How GameStop Rollovers Competitors during the Holiday in Sales

There are dark days ahead for video game retailers. Wal-Mart’s holiday sales fell short of expectations, but at least they hung on to post a 1.6% gain on last year’s December numbers. Best Buy watched its Entertainment Software (including our pride and joy, video games) sales decline by 12.2%. With the worst holiday shopping season since 1970 behind us, how did GameStop, the world’s largest video game and entertainment software retailer, manage a 22.3% increase over last year’s sales?

That’s not a typo; not 2.2% or 2.3%. 22.3 friggin’ percent! Over the 9 week Holiday Period that began in November and ended the first week of January, GameStop raked in nearly $2.9 Billion, roughly half a billion more than during 2007’s Holiday Season. Is this because video games really are recession proof? Or does GameStop have the Master Chief on its payroll, tasking him with clandestine missions to sabotage Wal-Mart, Best Buy, and other competitors with finely placed plasma grenades?

GameStop CEO Daniel DeMatteo explained the smashing success as “A clear indication that the GameStop model works everywhere.” But what is the GameStop model, and how is one chain so ridiculously successful? Following are just some of the reasons for GameStop’s success.

Used Video Game Product Sales
This is GameStop’s unique feature, meriting a separate mention on their 2008 Holiday Sales report. Best Buy, Wal-Mart, and other primary competitors don’t have anything like GameStop’s vigorous trade-in programs. They provide an avenue to trade in old games and consoles for credit towards buying other titles and consoles. GameStop then refurbishes the products and sells them back to consumers at prices below that of brand-spanking-new consoles or games, but significantly higher than what GameStop paid to buy them back. And more often than not, what does the aspiring individual who traded in a few old games or a console do? Take that credit and spend it on new games, consoles, and preorders.

Once praised before GameStop became so dominant, this practice now draws flak from publishers and gamers alike. For publishers the reason is simple: they don’t receive any of the profits that GameStop sees off of the used game resale. This article sums up the publisher bone of contention nicely: a publisher still owns the game when you buy it; you’re just paying them for the license to play it. Naturally, game publishers want a piece of this buyback pie.

For gamers, this is a double edged sword. On one hand, GameStop completely rips the seller off. A good game is a good game, but if you paid $60 for it new three months ago, you can expect to get $20 or less for it and then watch as GameStop slaps a “Used” label on the cover and sells it for $30 to $50 and a clear profit. On the other hand, if a game is sitting on your shelf collecting dust, why not turn it into a few bucks towards a newer game in cash-strapped times? It’s not as if your library will miss Madden 2008 all that much.

$543.2 million of GameStop’s 2008 holiday dollars were generated from these practices. That’s a half a billion holiday dollars that Best Buy and Wal-Mart will never see.

GameStop’s Recognition of Video Games’ Holiday Nature
Nowadays, a game console is the gift for the holidays; that one time children can convince their parents to plunk down $200-$300 for a game console. The model train, once a technological Christmas marvel, has been replaced by the video game system since the 80s. With the advance of “Casual gaming,” that isn’t likely to change.

When I reflect back on my youth, it seems all of my major console gifts were of the Christmas variety, except for the Nintendo 64 and GameCube I bought myself (proof that Santa selects better console purchases than I do?). My dream PC was always priced too high to beg for as a holiday treat, but this isn’t the case with the comparatively cheaper consoles.

GameStop benefits the most from this holiday situation because they’re the most visible, and they take lengths to keep it this way with aggressive holiday ad campaigns reminding consumers that they exist. The 2007 ad below nicely sums up GameStop’s holiday conquest plan regardless of year.

Warning: Annoyingly Squeaky Voice Ahead

Direct Competition (Or lack thereof)
Few retailers can match GameStop’s ferocity in its niche. In the past, Electronics Boutique/EBGames was a direct competitor, employing similar buyback practices. They merged with GameStop Corp. in 2005, helping to give them over 6,000 stores world-wide.

