Why category leading brick and mortar retailers are likely the biggest long term Covid beneficiaries.

Gavin Baker, in the must read text linked above explains why the future is omnichannel. Here's a quote:

The future was always going to be omnichannel. Pundits have been prematurely predicting this for many years, but it is finally happening. There is a strange belief in certain circles that the future will be e-commerce only and that brick and mortar stores have no value. This is strange because the worlds largest, most sophisticated e-commerce companies are all opening stores. Lots of stores. Amazon opened dozens of “Amazon Go” stores in 2019 and is reportedly planning on opening up to 3000 of these stores by 2021 in the United States alone. Amazon already has multiple store formats in the United States: Go, Whole Foods, Book Stores and others. In his 2017 letter to shareholders, Jack Ma wrote that “Commerce as we know it is changing in front of our eyes. ‘E-commerce’ is rapidly evolving into ‘New Retail.’ The boundary between offline and online commerce disappears as we focus on fulfilling the personalized needs of each customer.” Alibaba is rapidly opening several different store formats throughout China. JD is also rapidly opening stores. Wayfair has stores. Led by Warby Parker, most DTC branded startups have stores.

Here, I'll try to give some glances for what that means for GameStop.

People will buy more games online

In spite I believe that physical copies of games will never go away (remember that chaos when Microsoft proposed that in 2013?), I buy that more people will buy their games online.

So what?

Didn't you ever entered a bookstore just to buy an e-book from Amazon? Increasingly, game stores will be showroom places.

And companies will be willing to spend money just as Microsoft as a kind of marketing expense. Companies like Microsoft, Sony, Eletronic Arts, etc don't want to have brick and mortar stores at their balance sheets. In fact, it would destroy their Return on invested capital. But it doesn't mean that it can't be profitable.

As a comparison, Chinese cloud providers and tech giants such as Alibaba, Tencent and Baidu rent their datacenters from a company named GDS. GDS is a high growing busines (you should take a look at this stock too). Does it mean that Alibaba is being stupid for not doing it inhouse? No. It does only mean that Alibaba has more profitable ways to invest its capital.

E-commerce won't eat the world. Omnichannel will. And it will be the category leaders who will eat the market.

If e-commerce only strategies were too good, Amazon largest acquisition wouldn't be Whole Foods, a supermarket.

Bezos knows that a brick and mortar experience is important. Amazon is opening physical stores.

Buy online, pickup in store is something that GameStop have been doing for a while. Their e-commerce is now 20% of revenue. And the management is only talking about omnichannel experiences. They know the things I am telling you. And they are doing it.

Vendors know how important is to have real people at stores talking about your products. Your product at a shelf is a kind of marketing! People are seeing your products. People even trying your products! Even though they happen to buy it online.

Microsoft's deal is just a glance at this future.

Of course, it won't be just a revenue share that will sustain the companies. But omnichannel will.

Don't forget to read the article above.

All of these dynamics advantage category leading brick and mortar retailers for the simple reason that it requires a significant amount of technology infrastructure to manage an omnichannel experience — i.e. in store returns have complex impacts on the tax nexus. New customers who have formed new habits and repeated multiple times combined with structural semi-permanent advantages from increased online scale and BOPIS are why I am reasonably confident that these e-commerce gains will not be transitory.

Beyond acquiring millions of new customers, seeing their e-commerce business reach levels in 2020 that most brick and mortar retailers likely did not expect until 2025–2030, experiencing profoundly positive cultural shifts and aggressively resourcing e-commerce for the first time, these brick and mortar retailers will face a significantly less intense competitive environment when consumers do begin shopping online again. Generally speaking, their weakest, most leveraged, most discounting prone competitors have gone bankrupt during Covid. So in addition to a structurally improved e-commerce business that should persist post Covid they will have a stronger offline competitive position post Covid.

Disclosure: I am long at GME.