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Retail

Passed Around

Fri 30 Apr 2010 8:00am GMT / 4:00am EDT / 1:00am PDT
BusinessRetail

Publishers hate the second hand market - but it may be the only thing that's propping up high street games retailers.

Best Buy

With operations in the United States, Canada, Europe, China and Mexico, Best Buy is a multinational retailer...

bestbuy.com

More than a few eyebrows are likely to be raised at the enthusiasm with which US retail giant Best Buy appears to be plunging into the UK games retail market, with the company keen to place games at the heart of its offering as it opens its first stores over here. The timing couldn't be more peculiar; after easily a decade of speculation about when America's major chains would finally begin to exploit the opportunities on these shores, Best Buy is turning up to plant its flag after a torrid couple of years which many commentators see as proof of an irreversible decline in high street retail.

It's tough to disagree with that assessment. Specialist retailers in the UK have been squeezed from all sides in recent months. The core gaming audience, more tech-savvy than other market segments, have flocked in increasing number to online stores like Amazon and Play.com. The casual audience attracted by the Wii is more likely to shop at a mainstream retail outlet such as catalogue retailer Argos than to walk into a specialist store. Even the launch of what should have been a pillar of strength for specialist retail last Christmas, in the form of Modern Warfare 2, was a bitter pill, with supermarket chains muscling in and discounting heavily - resulting in queues of gamers forming outside Tesco and Sainsbury supermarkets, rather than outside specialist stores.

To cap it all off, sales of boxed games have levelled off and are even declining in some quarters. Publicly, publishers and retailers alike dismiss this as a symptom of recession; privately, many worry that the recession has masked a more fundamental shift in consumer behaviour, which would mean that the meteoric growth in boxed sales seen over the past two decades will not return when the economy recovers. Instead, gamers' money and, more importantly, their time, is being absorbed by new platforms with new business models - business models which don't feature retail anywhere on the value chain.

In the face of such odds, the UK's own specialist retail behemoth, GAME, has been forced to start closing down stores and has lost its long-serving CEO. In part, the store closures are logical - aggressive acquisitions and expansions have left GAME in the odd position of having multiple stores in many UK town centres. It's still a stark reminder of how things have changed - less than a decade ago, GAME was easily the most powerful company in the UK industry, capable of dictating its own terms to publishers and holding the success or failure of even high-budget titles in its hands.

What, then, possesses Best Buy to throw its lot into this market - a sector where even the market leader is being forced to downsize?

There are two key reasons. The first, of course, is the corporate drive for expansion, driven by the stock market; corporations cannot stay still, but must instead deliver growth on a quarter by quarter, year by year basis. If that means expanding into a market as unappealing as games retail in the UK, then so be it - however illogical that may seem on the surface.

The second reason is revealed fairly clearly by Best Buy's statements this week. It doesn't just want a slice of the UK games market - which, of course, the company would percieve simply as part of a wider home entertainment offering. It also wants a slice of the second hand games market.

If high street retail of games is facing tough times, then the sliver lining - from the point of view of the retailers, at least - is the second hand games business. The pre-owned market is booming, delivering huge turnover - every penny of which is profit. Pre-owned games have become more and more prominent in specialist stores, and even non-specialists are getting in on the act. That's unsurprising; many customers admit to treating pre-owned games as a glorified rental service, which means that the same game can pass through a retailer's shelves many times, making an order of magnitude more profit for the store as a second-hand title than it did when it was sold brand new.

Unsurprisingly, games publishers aren't terribly happy with the situation. Several have tried to cut down on the second-hand market through tactics such as EA's well-known "Project Ten Dollar"; others have simply been outspoken in their denunciation, some even arguing that the second-hand market is more damaging and insidious than piracy itself.

Consumers tend to react badly to attacks on the second-hand market, and quite rightly so. It's called different things in different countries, but the concept of "right of first sale" is enshrined in the law of many nations, and in the mentality of every consumer. If you buy something, it's yours, and you're entitled to sell it on if you choose to do so. Attacks on the preowned market are seen as attacks on a basic consumer right - and to some extent, of course, that's exactly what they are.

On the other hand, many savvy consumers are also equally unhappy with the actions of retail chains in this regard. Stores such as GAME and its ilk are arguably abusing the concept of "right of first sale"; rather than creating a free market for second hand goods, they create an artificial system in which they cream off a huge profit from each game re-sold, and often undermine brand new sales by placing second-hand copies (which have higher margins for the retailer) next to them for only two or three pounds less. It's an entirely legal practice, but a morally dubious one.

The distinction is important. Few in the publishing or development industries have a problem with, for example, the existence of Amazon's Marketplace, or Play.com's PlayTrade, or with eBay itself. Customers selling their games directly to other customers is a healthy expression of a free, self-regulating second hand market - and while each of those companies takes a small fee from each transaction, the actual prices are set by the buyers and sellers themselves. Not so with pre-owned systems at high street retailers, where the retailer simply sets a price that undercuts the brand new copy while keeping as large a margin as they possibly can - and, of course, giving the customer who sold them the pre-owned game as little money as they can get away with.

That's capitalism, of course, and the reality is that if customers wanted to break out of that cycle, they should start selling on eBay, or on Amazon Marketplace, or on another equivalent service. Publishers, meanwhile, will be sighing loudly as Best Buy becomes the latest retailer to trumpet such a second hand service from the rooftops - although whether they'll ever develop the backbone required to start actually punishing so-called business "partners" who treat them in this way is another question entirely, of course.

