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Why Best Buy Should Kick GameStop's Butt in Used Video Games -- but Won't

For years, used games have been the salvation of GameStop (GME). Now Best Buy (BBY) wants a seat at the console -- but odds are that GameStop may have little to worry about.

There's money in new video game titles, but far more in used. Look at the following two tables from GameStop's latest 10-Q for the quarter that ended on May 1. The first is for net sales by product category and the second is gross profit. Used games were 27.4 percent of sales last quarter, compared to 41.9 percent for new games.

However, used games brought in 48.1 percent of the quarter's entire gross profit, while new games were 30.6 percent. Put differently, used games bring in over 48 percent margin and new games sales see about 20 percent. You could make a strong argument that GameStop sells new games to create a marketplace for used, because on a used title sale, all the money stays with the company and none goes to the developer of the game.

That level of margin would be tempting to a retailer like Best Buy that, in its 10-K for FY 2010, indicated an average gross profit rate of 24.5 percent. That's why Best Buy will start an in-store game trade-in program this summer. The company has an existing online trade program, but in-store consumers are often impulsive, and given the lower prices of used games, it's a perfect match for profits.

Under the new plan, customers can purchase pre-owned titles backed by the company's return policy, and also exchange their own games for gift cards that can be used throughout the store. Select stores will have dedicated trade-in desks within the gaming department, while the balance of locations will accept and sell pre-played titles at the customer service desk.
My guess is that Best Buy will try to use a similar process as GameStop and keep the packaging for available games out so customers can handle, browse, and buy. That plays perfectly to impulse buying.

You'd think with its greater reach, Best Buy would push GameStop out of the picture. However, Best Buy is not GameStop, and a quick tour through one shows that the few aisles devoted to games doesn't come close to carrying the number of titles that a GameStop has. GameStop's focus translates into more influential video game sales than anyone else in the country. As GameStop CEO Dan Dematteo noted in last month's earnings call, the company dominates first week marketshare for new games, often reaching 60 percent to 70 percent. The breadth of offering and concentration on games helps drive people to go to the game chain in the first place. GameStop will lose some important business to Best Buy, but will likely continue to stay ahead on sales, both old and new. It may be, as Kevin Maney at DailyFinance argues, that the console business is ultimately doomed. But the final days are some time off, and until then, there will be plenty of profits for the likes of Best Buy and GameStop to pursue.

Image: Flickr user emilydickinsonridesabmx, CC 2.0.

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