GameStop Corp. (GME) shares fell hard last week following Best Buy (BBY) plans for a new video game trade-in policy at their retail locations. It’s not strange that GME stock shareholders are anxious over the Best Buy announcement; used videogame sales account for around 20% of GameStop’s annual revenue, around $2 billion in total sales. Considering that GameStop dominates the used game sales market, encroachment from a competitor with retail reach like Best Buy is cause for concern indeed.
Or maybe not. As Lazard Capital Markets analyst Colin Sebastian said last week, Best Buy’s new initiative “is likely to expand the market for used games, rather than cannibalize the core gamer niche currently dominated by GameStop.” And with one of the lowest PE ratios on Wall Street right now, GME stock doesn’t look like it’s going to fold anytime soon.
Interest in the used games sales business has been increasing steadily over the past three years. This isn’t the first time that Best Buy has flirted with used game retail. In 2009, the big box retailer began testing used game sales programs at stores in Dallas and Austin, as well as a program to GameStop’s used game prices at other locations. Wal-Mart Stores Inc. (WMT) used the same test program, called E-Play, last year before calling it quits in February 2010. As of May, Wal-Mart announced a new partnership with Game Trade to get back into used game sales. Target (TGT) tested online used game sales back in 2007, a program similar to the one launched by Amazon (AMZN) in March 2009 that allows customers to mail-in their used products for new ones and store credit.
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Of the nearly $15 billion spent on videogame software and hardware in 2009, and estimated $4.75 billion came from non-retail sales, including digital downloads, rentals, and dowloadable content. The majority of that $4.75 billion comes from used game sales however. Interest in competing with GameStop for a full third of the game market’s revenues is a no brainer, but Wal-Mart, Best Buy, Amazon and anyone else looking to enter the space is bound to face an uphill battle. It’s by no means because of consumer loyalty to GameStop however. GameStop enjoys dominance in the used games market almost purely thanks to it physical retail presence. GameStop spaces are small and spread out, often with multiple locations in small shopping districts close to residential neighborhoods across the United States. With the majority of their space devoted to used product, and literally all of their space devoted specifically to gaming products, they offer consumers a directed shopping experience that Best Buy and Wal-mart can’t hope to match without opening entirely new retail outlets, unthinkable for premiere big box chains.
Best Buy would do well to consider the fate of GameCrazy before launching their new program. Movie Gallery Inc. tried to build their used game chain by affixing them to their Hollywood Video locations. The Movie Gallery bankruptcy was caused chiefly by the death of boxed film rentals, but GameCrazy was a failure long before that, due to consumer confusion and indifference.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