It may not even be the most relevant question, however. Reading Best Buy's pronouncements, in the wake of GAME's tough results and announced closures, gave me pause to wonder - just how many GAME stores would be left in the UK if publisher pressure actually forced them to shut down the second-hand business, or simply start running it less abusively? Would Best Buy even bother making games into a serious part of their offering, if they couldn't profiteer from second hand sales? Would HMV?

It's hard to say - but this, I suspect, is the sword which game publishers feel hanging over their heads whenever the topic of second hand sales is raised. They hate it, of course - but it's not the power of high street retail that forces them to tolerate it. On the contrary - it's the weakness of those retail chains, their commitment to games propped up mostly upon pre-owned profits, that stays the hand of the publishers. Is the games business better off as it is now, with major chains like GAME and HMV selling pre-owned games; or would it prefer for those chains to be vastly diminished, games relegated to a dusty corner of HMV and GAME itself relegated to a dusty corner of the shopping centre, but selling only brand new games? Right now, the former is the lesser of two evils - but the fact that any such choice is having to be made at all is another nail in the coffin of high street retail, because one day, the balance won't be quite so clear.

5 Comments

Kingman Cheng Illustrator and Animator

956 185 0.2
My eyebrows are included in that.

They just want to dip their fingers into more pies really.
I remember the days when there used to be loads of those 2nd hand games shops which have been dying over the years. The way Game treats second hand games is a joke really. I'm sure I can buy titles new and unopened from Amazon often cheaper if not just as cheap as the 2nd hand copies in Game. At this rate Game are just going to continue to slide.

Edited 1 times. Last edit by Kingman Cheng on 30th April 2010 12:58pm

Posted:4 years ago

#1

Tony Johns

520 12 0.0
I remember when I had to buy a game, I had to buy it within a few months or else it was gone or at least in the few years it was on the shelf, and no matter if it was a month old or 3 years old, it was mostly the same price of over $90 in Australia.

I seriously don't want to go back to those days where I had to save really REALLY hard for games that I wanted and hardly had any more money for other things in life except for food and water to keep me healthy.

School costs were tough too, but then again I was lucky to be working for my family during those teenage years back 5 to 10 years ago.

It is better now than it was back then, and the industry has bennifited from new players and new buyers because the pre-owned games business has attracted people who may not have had the money to buy the newest games but they are willing to see what is there because they can afford the cheeper ones that have been out for some time.

I still buy the games I want as soon as they are on sale, because that way I am supporting the companies that have worked hard, but there is alwaus times when I am short on cash and I wait for a game that I was not sure about to be cheeper before I buy it too.

Posted:4 years ago

#2

Tony Johns

520 12 0.0
I have also had my share of trading in games that I didn't want anymore and sometimes felt that I had been ripped off sometimes selling around 10 games only to get $150 or $200 Australian Dollars back... just enough to buy a used PSP...and also a new game I would have wanted.

So yeah, used games is not really a smart way of saving money by selling your old stuff, the only winner is the retailer.

Selling things on amazon.com is better as you can charge your own price for it. But then this comes with people selling games that are over 10 years old but because of the rarity like those early 90's games that came on the SEGA CD that cost over $200 or $500 can be really REALLY steep...

Posted:4 years ago

#3

Tommy Thompson Studying Artificial Intelligence (PhD), University of Strathclyde

110 0 0.0
Another great article, thanks Rob!

This article summarises why I have refused to purchase games from high street retailers for many a year. Retailers such as GAME have often exploited the less-savvy consumers to increase their profit margins. By continuing to sale games at ridiculous prices, and often with the second hand copy right beside it literally 2-3 less. Even their 'sales' are often a joke.

Retailers such as Play.com, Shopto.net and Amazon provide games at reasonable prices and their sales are always miles better than anything a high-street retailer can offer. I discovered some time ago that the best option is simply to sell games on eBay and use that money to buy new games online. Sometimes you don't get much for what you sell, and other times you can even make a tidy profit, provided you bought the game from a good online retailer in the first place. In either case, you will probably make more money than you would trading the game into the nearest GAME or Gamestation.

I personally enjoy watching these retailers struggle to maintain their business given their continued exploitation of the developer/publisher and the consumer. I personally have not bought a game from GAME/HMV/Gamestation since I got back into gaming around four years ago. Yet I can say I bought many a game (either new or second hand) on eBay, Play and even in supermarkets thanks to their aggressive price cuts.

Sadly their second-hand market thrives due to many a consumer being either ill-informed or, perhaps more appropriately, too lazy to sell the game on themselves. Leading to many second hand copies of 'Big Title X' sitting on a shelf begging the next bewildered consumer to buy the slightly cheaper one and boost their profits.

Posted:4 years ago

#4

Nicholas Lovell Founder, Gamesbrief

210 254 1.2
Oh Rob, you've got lazy in your old age:
"The pre-owned market is booming, delivering huge turnover - every penny of which is profit."

Pure, arrant nonsense.

The GROSS PROFIT on a second hand game is the difference between the retail price and the price paid to the consumer for the game in the first place. I grant you that is a very big margin, but it's not "every penny".

The OPERATING PROFIT comes after all the fixed costs: staff, premises, lighting, the Christmas party. Running a shop is expensive irrespective of whether you sell anything or not.

GAME's accounts say that the pre-owned GROSS MARGIN is 41% (I imagine they factor in handling costs as well as the amount they pay their customers); the gross margin on new hardware and software is 23.9%.

I think that it is disingenuous to combine new hardware with new software but it would be more accurate to say "41p out of every pound is pure profit".

"Every penny" is just plain wrong.

Posted:4 years ago

#5

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