to stream new movies directly on Disney+.
Which brings us to our second example. While movie production pace increased worldwide, movie theatre foot traffic saw a steady decline over the past 2 decades. This was not due to people spending less time in front of a screen — quite the opposite. The switch was in the consumption channel: away from big and small screens and towards electronic and handheld devices in private settings. Consumers were increasingly looking to control the freedom and quality of their time. Movie theatres (and other entertainment venues) were forced to close during the pandemic, exposing their vulnerabilities. Movie theatre operators — such as AMC — suffered as a result.
Technological advances, high speed internet, global supply chain streamlining, and changing consumer preferences and behaviours caused slow but major shifts in how and where consumers shopped, browsed, got entertained and spent their money: away from physical retail stores and entertainment venues in favor of digital and online convenience.
This is what has been commonly referred to as the brick-and-mortar retail meltdown. The phenomenon is far-reaching, widespread and ongoing. Books, electronics, clothing, cosmetics, household items, even furniture, appliances and food… the list is long: only few product categories remain immune for now (e.g. gas stations.) And the pandemic just seems to supercharge this trend: packing years of meltdown into months. And there have been many high profile casualties over the years. From flagship department stores to toy stores to mall operators. Even traditionally large retailers that still dominate have done so in part thanks to a successfully managed ecommerce presence in parallel (e.g. Wal-Mart)
Video gaming is another highly profitable and rapidly growing category of the entertainment industry. It recently became the biggest sector surpassing TV — and triple the size of Box Office revenues. It is set to quadruple in the space of just 10 years. Notably, this growth was driven mainly by a change in the nature and distribution channels. Gaming digitization more than offset the shrinking contribution of physical games and platforms. Just like for movies, the most popular gaming console is probably in your hand (or your pocket or purse).
So, stop me if you heard this story before: a previously successful retail store with a big physical footprint in a booming market that did not see the future coming got swept away by not only e-commerce but digitization of both the products it sells and the distribution channels of those products.
In this context, quite predictably, GameStop’s sales quickly eroded from their peak in 2015, losing up to 50% by the end of 2019. And this is even before the pandemic hit.
It is therefore easy to conclude, absent some dramatic transformation, that it is just a question of time before GameStop pulls a Blockbuster.
And it showed on the share price. Both GameStop and AMC lost more than 90% of their value going into 2020. WallStreet was betting the company’s stock is likely tending towards 0. A pretty unremarkable story in and of itself (unless you are an investor)
In the next installment we will review what a short squeeze is and how it happened.