Wal-Mart and Best Buy are too involved with other sales to devote time and energy to used game sales and systems that GameStop does. As GameStop VP Tony Bartel explains in an interview with GameSpot, “…there are huge barriers of entry to get into that market.” A new competitor would have to match GameStop’s ability to move used games where they’ll get sold, refurbish old consoles, and the like. These are huge business challenges for the uninitiated, ones that require a hefty financial investment to get started and blow up big time if they fail.

From a financial standpoint, the only company with the sheer monetary power to challenge GameStop is Wal-Mart, but GameStop’s domination and Wal-Mart’s broad retail market make this unlikely. Unless Wal-Mart were to operate a wholesale video game chain of their own, essentially a Sam’s Club type of retailer experience for gamers that would be able to offer games significantly cheaper, they aren’t likely to knock GameStop off this pedestal. It’s not as if Wal-Mart didn’t try to steal some of GameStop’s fire this season with the occasional exclusive, but this clearly hasn’t made much of a dent in GameStop’s profits.

Market Sensitivity
On December 2008, for the first time in my life, I was carded for an “M” rated video game, in this case Ninja Gaiden II. The guy took the time to card me despite the fact there were about thirty people crammed into one tiny GameStop store. Aside from the colossal ego-boost of being 25-years old and getting carded, (two full decades of game playing clearly hasn’t irradiated my face to the point where I look like a 40-year old) the incident showed me that GameStop was willing to police itself.

Essentially, GameStop is displaying the foresight necessary to head off potential Public Relations nightmares. When violent video games are inevitably slammed again as a corrupting force for minors, this practice protects GameStop from some of the criticism. At the same time it permits them to carry more mature titles that Wal-Mart can’t go out of their way to promote, giving GameStop another unique product that forces gamers into their stores.

Accessibility

Gosh gee-willickers, there are a lot of GameStop’s around. You can have a lot of fun playing with GameStop’s store locator and seeing where there isn’t a GameStop Corp. owned store. Ten years ago I knew of one GameStop within my own neck of the woods, located in the only mall for miles around. Today there are four that are a fifteen-minute drive or less away. The only place that stymied my store-finding efforts was Moscow, Idaho. Oh well. At least they have the Kibbie Dome.

Community

Perhaps because they’re strictly oriented in video games, unlike their primary competitors, GameStop creates a gamer culture with launch parties, tournaments, and the like. These events are also prime opportunities to market.

An example of this kind of market is the PC games market. GameStop still merits a fair chunk of profit from new PC games sales, what with the PC being the ever changing video game platform that nonetheless remains the same. However, you can’t sell a used PC Game and this is why for GameStop the PC Market is on the sidelines.

They still reached out to that market in a big way during the nine-week holiday period by participating in the World of Warcraft: Wrath of the Lich King launch parties. As the WoW site shows, this practice wasn’t unique to GameStop, and yet… GameStop’s vaunted accessibility rears its head again. Quick quiz: which retailer had the most locations with developers on hand to sign copies?

The Bottom Line
I could go on because I’ve barely scratched the surface, but in the interest of sparing those of you patient enough to read this far, the bottom line is GameStop has a good thing going on and they know it.

While not all their business practices are on the side of the angels, when something gets out that could be damaging to GameStop, their executives are quick to jump to their own defense.

With more and more highly-touted games coming out and consumers completing or growing dissatisfied with their old titles and at best, going to GameStop to trade them in for new titles, at worse, still taking their hard-earned dollars to GameStop to buy their new titles, it’s almost impossible for GameStop not to post gains each year.

The only things that could derail GameStop at this point in time is if people flat out stop buying console video games, or Digital Distribution grows to the point where it outstrips retail, making physical copies of games a thing of the past. Digital Distribution is already encroaching on the PC Market, but this is only a side market for GameStop; the big bucks roll in from what they can sell and buy back, the big three of Microsoft, Nintendo, and Sony. If these companies ever develop consoles that rely exclusively on Digital Distribution, GameStop could find itself in trouble, but that’s off in the future.

Now, if you’ll excuse me, I’m off to blister my fingers with some Ninja Gaiden II. The tear that rolls down my cheek will be for the guy who paid $60 for this game and probably got $10 in return, while GameStop made a $15 profit off of my $25 lust for ninja blood.