Did Best Buy's Gamble Doom GameStop?

Best Buy's enhanced Unlocked loyalty program may have locked out GameStop -- and Best Buy itself.

Jan 21, 2014 at 3:00PM

GameStop (NYSE:GME) and Best Buy (NYSE:BBY) were two of last week's biggest losers -- shedding 17% and 36% of their value, respectively -- as they warned about coming up short this holiday shopping season. However, what if one retailer's gutsy move sparked the downfall of both chains?

Two months ago, Best Buy moved to enhance its My Best Buy Gamers Club Unlocked membership. The consumer electronics superstore's loyalty program for die-hard gamers, which offered double the points on purchases that could be used for reward certificates, 10% discounts on pre-owned games, and a 10% credit on trade-ins, introduced a new savory perk: Best Buy would offer members 20% off new video game purchases.

Now, a 20% price cut is a pretty big deal, especially for a retailing niche in which stores typically sell products at full value outside of the occasional sale. Give gamers a 20% price break on new titles at any time -- when coupled with the existing perks of the Unlocked program -- and it's hard to see GameStop standing much of a chance, even with its own PowerUp Rewards Pro membership plan.

Unfortunately, Best Buy got too greedy. The Unlocked program that rounded up a fair amount of die-hard gamers at $30 for a two-year membership -- similar to PowerUp Rewards Pro at $14.99 a year -- jacked up its price to $120 for a two-year tenure. 

Existing Unlocked members were allowed to renew at the old rate, and that's probably a good thing, since it's hard to fathom too many die-hard gamers paying $120 for two years for price breaks on game discs that are fading in popularity anyway. The new Xbox One and PS4 feast on digitally delivered games. Who would pay $120 unless they knew they would be buying more than 10 new games over the next two years? The industry is changing dramatically, and video game discs are becoming the next CD, DVD, or book -- any medium that has peaked in the era of Internet delivery and cloud computing.

GameStop saw new software sales plunge 22.5% during the holidays. Despite a huge uptick in hardware sales, gamers aren't buying new releases. A decline was inevitable, but did Best Buy's enhanced Unlocked program win over the most active game buyers? Did it force gamers to seek out bigger discounts, turning their attention to cheaper online retailers? Best Buy didn't break down how its video game software sales held up during the holidays, but it wouldn't be a surprise if they held up better than GameStop at the expense of squeezing margins with the 20% price cut. Best Buy's gamble to make a bigger play for the shrinking market of buyers of new software appears to have worked in taking down GameStop. Unfortunately, it has also delivered a blow to the niche's profitability, and last week we saw both companies pay the price.

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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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