Game Group's play for rival Gamestation pays off with £74m deal

Game Group hopes to capitalise on the booming video games market after snapping up its main high-street rival Gamestation in a £74m deal.

The video games market has proved to be one of the few bright spots for high-street retailers selling entertainment products, with sales of CDs, DVDs and books under severe pressure from online competitors. In contrast, demand for video games has received a significant boost from the launch of new gaming consoles from Sony, Microsoft and Nintendo over the past year, with sales in the UK rapidly heading toward the £3bn mark.

Game said the acquisition of Gamestation had not been driven by pressure to consolidate due to tough market conditions but instead by its growth plans. While a number of CD and DVD retailers have recently shut down, Game does not plan to close outlets and expects to add around 500 staff by opening 15 more stores this year. It has purchased the chain from Blockbuster, the DVD rental company, which is realigning its business model to deal with pressure from online competitors such as LoveFilm.

Game has around 400 stores in the UK and 400 internationally. The acquisition of Gamestation, which will be maintained as an independent brand, adds a further 217 outlets to its stable. Lisa Morgan, the chief executive of the company, said: "This is definitely a story about growth." She said that while Game's stores are designed to appeal to mainstream gaming customers, the "edgier" Gamestation outlets appeal to "hard-core gamers", so the two brands will fit together well.

Gamestation also has a much stronger used-game business than Game. Ms Morgan said the pre-owned game trading system helped to offset pricing pressure from online retailers. "These customers use old games as currency that enables them to get the best value on the high street," she said.

Game Group has acquired a number of new companies over the past year as it looks to take advantage of increasing demand for games and game consoles. It is also the third largest online retailer behind Play.com and Amazon. Over the past year, its sales jumped 24 per cent to £801m, while pre-tax profit more than quadrupled to nearly £30m.

The video games market is very cyclical with the games sales dependent on the volume of consoles sold. In the early part of this decade, Sony's PlayStation 2 dominated the console market and game prices soon declined as customers grew tired of paying £40 for a game that they might not like. Meanwhile, the game development market consolidated rapidly as independent producers struggled to keep up with volume-driven giants such as Electronic Arts.

Yet the release of Microsoft's Xbox 360 console in December 2005 and the launch of Nintendo Wii and Sony's PlayStation 3 over the past six months has reinvigorated the games market. The success of portable games devices, including Nintendo's DS and Sony's PSP, has also revived sales, while the burgeoning market for mobile games has benefited games developers.

Paul Jackson, an analyst with Forrester Research, expects the current cycle to peak in 2008 as more top-end consoles are sold before "a graceful decline in profitability into 2010". He said the new range of consoles had helped drive up prices but the challenge for companies like Game Group was dealing with a potential structural shift in the industry.