Wal-Mart's Newest Target: Gamestop

Wal-Mart's aggressive expansion plans are now targeting GameStop's used game business, although some wonder whether the retail giant will be able to capture meaningful market share.

Mar 24, 2014 at 7:00AM

To my mind, Wal-Mart Stores(NYSE:WMT) recent expansion plans are becoming a little scary. It looks suspiciously like the company is seeking complete world domination. Not content on merely being the world's largest retailer, the company is looking to expand into a number of different areas in order to prop up slowing growth in its main businesses. After moving into dollar-store territory, the latest victim seems to be GameStop (NYSE:GME), Wal-Mart having announced plans to start dealing in used games. What does this mean for the game-retail industry?

Game on!
The poor retail sector just can't get a break. Recently, Wal-Mart announced plans to start focusing on smaller stores, founded on the logic that consumers don't want to trudge through one of Wal-Mart's massive supercenters for a gallon of milk. Operators of dollar stores were rightly worried, as this is generally their territory. Now, GameStop got a rude awakening.

The behemoth from Bentonville, Ark. stated on Tuesday that it will be rolling out a program in which gamers can trade in their used games for store credit, usable in any Wal-Mart or Sam's Club store. This store credit is also usable online. Once refurbished, the games will go on sale again, according to Wal-Mart for a very low price. Games for popular consoles like the Xbox, PlayStation, and Wii will be accepted undamaged in their original packaging, the service going live in some 3,100 locations around the country.

Walmart Games

http://news.walmart.com/

It is clear why Wal-Mart wants to move into used games, the $2 billion business providing a lucrative opportunity for growth. The number of unused video games in the US is estimated at around 1 billion, and according to the company, it was the customers who requested the service. Last year, Wal-Mart started a program to trade in used smartphones and tablets.

Industry ripples
Due to its massive size, Wal-Mart is able to quite easily disrupt any industry it chooses to enter, and the used game market will presumably be no different. Clearly, this could spell bad news for GameStop, as it is heavily reliant on its used game business, which generally provides higher margins than new software.

Images

Wikimedia Commons

Last fiscal year, used games accounted for some $2.4 billion in worldwide sales for GameStop, which represented more than 27% of its total sales. Due to the higher margins on used titles, the business was good for nearly 45% of the company's gross profit over the period. But, as Wal-Mart is generally able to offer lower prices on almost anything, investors see the move as a threat to GameStop's dominance in the industry, shares down almost 4% following the news. However, GameStop's CEO didn't seem too worried, stating that Wal-Mart's entry could increase attention for its own used game business.

Best Buy (NYSE:BBY), which has its own game trade-in program, is another company that was seen as threatened by the move, shares down in sympathy with GameStop. However, Best Buy hasn't fared too well with its used game business. When the company entered the space in 2010, analysts feared it would be the end of GameStop's dominance in the industry, a threat which never really materialized. As such, with GameStop's well-established reputation and loyal customer base, one could wonder whether Wal-Mart will be able to garner meaningful market share in the used games trade.

The bottom line
Wal-Mart's latest expansion plans are targeting companies like GameStop and Best Buy, the world's largest retailer having announced plans to start swapping used video games for in-store and online credit. Wal-Mart's formidable size and pricing power generally allow it to easily undercut other companies, which may be bad news for GameStop. However, the failure of other companies to capture market share from GameStop in the used game space casts some doubts on Wal-Mart's aspirations.

Is Wal-Mart on the way down?
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Daniel James 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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