Wal-Mart Can’t Reach GameStop’s Level in High-Margin Used Videogames; Selling used videogame boasts gross margins of 40-50%, compared with 20% for new game software and 5-10% on new game hardware

March 25, 2014 Leave a comment

Wal-Mart Can’t Reach GameStop’s Level
MIRIAM GOTTFRIED and JUSTIN LAHART
March 18, 2014 3:40 p.m. ET
GameStop’s stock fell on news that Wal-Mart is entering the used-videogame business>. But Heard on the Street’s Miriam Gottfried thinks the reaction is overblown. Photo: “Call of Duty” Activision.
In the world of videogames, it is tough to beat a seasoned professional.

That isn’t stopping Wal-Mart Stores WMT +0.12% from trying. The retail giant is angling for a piece of the high-margin used-videogame business dominated by GameStop.GME -3.42% Starting next week, Wal-Mart will begin letting customers trade in used videogames for anything it sells in its stores or online. It will then refurbish and sell the used games in its stores.
News of this sent GameStop shares down as much as 5% on Tuesday. But even Wal-Mart may find it tough to beat GameStop at its own game.
Wal-Mart isn’t the first to try. Best Buy, BBY +0.15% Amazon.com, AMZN +0.99%Blockbuster and Circuit City, and even Wal-Mart itself have made earlier forays. The attraction is clear: Selling used videogame products boasts gross margins of 40% to 50%, compared with 20% for new game software and 5% to 10% on new game hardware, according to R.W. Baird.

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But so far, GameStop has defended its turf, thanks in part to being able to leverage a loyal customer base. Wal-Mart has emphasized its own ability to give customers flexibility in spending trade-in proceeds. Yet GameStop’s intense focus on the videogame niche may be its best defense.
Its loyalty program has more than 26 million U.S. members, accounting for about one-third of all videogame software sold. GameStop also has systems to track used inventory and pricing, plus the ability to refurbish products and use customer data to restock stores with used games based on supply and demand.
Granted, the used-game business is crucial for GameStop as more new videogame sales move online. So any threat to it should be taken seriously.
Still, Wal-Mart may attract a different demographic. Both retailers have roughly the same number of U.S. stores. But GameStop’s skew toward richer and more densely populated states.
Its locations also are easier for core customers to get to. Wal-Mart has more North Carolina locations than GameStop, for example. But the 10 GameStops closest to downtown Raleigh, N.C., are an average of 5.5 miles away, while the average Wal-Mart is 8.5 miles away. Meanwhile, in Chicago there are about three times as many GameStop as Wal-Mart locations.
For GameStop investors, Wal-Mart’s entrance shouldn’t mean game over.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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