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Amazon and Toys R Us Can't Beat GameStop At Its Own (Used) Game

Posted by shipwreck, 10 March 2009 · 560 views

A lot of analysts have been weighing in on Amazon and Toys R Us entering the used game market and most seem to think that this will have a negative effect upon GameStop. I’m here to say, quite simply, “not a chance" or as GameStop CEO Dan DeMatteo eloquently told Edge, “I give the probability of this working at zero."

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.


Commitment

Posted Image 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.

Posted Image 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.

Posted Image 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.


Pricing

Posted Image 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.

Posted Image 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.

Posted Image 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.


Public Perception

Posted Image 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.

Posted Image 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.

Posted Image 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.


Location

Posted Image 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.

Posted Image Toys R Us and Babies R Us have 1500 stores worldwide including 850 stores in the United States.

Posted Image With no local presence, Amazon is strictly an online store.


Ease of transaction

Posted Image 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.

Posted Image 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.

Posted Image 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.


Selection

Posted Image 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.

Posted Image 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.

Posted Image 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.




A lot of analysts have been weighing in on Amazon and Toys R Us entering the used game market and most seem to think that this will have a negative effect upon GameStop. I’m here to say, quite simply, “not a chance" or as GameStop CEO Dan DeMatteo eloquently told Edge, “I give the probability of this working at zero."

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.


Commitment

Posted Image 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.

Posted Image 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.

Posted Image 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.


Pricing

Posted Image 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.

Posted Image 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.

Posted Image 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.


Public Perception

Posted Image 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.

Posted Image 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.

Posted Image 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.


Location

Posted Image 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.

Posted Image Toys R Us and Babies R Us have 1500 stores worldwide including 850 stores in the United States.

Posted Image With no local presence, Amazon is strictly an online store.


Ease of transaction

Posted Image 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.

Posted Image 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.

Posted Image 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.


Selection

Posted Image 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.

Posted Image 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.

Posted Image 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.
Nice job, Shippy! I'm in complete agreement and am totally onboard...get it?
wow. very nice read. You make some excellent points.
Agree...
Also i don't know if you've noticed but Toys R us depends on sales of games rate 3+ or E and at toys R us its more like i saw the game and picked it up therefore you are not going there to purchase a game, whereas at gamestop you are going there because you want to pick up a game. So really Toys R Us has no chance but i still think amazon could pull it off provided they put a section on their website which only deals with used game deals.
I think another thing going against Amazon is this... If I'm going to go to the trouble of shipping out a game someplace online, then I'm far more likely to do so by selling the game on Ebay or some other method, thereby maximizing my value on the trade in/sale. Like Shipwreck says, Gamestop offers that immediate gratification of trading in stuff and getting immediate credit or new games. I traded in my copy of Wii Fit and 5 other games to take advantage of their trade in 6, get an extra 40% (50% with Edge card) and got $115 in Store Credit, enough to buy Killzone 2 (of which they had a used copy of, so I saved another $10) and two DS games. I could have maybe gotten a bit more for the games on Ebay, but then I would have go list them, hope they sell (and most of these games I had already tried to sell, and they hadn't) and ship em out. I'm not saying Gamestop is the greatest thing since sliced bread, but as Shipwreck says, they have way too many advantages and brand recognition as the used game destination for TRU or Amazon to make much of a dent in them (especially in Amazon's case)
This just in: Fish in Barrels are Easy to Shoot, Film at 11

OK, that sounds meaner then it should, reading it over. But I would like to see the blogger offer an alternative for Toys R us or Amazon. Is there something they could be doing to get in on the used market?

I for one would consider trading in a game at Toys R Us, if I can use towards things Gamestop doesn’t offer. For me that’s Diapers or Baby Formula. 20 Bucks towards a 360 game or 20 bucks towards Diapers is an easy choice for me to make.
Very well written. Yes, it might be what everyone was thinking, but you have done a good job articulating the general consensus.
What's the point of this article? Does CAG or the author own stock in Gamestop? Sure seems like it. Gamestop sucks, 'mmkay? Used game sales hurt the industry. And folks who buy used games to save a measly $5 are worthy of contempt.
Great article, very appropriate.

Looking at Public Perception, sure the idea that Amazon jumping into used games made all of the ethusiast blogs and press is one thing, but it's no Kindle or Harry Potter book. That's the stuff that gets you Page 1 Life Section in USA Today.

I'm putting this as numero uno on my list of barriers to entry for Amazon.
Enjoyed the article, thanks.
One more strike against Amazon is that I don't know the condition of the used game I am buying unline being able to stand in a Gamestop and look at it. If it's really scratched or the box looked like the dog mangled it I won't want to buy it and definately don't want to have to hassle shipping it back.
Right on, Ship. As much grief as Gamestop gets from hardcore gamers for some of their practices, it's easy to overlook just how good they are at the business they're in.

Amazon and TRU are just dabbling and are no threat - the only competition they might have is from another dedicated used game retailer. Gamecrazy had a good run for a few years but is saddled with being attached to a Hollywood Video (in most locations) - they will sooner or later go under as video rentals continue to die out.
GIve little over $20 for newest releases that will surely sell in matter of days if not hours.

Do not give more than $20 for newer games (1-3 months old) that might stuck in sheleves for days.

All general titles of recent years are fall between $2-$10. You pick the number.

All sports games of previous years are worthless. Give them $.25 so most people would take them back.

REALLY....How hard someone to beat this crappy GS way of dealing used games.
Nice article Shipwreck, I'm hoping that if nothing else we get a few good deals out of GS because of the new competition. Even if that competition probably won't be around long.
@ElektroDragon

You won't know the point of the article unless you read it, which you clearly did not as shipwreck mentions he owns stock in 2 of the 3 retailers. Since TRU is not a public company, that leaves GameStop & Amazon.
I agree on all points Ship made but also with Wombat's comment.

Back when Toys R Us offered "Geoffery" dollars for trade ins, I do not remember them selling the used games back to the consumer. So it is very possible all they are looking to do is increase revenue by getting you in the store.

I really do hope Amazon and TRU can find a way to make this work because I too would like my "credit" to be applicable to items other than games.
Good article and I am a Play N Trade owner. I used to work at Toys R Us about 6 years ago and I told them that they needed to expand it. At our store, the R-Zone, accounted for over 50% of the sales and this is way before the Wii. I told them that they should expand into strip malls and take a page out of Gamestop's book. Families are familiar with the Toys R Us brand and that could be a factor. This will not work at Toys R Us, people don't care and I am sure it will just go away by the end of the year.

I do think there is room to do things differently and get a bit of Gamestop's share but it just takes time and doing things differently.
@Wombat: While Amazon trade-ins are bit more work, what you can do with your trade-in is vaster than either of the other two. You do lose that instant gratification. Plus, since you live in NY you'll be taxed anyway thanks to state law.
What, TRU hasn't died yet? What is keeping them alive? Is there really anything unique about this retailer?

Anyway, good point Wombat about the diapers. That way my wife could pressure me nonstop to trade things in and buy diapers and kid supplies with them, leaving me with the sobering responsibilities of parenthood with no beloved hobby to cling to. Oh wait that's a terrible idea Wombat!

Seriously though I do see your point. If Target did this, the sky would be the limit.

That said, implying Amazon is not committed to this because they've outsourced this function is not really knowing how actual larger businesses work these days (when they're not crumbling. Or merging. And then crumbling): If you don't know how to do something well, you outsource or partner with someone who does to get it done right.