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Web Retailer Bails on Games Industry, Hard
Online retailer DVD Empire has gotten out of the sale of videogames, and on their way out the door they made a point to call out the industry on a number of sore spots. As reported by Gamespot, the company felt that they actually lost money by offering games to customers. In their eyes big publishers only care about large chain stores, leaving small and medium-sized retailers to pick up enormous overhead costs on the titles they carried. They have an extensive list of frustrations on the former 'games' page, including: "When we sell a game we make on average 8.3% gross margin. That does not take into account any of the cost to store the video game or labor to receive/ship an item. The only way we can make a profit on an item is to sell it over the MSRP, but unfortunately we are not allowed to do this. Take a $400 console; we only make $5 on the sale--that is a .01% gross margin (note the decimal point). The game companies make their profit selling to us. We make no profit selling to you." Besides Gamestop there are two other videogame stores in my town ... but both of them are exclusively used game resellers. Are used games the only way to make videogame sales profitable?
Surely. .01% would be 4cents.
A friend of mine ended up working at futureshop after failing out of University. When he first got the job one of his 'perks' was that he got to buy anything from his department (videogames) at cost. Soon enough, he found out that with how small the mark-up on videogames was that the store made more money off of the chocolate bar rack at the front of the store than they did off of their videogame department.
Now, the reason most stores (either electronics or big-box stores) keep sections of videogames is that they bring tons of foot trafic into your store. Imagine how many people walk into Futureshop/Walmart to see if they have a Wii/PS3 in stock and end up buying a DVD/CD or snacks (all of which the store's margins are way larger on). I imagine that EBgames continues to stock new games/systems so that people will pick up a copy of a used game when they buy a new game.
I think you underestimate the sheer volume of sales that go through Wal-Mart by a huge margin. There is a reason that they are able to force manufacturers to alter thier business practices to suit Wal-Mart's vision of how business should be done. Wal-Mart has bankrupted several large companies simply by taking thier product off the shelf (Rubber-maid) or in the case of Clausen pickles by offering thier product at a ridiculously low price as a loss leader for Wal-Mart. I see no reason to believe they have any less influence on the gaming industry than they do in any other industry they retail for.
I was the assistant manager of a mom and pop shop about 7 years ago. They eventually went out of business because this is exactly the way the industry works.
Used games and accessories are the way to keep a store profitable, period. Now, my experience was from the PS1 up through DC and PS2 era, but it's basically still the same.
Consoles are worth zero profit. Our store manager actually bought them from Target on an "air miles" card because it made more sense than ordering a $199.99 console for $197 plus shipping (sales tax can be refunded if forms are filed correctly). The games themselves weren't all that great, either. $50 games were sold to us for $41 to $43. I later verified these numbers when I got to look at employee discounts in big box stores - we were paying a bit more than the Best Buys of the world, but not much.
Best Buy uses the games to draw people in for the more profitable items, and we did the same. Used games usually had a 100% markup. New games that sold for $50 were purchased from gamers for $15 cash or $20 in credit toward another used game, and sold for $30 or $35 retail depending on the popularity. Just as in every other retail store, the key is attachment. Go walk into EB/GameStop, and look at all of the strategy guides, toys, trading cards, and accessories. We made more on a $20 memory card than on a $50 game; we pushed hard to sell the strategy guides because they tripled our profit on the transaction. One month, we made almost 1/3 of our profit on pokemon cards during the height of that trend. It was still a losing battle, though. New game systems became harder to get during the launch cycles, the emergence of three viable consoles instead of two made our inventory balancing much more difficult, and the store ultimately folded about a year after I left for good. I've since seen several other mom and pop game shops come and go in the various cities I've lived in, and I've arrived at the same conclusion as TFA - big boxes are the only ones who can afford to sell games.
The videogame industry just isn't the music industry; the culture that allows the small record stores to still exist in the trendy urban areas doesn't translate to videogames. The "indie" games are all available for sale online, and there's no concept of "local scenes." It's cool; I'm okay with that. I just hope people realize this before they throw their savings at the dream of combining their hobby and business.