Wal-Mart Poses Major Threat to GameStop’s Way of Life

Source: http://www.flickr.com/photos/nyctrip/

Source: http://www.flickr.com/photos/nyctrip/

GameStop (NYSE:GME) just can’t seem to get a break. Threats have been mounting for the video game retailer. It dodged a bullet last year, but now it has to contend with the largest retailer in the world. This may not be a fight in which Gamestop has allies coming to its side to help.

Wal-Mart (NYSE:WMT) has announced that it will be getting into the used video game business. The retailer will allow trade-ins of old video games and offer gift cards for customers to spend in Wal-Mart or Sam’s Club location, including online, reports Forbes. A company the size of Wal-Mart could pose a great threat to the much smaller GameStop. The game retailer stands to lose over half a billion dollars in revenue if Wal-Mart can steal its business.

Last year, GameStop faced another threat to its used video game business as both Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) had plans to restrict the usage of used games on their new gaming consoles, the Xbox One and PlayStation 4, respectively. GameStop would still have been able to operate its used game business for older platforms, but the future would look a whole lot darker. Fortunately for GameStop, both console manufacturers faced a lot of pressure from the gaming world, as the restrictions that would have been imposed on gamers lead to quite a lot of backlash.

The challenge from Wal-Mart will be quite a different story for GameStop, since the company will be targeting the same segments and be doing so with all the extra might allowed by the size of the company. With Wal-Mart’s bigger pocket book, it has a bit more wiggle room in what it can reasonably offer customers for used games. On top of that, it can appeal to customers that want to trade in their games for something other than games, as a customer could easily trade in a video game to buy a few boxes of cookies instead of a new game.

Interestingly enough, this isn’t Wal-Mart’s first time trying to get into the used video game business. According to Forbes, the company tried to use kiosks where customers could trade in used game, but the system didn’t end up working out so well. Of course, Wal-Mart had many millions of reasons to try again.

GameStop reported that its sales of pre-owned games in the holiday season last year totaled $567 million and accounted for 18 percent of the company’s sales during the period. That’s only a portion of the market — Wal-Mart U.S. chief mechandising and marketing officer Duncan Mac Naughton sees a the market as a “$2 billion pre-owned video game opportunity,” reports Forbes. With that much at stake, it’s no wonder Wal-Mart isn’t giving up.

It becomes even easier to understand why Wal-Mart is after this market after taking a look at the margins. A report from Los Angeles Times cited data showing that the average margin for a retailer on a $60 new video game was $15, or 25 percent. In contrast, when GameStop reported discussed the holiday season, it noted that the gross margins for used games were just shy of 50 percent, reports Forbes.

Things already weren’t looking good for GameStop, which saw its shares drop from over $55 in November to below $40 early in 2014, where it has remained. Between Monday and Tuesday, GameStop’s shares dropped over $1.50. Though shares slowed moved back up over the course of Tuesday, it was still 3.42 percent below the previous close near the end of the day.

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