Last week GAME revealed its poor Christmas financials, with UK and Ireland retail sales down 17.6 per cent over the festive period.
We speak to CEO Ian Shepherd about the state of the market and how the Group can turn its fortunes around.
So what went wrong?
The video games market was very weak all the way through 2011, and it was a weak market over the Christmas and immediately the post-Christmas period as well. And there's no avoiding the impact of a market being double digital negative on a retail business like ourselves. I am very proud of what the people in our teams all around the world achieved. Because, although not enough people came out to buy video games, when they did come out to buy video games, they came to buy them from us. And the evidence of that is our market share grew strongly year-over-year. So in a very difficult and very challenging market place, I think our people in our stores and operating our web business did a terrific job of making us the customers' first choice. It is just unfortunate that that doesn't translate into great overall results when you are working in such a challenging economy.
Is there a lack of innovation in the market?
We work with all of the platforms and the publishers and the developers really, really closely. In fact, usually months and month in advance we would have been working with our partners to make sure that we make their launches as strong as possible. We are very much in the middle of the games industry's planning and the way it brings things to the market place. When I look at 2011, I think there were a lot of great titles that came to market. So overall, the weakness in the overall numbers was yes, partly driven by the wider economy and issues of consumer confidence, but obviously also it was driven by where we are in the hardware cycle. So the games hardware market was much more negative than the games software market. I think that tells you that the industry and the consumer is ready for more innovation in that space. But look at the way the industry organises and manages itself, obviously as a retailer we would like key titles to be slightly more spread out through the year than they were. But in terms of the kind of things that came to market and the level of professionalism that publishers and platforms showed in the way they brought those things to market, I was, as I always am, really impressed. This is a strong industry full of good marketers.
You've mentioned the congested schedule before. It was a long summer between LA Noire and Deus Ex last year.
The increasing concentration around the key launch period, I think people will probably learn some lessons from that. But I don't think that is the big issue. I think the big issue was the customers' desire for hardware innovation, for product innovation, and obviously a weak overall economy. The net result was the games market in aggregate, in the UK and in other European territories as well, was significantly smaller in 2011 than it was in 2010. That just makes it very hard work for everybody. But what I am keen to emphasise here, is that in a difficult market, the best you can hope to do is to win market share. And the fact that we won market share in 2011, whilst that doesn't change the overall results, it is something that our teams should be very proud of.
Much of the media has focused on the fact you might need to rely on lender support having suffered a worse-than-expected sales performance. Do you think that reporting has been fair?
I just come back to the facts of the situation. We are a very pragmatic and open company. We have made our strategy very clear since we laid it out at the beginning of last year. We have been very clear about what we are doing with the business. And we have a group of banks that support our business and joined us at the same time that I laid the strategy out at the beginning of 2011. We refinanced the business then, and essentially those banks were saying: ‘We understand your strategy, we believe that that's the right thing to do with this business, and therefore we are going to support you.' All that has changed since then is that 2011 has ended up being a weaker market than either we or the banks expected when we set out on the journey. We have clearly got to be keeping talking to the banks and making sure that we have a financial arrangement with them that reflects how tough things are at the moment, but also which continues to allows us to invest in the areas of strategic growth that we want to create. And that dialogue is on-going. It is a perfectly normal thing. And is something we wanted to be open with everybody about. It is easy to write an apocalyptic headline. But the reality is what you see here is a business that has good relationships with its investors and its banks, with a very clearly articulated strategy, in a very difficult market, with a bunch of people rolling their sleeves up and getting on with the job.
Is there a need to do anything to appease your shareholders and lenders? Selling any parts of your business or perhaps accelerating your digital plans?
In any market as vibrant and fast-changing as the video games market, you have got to be flexible, you have got to be nimble, and we will be both of those things. We will be very careful in making sure we invest our money in areas that our strategy says we should, where there is a return to be made, across the balance of this year. I think 2012 will also be a difficult and challenging environment in which to trade. I don't think the consumer economy is suddenly going to turn around anytime soon. And so we will be very careful. But fundamentally the wider context is, we have a clear vision about where we are taking this business. And when I talk to investors and banks, I hear a great deal of support for that strategy.
So there's no real need to close more stores or sell anything?
We have always proved ourselves to be very careful with other people's money. Whether that is investors or lenders. So we have been gradually re-engineering this business, we have reduced the number of stores that we have in the UK already, last year and the year before and we have been very clear about the fact that programme will continue this year. We have taken other operating costs out of our business over the course of the last year and I have no doubt that we will need to continue to find ways to be more efficient, to do things faster. So I am absolutely not saying nothing will change, but what I am saying is that it will be the same sort of change that we have been working through really for the last year since we laid our strategy out, which is that we want to make sure when we spend money we spend it on areas which are changing and improving the GAME Group and taking us towards our strategic vision.
