Shares of GameStop (NYSE:GME) are heading lower today now that Wal-Mart (NYSE:WMT) is gearing up to enter the video game retailer's highest-margin business. Wal-Mart will begin accepting used video games at most of its stores in exchange for store credit starting a week from today.
Accepting trade-ins of secondhand games and gear has been a major component of GameStop's model. Gamers come in with titles that they've already beaten or consoles that they no longer need, to swap for newer diversions. GameStop then refurbishes the submissions and sells them as pre-owned merchandise at big markups.
The problem here is that resales have been slumping at the small-box video game retailer. The category's revenue slipped 7.3% in fiscal 2012. Pre-owned sales through GameStop's first three quarters of fiscal 2013 have gone on to fall 7.5%, 6%, and 2%, respectively. GameStop should get a bounce when it reports fiscal fourth-quarter results next week. It saw a 7% spike in the sale of pre-owned merchandise during the holiday shopping season. However, that's likely a blip, given folks scrambling to raise funds ahead of November's PS4 and Xbox One launches.
Wal-Mart can't be guilty of killing GameStop's resale business, because it's already dying.
It was five years ago this month that Amazon.com (NASDAQ:AMZN) began asking shoppers to mail in their pre-owned games. Amazon naturally can't offer the instant gratification that a diehard gamer can get at a local GameStop, but Amazon's prices have been more than competitive on both ends of the transaction. Toys R Us and other retailers have also followed GameStop into the resale market. Wal-Mart is the world's largest retailer, but it's not necessarily any more relevant with video game buffs than Amazon, Toys R Us, or your favorite consumer electronics superstore.
There's also another problem that could be even bigger than just the general decline of this niche. Digital delivery is a major part of the new wave of consoles. The PS4 and Xbox One come with chunky hard drives and cloud-based gaming solutions. This should lead to the sale of physical software drying up as developers deal directly with players, and it follows that the resale of game discs can't exist without the initial disc sale.
Wal-Mart is too late. It's late to the resale business that's falling out of favor, and it's hoping to drive in-store traffic through trade-ins that will continue to fade in relevance as gaming media continues to make the digital migration.
When you see Wal-Mart heading into a new market, it's a good thing to head the other way, and not because of the damage that Wal-Mart may do to those already in the business.