Can Wal-Mart Take On GameStop?

Wal-Mart has just announced that it's going to start selling and buying used games, but GameStop isn't sweating it.

Mar 18, 2014 at 6:00PM

Today, Wal-Mart (NYSE:WMT) announced that it is going to try to bury GameStop's (NYSE:GME) still-warm corpse by accepting used video games for trade-in. GameStop's unique selling point has always been the fact that it is the one big chain where you can go and trade in games, so does this mean that we're watching the end of an era? Probably not.

As it turns out, a handful of big chains have already tried to get in on the used-game market. Best Buy (NYSE:BBY) and Amazon.com (NASDAQ:AMZN) have been accepting games for years now, and they've taken very little from GameStop. Analysts have said that they "do not believe Wal-Mart will have a material impact on GameStop's dominant used video game market share" and that "[history] suggests the competition is unlikely to capture meaningful share." In classic market style, GameStop's stock fell 5% on the news.

Why GameStop can hold it down
There are two main reasons that GameStop has been able to defend its moat. First, the company is, ostensibly, staffed with video game fans. When video gamers are looking for someone to talk to, they head to GameStop, where the in-depth discussion never ends. Just kidding: No one talks to employees anymore. What do you think this is, 1950?

The real reason GameStop can hold off Best Buy is that it generally has a bigger selection of games, and the value you get for trading in doesn't fluctuate enough between the two to drive business to Best Buy. If you're going to get the same amount for your game but you've got a broader selection of things to buy at GameStop, you're probably going to go there.

Wal-Mart is likely going to face the same headwinds as Amazon has. Amazon -- a company that competes on price for everything else -- has done, at best, a mediocre job of paying players for used games. Wal-Mart's plan is to take used games for store credit, without selling used games until they build up a collection. So for the first few months, you can walk in, leave your game, get some Wal-Mart credit -- the company won't give cash for games -- and then come back in a few months to buy a different used game.

GameStop isn't out of the woods
Just because Wal-Mart isn't going to crush GameStop doesn't mean that GameStop is fine. The company is still grappling with the increase in digital sales and the fact that the future is going to be all digital. While that time is still a ways off, GameStop needs to have a plan in place ahead of time. The good news is, if you believe that GameStop will get its act together -- I'm still on the fence -- today's fall would offer you a nice discount to get into GameStop. On the other hand, if you think it's all on its way to pear-shaped, maybe now is the time to cash out on those old Sonic games.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com. It also 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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