Comment: How WHSmith and Game are entertaining the high street

Amazon’s slick and efficient distribution service has already enabled it to make huge inroads into the entertainment markets once dominated by high street retailers like WH Smith, Game, HMV and Woolworths. And the new same-day pick-up service available with local newsagents and convenience stores will now make Amazon an even more powerful competitor.

But although the pressures from online rivals like Amazon put paid to Woolworths some time ago, of course, HMV has come back well from the dead and today has brought a reminder, via their final results, that both WH Smith and Game (now known as Game Digital) are also in good health.

WH Smith and Game have both reported strong profits and cash flow generation over the last 12 months. How have they done it and why are they confident about the future?

Books are still an important product category for WH Smith, although sales continue to fall, with LFL sales down by 7% overall in y/e August in what is clearly still a challenging market. But WH Smith haven’t given up on books and they continue to efficiently manage space, maximise gross margin and shake out what operating costs they can from the supply chain.

The kids book market has been much more resilient, partly thanks to the “Minecraft” series, so kids books have been given more space and in total they will account for 40% of WH Smith’s book sales this year. Children’s books are now a bigger business than fiction books, where WH Smith remain at the mercy of the publishing schedule.

But WH Smith continue to give more High Street space to the high-margin Stationery category, which saw 1% LFL sales growth in the last 6 months, and one sub-sector has received even more attention, namely greeting cards.

WH Smith announced today that a new store concept called “cardmarket” is to be trialled in cheap secondary locations, with 20 shops due to open before Christmas in such towns as Swindon, Slough, Watford and Gloucester. The success of Card Factory has shown that the discount card market is attractive, so WH Smith should be able to carve out a slice of this pie for itself. 

Active space management is also the watchword in the Travel Division of WH Smith, where Amazon is not a competitive threat…Travel LFL sales are now edging forward, thanks to improved passenger traffic at London airports and the success of the new “Food to Go” areas. And WH Smith has also pushed into profitable new categories like Travel Accessories and Souvenirs, as well as rolling its model out into International markets like Australia and India.

So if WH Smith’s hard working management team are having plenty of success in growing overall profits and developing new business ideas, despite sluggish sales and the incursion of Amazon, what of Game Digital?

The games market has seen a remarkable revival over the last 12 months, thanks to the launch of the new Xbox and Playstation consoles, and, as the leading games specialist, Game has taken full advantage, with sales growing by 31% in y/e July, pushing its UK market share up to 33%.

The watchword at Game is community and it has been very successful at attracting serious gamers with its exclusive deals, store launch events and loyalty card event.  “Hard-core” gamers probably wouldn’t be seen dead buying a game at Tesco (or Amazon), but Game has made it very easy for them to buy digital content and physical product, via their unique eWallet product and personalised pricing apps.   

At a time when the world is wondering how well Tesco is using its Clubcard customer spending data, Game is gaining valuable insights into its core customers through its new Digital services and Reward card data, which it is able to share profitably with suppliers.

And the lucrative pre-owned or secondhand games business has been enhanced in the UK with the new GameTronics service to recycle old tablets and smartphones.

WH Smith has not yet identified a standout new book for customers this Christmas, but Game have a very healthy pipeline of new game releases coming up from established franchises like “Call of Duty”, “Assassins’ Creed”, “Far Cry” and “Grand Theft Auto” and the release schedule looks pretty healthy for early 2015 as well.

So Game is quite entitled to feel confident about its prospects for Christmas, despite the threat from Amazon, and its IPO back in June was an unexpected success, with the shares now over 40% up on the float price.

And though WH Smith is not operating in such a “hot market” as Game, their track record of generating cash is exemplary and they will be around entertaining shareholders for many years to come.

• Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank