GAME's Failure | What Went Wrong

GAME is the UK's largest video games retailer. The business grew exponentially through the early 00's, the buy out rival company GameStation in 2007 being their biggest move. Even further back they went on a spree of buying out independent stores and chains like Electronics Boutique (initially a merger until a full takeover in 2004, oddly enough from the company now known as GameStop in the US) to build a games empire of over 670 stores nationwide. But today is a big day for the retail outlet as the administrators are calling time. No one is sure at the time of this blog, but it looks like Game and Gamestation stores nationwide will be closing very soon.

"In April 2010, CEO Lisa Morgan resigned; Looks like she jumped at the right time."

But why did this happen and what does this mean for video games as an industry? The "why" part cannot be answered truly as of yet. I'm sure it will all come out in the wash, but at the moment all the finger pointing is mostly assumptions and educated guesses, most of which I will cover below, plus my own thoughts. In April 2010, CEO Lisa Morgan resigned after a 28% dip in profits in the 2009-10 fiscal year, departing with a promise of reducing stores by at least a 100. Looks like she jumped at the right time.

A thing of the past?

Come January 2012, the then CEO Ian Shepherd issued a profit warning, amid fall stock prices and rumours of the company breaking it's bank loan terms. He remained confident that "the company was in good shape for a recovery" and blamed the poor performance on people only buying the main franchises like FIFA of Call of Duty as opposed to a wider range of titles.

As we now know, recovery was almost impossible. But the point that Mr Shepherd made is what interests me most. While EA's FIFA titles are massively popular and Activision's Call of Duty series continues to break sales and pre-order records, there is the feeling that a lot of people only play those games and nothing else. I personally know a lot of people that see their games console as simply "FIFA Machines" (or Modern Warfare, replace where appropriate). It is seen that, if you really get into such games, then you spend hours upon hours completely engrossed in the action. These titles offer a gaming experience that can, and often does, stretch into hundreds of hours of game time and still continually top the sales charts. The net result could be that a lot of people are less likely to buy anything else, as all their time goes into buying new DLC map packs for COD or packs of Ultimate Team rosters for FIFA, to even further extend the game.

(The same could be true of Wii Fit, Zumba Fitness and Wii Sports - People bought them, but then didn't move on to something new)

While GAME and other retailers have tried to counteract this buy selling vouchers for such downloadable content, there are 2 main problems with that model. First is that your market for such products is limited, as you are appealing to only those who are either too young to have a credit/debit card or those who refuse to input details online. Everyone else can simply buy game add-ons online, through their games console, on the couch, at the touch of a button and be playing it minutes later. Second is that profit margins on such vouchers is virtually non-existent. For instance, after a bit of digging around and talking to someone who owns an independent games shop (apparently one such thing still exists!), the profit on an XBox Live points card (on average) for instance, is around £1.20. To make anything meaningful, you have to sell bucket loads, yet as I have mentioned, you are targeting only a select group of gamers.

"Strong price competition and diminishing margins on new games meant a focus on used games." 

Gamestop in America say that "50%" of their profit comes from the used game market. The same could be true of GAME and Gamestation in the UK. Over the past few years, if you visited one of their stores, they had larger store space for their used game range. Strong price competition and diminishing margins on new games (or any electronic goods, including games consoles) meant a focus on used games. Other companies like Computer Exchange have seen growth over the past 10 years or so, focussing on second hand items. It was perfectly logical for GAME to push this area of the market (something that could not be avoided if you bought something new, with staff trained to tell you about trading in the game once you have finished it). Buoyed by the stronger profits garnered from used games, many other business have also entered the used game market place, which is taken away from GAME's market share. The growth of CEX is a main competition, but now even supermarkets like ASDA Walmart offer second hand games.

This however, had a knock on effect. The publishers and developers of games don't see a penny of a used game sale and with GAME stores selling more and more used games, they decided to act. In an unpredictable global economy, not only have publishers invested heavily on their strong franchises and well established titles like FIFA or COD, but in many cases they have also tried to prevent the used game market. Many games now come with online codes, known as an Online Pass. Buy a game new, and you input the one-use-only code to unlock in-game extras and online multiplayer game modes. Buy it second hand, and you can't play that game online without shelling out £6.99 on a code (through your console only, not through in-store vouchers). Therefore, greater incentive to buy new, less used game sales, more money directly to the publishers and less profit for retailers.

So, by chasing greater return on investment, the publishers of games have been hurting the retail games market. Yet, if the retailers perhaps did not focus on the used game market so heavily, the online pass would not be in existence. For GAME it was the perfect storm. Not only were people only buying the big games, they were extending their gaming experience by buying extra game content online and then not buying used because of online codes. Next, throw into the mix GAME's massive expansion of the last 10 years. They had a declining market, a large number of employed staff and long-term rent leases across hundreds of stores. You have to say it was always going to be a struggle. Then again, hindsight is a wonderful thing.

Sadly, with today's rumoured news it looks like the failure to find a buyer means the end for GAME as we know it. There is a brand name that has a high awareness and some loyalty (those GAME reward cards don't count for nothing). There is also still potential for a high street supplier for the gaming industry. While a lot of people buy games online and despite a shift towards downloading games instead of physical copies, there is still strong demand for a boxed, tangible game, seemingly more so than in other entertainment industries.

"A quick glance in the comments section of any GAME related news article shows that a lot of people where unhappy with their pricing."

One main sticking point with the gaming community seems to be that prices were too high at GAME (a quick glance in the comments section of any GAME related news article shows that a lot of people where unhappy with their pricing). While most new release titles in their stores were selling for £40-£45, a quick look around online would net you the same game, brand new, for up to £10 less. A lot of angry internet people like Bob336 or StarWarsRulez86 are quick to lay the blame at their pricing strategy. But with tighter margins, online passes and lower sales of the number of different games sold then the prices had to increase, especially seen as the cost price is most likely to have remained the same.

You could argue then, why were other places cheaper? Well, online outlets like Play.com (based in Jersey) and Amazon (technically registered Swiss, so not part of several EU trading regulations) are in nice cushy positions whereby they pay less or no tax. The EU regulation that helps internet traders avoid tax is about to change however, with a bill recently passed to change the taxing policy to be based on the delivery destination, as opposed to the location of dispatch. However, this will take another 2 years before the effects are seen and way too late to help GAME. Increasing VAT to 20% couldn't have helped GAME's cause either amidst the competition.

But supermarkets do have to pay tax, yet still they manage to be extremely cut throat and competitive. This is actually relatively simple. By selling games in their stores, they are enticing you to shop there and maybe pick up more profitable items like mushrooms or soup. They can afford to offer lower prices as this is offset by the large range of bananas. This also means they can do the odd loss-leader, such as the crazy Call Of Duty Modern Warfare 2 prices that Sainsbury's and ASDA did upon release. Having said all of that, a quick look at ASDA reveals that their prices have actually risen of late too.

In summary then, combining all of the factors mentioned above (some of which are the games industries fault, some of which are GAME's fault) what we are facing in many store closures which means empty shops across the UK and more importantly, the possibility of 6,000 unemployed people. PricewaterhouseCoopers have been selected as the administrators and in sacked GAME CEO Ian Shepherd's final statement it is said that they will "make big changes both to the store estate and in the office, but will be doing so with a view to creating a trading business that we can attract a buyer for." I other words, cutting the fat, job losses and store closures. The word today is that 2,000 jobs will be lost almost immediately and as I passed by my local GameStation on the way home from work, it was shut. A note was over the door stating that Wakefield would be me closest available outlet (quite far from Leeds).

It is sad to see the probable loss of yet another well-known high street name and the unemployment that follows. Not only that, despite their huge losses, GAME and GameStation stores certainly sold a very healthy number of games. While online only sellers, supermarkets and HMV will do well to fill the gap, this is still sure to affect game sales. The lack of a dedicated, specialised game shop on most high streets has to be detrimental to the industry as a whole. By simply having a presence and a big sign on the high street, that reminded people to play video games and helped gaming reach a larger audience. Of course, there is an opportunity here for either a smaller company to become slightly larger (like Grainger Games) and it may not be a bad thing for the consumer in the long run provided whoever it may be that profits from the demise of GAME doesn't make the same errors.

Certainly, GAME made plenty of mistakes, but the games industry itself is far from innocent and it could well be that they have shot themselves in the foot.

Sources | BBC, MCV UK, GFK Chart Track, The Telegraph, The Guardian, TheSixthAxis.com & Reuters.