Is hardware the big thing to drive your business this year and the next?
If you look at the video games industry over a long period of time you can see that all of the games market – but particularly the home console market – is a very cyclical one. Innovation in hardware is driven by a generational change from one set of consoles to the next. Whenever I see the platforms bringing new hardware to market, that excites me. Whether it is in the handheld space with 3DS last year and Vita coming up, or whether in the home space with Wii U coming later in 2012. All of that is good for the consumer and will excite the consumer in coming back to the video games market again. There is no doubt, and history teaches us this, that changes and innovation in technology brings the games industry back to growth.
Are you looking to E3 for some big announcements in this space?
Obviously E3 every year is a critical determinant of what both key trading and also the following year is going to bring. It is a very important event and I am really looking forward to it. In terms of further bits of new hardware coming to market, I will wait and see. Our focus in the short term is getting ourselves ready to do a cracking job on selling the ones that have already been announced. I am sure we hear story and counter-story a million times between now and E3. I am not going to get involved in speculating. I am just going to wait and see what people have to say.
HMV is scaling back its presence in games. What's your take on this? Why is one specialist High Street retailer telling the world games isn't worth it, while you're telling us it is in growth? What's the difference?
Let me preface the answer by saying that I never talk about someone else' business, I will only talk about my own. There is no doubt that the video games market in the UK is extraordinarily competitive, it is a very difficult place to win customers and therefore to make money. So when I see people back away from the games market in some senses, I am not surprised. For us, the games industry in the UK is still a big one, there is a lot of money spent from customers, so our starting point is that when people choose to buy games they choose to buy them from us. Our job has got to be to hold and grow our market share, which is what we did during 2011.
Is losing some of this competition damaging to the retail sector or does it help it?
I don't wish any ill to any other retailer on the High Street. We are all having a hard time and we all need to do whatever we can to make ourselves the customers' first choice destination on the products that we sell. I am not going to wish ill to anybody on the High Street.
Elder Scrolls V: Skyrim was Xmas No.1. Is it fair to say that that we because of GAME and your price cut?
Fundamentally Elder Scrolls got to No.1 because it is an incredibly good game. It is however a very good example. We had planned the launch and the Christmas campaign for Elder Scrolls with Bethesda for a very long time before the game even came out. It was a very close partnership over months and months. What we certainly did do was execute a number of stages of our marketing campaign with that game with very close partnership with the publisher. We were delighted with its success and delighted to have played a small part in it. Fundamentally it all comes down to the quality of the game. But the fact that we were able to play a role in that, and the evidence of the role we played is that we took very, very high market share on that title. We were very pleased.
Do you have this high-level of partnership with all the publishers? Or are you looking for a bit more from them? Do you need more to start behaving like Bethesda?
No. Elder Scrolls was a hallmark of how we work. We are a specialist retailer so we know and love the video games industry, and we know and work very closely with everybody in it. When you look at what we have done over 2011, and this is not an interview in which to sound triumphant, we've had a bad year financially. but if you look at the good year that we had from our market share point-of-view, with a whole array of really well executed midnight openings, with a whole array of promotions on games, exclusive content and variants of games, the co-operative marketing we have done with publishers from all across the industry. That is testament to the fact that we take our relationships with our partners in the industry very seriously. Without them we are nothing. And without us I think the video games industry would be a very different and much smaller place. We support each other and we have done a very good job of it over the last year.
Midnight openings is a sign of how buoyant the games industry is in many ways. You don't get that excitement in DVD or music.
That is a big part of what we do and it is a good example. You don't do those sort of things unless you are working in very close partnership with the publishers and developers. Right down to working level, the relationship between the publishers' field teams and the guys in our stores is a very close and a very positive one. We are absolutely integrated into the video games industry and we want to stay that way.
One analyst [Philip Dorgan of Panmure Gordon] seems to think that it is online retailers and supermarkets that will benefit the most from a new hardware launch. Is that correct?
I think that defies any reading of video games industry history. When new consoles and hardware comes to market, customers want to hear about them early, they want to preview them, they want to hold them and touch them, they want to talk about them, often they want to put pre-orders down on them, and they want to bring back their old ones and trade them in. All of that lends itself to the model of the specialist retailer. So historically we have always done extremely well when innovation has come to market and I expect to do the same when innovation comes to market this year and beyond.