Amazon and Toys R Us Can't Beat GameStop At Its Own (Used) Game
Before we get to my seven “highly effective” points on why these new entries into the used game market are not a threat to GameStop, let me first point out that this is not meant to be an article praising GameStop for being a perfect retailer. We all know one doesn’t exist. This article instead is meant to show how difficult it is for companies to actually challenge GameStop in this market and why I do not think Amazon and Toys R Us are up to the task. This is also not meant to condemn Amazon and Toys R Us for trying, as we all know that competition is good for the consumer. And, quite frankly, I shop at all three of these retailers frequently and actually own stock in two out of the three.
Used games are GameStop’s primary focus, accounting for approximately 49% of their total yearly profits. Their business is built from the ground up to be focused around the used game market. From day one, their employees are taught the cycle of used game sales.
With store layouts that really aren’t currently setup to handle used products, Toys R Us seems fated to struggle like so many of the past big box stores that have dabbled in used games. According to their 2004 yearly financial statement (the last year they were a publicly traded company), video game sales “tended to account for 10-20%” of their domestic toy sales. This percentage could have increased in the past few years with high sales of the Wii and DS, but it is clear that video games are not top priority for Geoffrey and friends.
Amazon is using a third-party vendor (NorAm International) to purchase the used games and Amazon is not selling used games directly. This doesn’t speak highly for the level of commitment Amazon is willing to put forth. Customers can of course still buy and sell used games through Amazon Marketplace, which poses direct competition to their new trade-in program.
Like many of the following bullet points, pricing ties in closely with commitment. Keeping trade-in values up-to-date with used game market conditions and pricing used games for sale is no simple undertaking. GameStop does an excellent job of maximizing profits by not offering too much for trade-ins and by reselling those used games at a competitive price. Additionally, GameStop often runs promotions that increase trade-in values, usually offering bonuses when trading in multiple titles and/or if store credit derived from trade-ins is put toward the purchase of a specific new release game.
For all intents and purposes, Toys R Us is a “Manufacturer’s Suggested Retail Price” type of store. They understand how to manage stock effectively and run attractive sales promotions, but this is a company based around sticking to manufacturer issued price drops. As such, they do not have the experience of a GameStop when it comes to determining prices for used products. This will likely lead to trade-in prices that are either too low or too high.
Amazon’s trade-in values are currently comparable on many titles, but the selection of games that are able to traded-in is limited when compared to GameStop. To truly compete with GameStop, Amazon must be willing to offer substantially better trade-in values and accept more titles. Since Amazon is using a third-party vendor, they will not have to deal with setting used game prices to obtain proper margins and stay competitive, but that also means that they will not be directly reaping the benefits of those profit margins.
GameStop is a destination for games. The average consumer knows GameStop as the place where you take your old games when you are ready to trade them in. Compared to the competition, GameStop has knowledgeable employees when it comes to games.
Toys R Us has a dedicated video game section, “R Zone”, but their employees are usually not as well informed as those working for GameStop. Toys R Us is by design, a toy store, which means they are not regularly visited by a substantial amount of the game-trading customer base. The 16-24 age demographic just aren’t drawn to Toys R Us.
Amazon would have to make a strong marketing push to grab the attention of the general public and give them a reason to trade their games online rather than just taking them to the local GameStop. That’s going to take a lot of time and a lot of customer incentives will be needed. Since Amazon is outsourcing this operation to a third party, it seems unlikely Amazon would foot the bill for a big marketing campaign.
With 6100 stores worldwide (over 4000 in the United States alone), GameStops are everywhere. They are in Wal-Mart strip malls, they are in actual malls, and they are across the street from other GameStops. They are the Starbucks of the gaming world.
Toys R Us and Babies R Us have 1500 stores worldwide including 850 stores in the United States.
With no local presence, Amazon is strictly an online store.
Ease of transaction
The instant gratification which arises from trading in old titles to a store and coming out with a new release is extremely important in the used game market. In addition, customers are given the option to receive cash for their games, although at a much lower value. GameStop accepts games in less than perfect condition (with scratches, without cases or manuals, etc.), which means most customers’ used games are not rejected. This means customers leave happy with their trade-in experience and GameStop has either sold them something or they will be returning to the store to use their store credit.
With approximately 1/5th the number of store locations in the United States, chances are that the majority of customers will be closer to a GameStop than a Toys R Us. Add in the fact that it’s not readily apparent whether customers should take the games to customer service or to the R-Zone, and there is potential confusion for a process that customers want to be quick and painless. Toys R Us must also now take the time to teach their employees how to take trade-ins.
Being online only, means the impulse trade-in is taken out of the equation. Customers who see a television commercial for a new release can't use Amazon's service to get that game in the same day. There is at least a week long waiting process involved that requires customers to package up their games, mail them to Amazon, wait for their accounts to be credited, purchase an item from Amazon, and then have that item delivered. In addition, customers’ games must be in good condition with the case and manual. One advantage is that customers can spend the Amazon credit on anything Amazon sells, not just video games.
Selling used games online via an online marketplace such as eBay, Half.com, Craiglist, or Amazon's own Marketplace will usually produce a greater return than a trade-in. Therefore, it seems Amazon's program will appeal to a very small audience; one that is savvy enough to deal with online trading, but doesn’t want to make a slightly larger effort to sell their games online for greater profit.
GameStop’s primary focus on used games means they have a huge selection of used games in stock at all times. This means consumers know that they can go to GameStop and pick up a used copy of a game for cheaper than a new copy of the game. They have the distribution methods in place to adjust stock between stores, so they are less likely to get stuck with an overstock of used titles at a single store. They also have one of the largest selections of new games.
Toys R Us will have an extremely sparse selection of used games to go along with an adequate selection of new games (although significantly less than GameStop). Couple this with the fact that Toys R Us is routinely a couple of days behind GameStop on stocking new releases.
Amazon has an amazing selection of both new and used games, but all the used games are sold by individuals or third-party merchants on Amazon Marketplace. Amazon is very aggressive with their pricing and offers free shipping, so as CAGs know there are plenty of deals to be had, but all of this was true regardless of whether or not Amazon accepted game trade-ins.
History & Conclusion
Toys R Us and Amazon are certainly not the first retailers to try and grab a piece of the used game market and they won’t be the last. GameStop has had competition in the past and still has competition to this day. Stores including Circuit City, Best Buy, Blockbuster, Game Crazy, FYE, Play-N-Trade, and Wherehouse have all tested the waters with little effect to GameStop’s used game profits. Toys R Us and Amazon aren’t positioned in ways that are significantly different than those who have already thrown their hats into the used game business ring.
So there it is, a pretty straightforward analysis of the factors stacked against GameStop competitors. Maybe in the future, a company will put forth the necessary resources and commitment to become an actual challenger to the used game throne, but until that time comes, GameStop is still king.