Kokomo Tribune; Kokomo, Indiana

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March 19, 2014

Wal-Mart takes aim at $2B used video game market

Store going after the bread-and-butter business of GameStop.

(Continued)

Investors appeared to think Wal-Mart's move spells trouble for GameStop, sending its shares down 3.7 percent to $38.30, while Wal-Mart shares rose 14 cents to $74.82.

But analysts suggest the new program isn't necessarily a death knell for GameStop. After all, other retailers have tried to take business in the used game market with "modest" success, said Baird Equity Research analyst Colin Sebastian, but GameStop has loyalty among video game customers and a broad inventory of new and used video games.

"History suggests the competition is unlikely to capture meaningful share," he wrote in a client note.

The trade-in business is appealing for a retailer: When a consumer buys a new video game for $60, only a small portion of its sale price goes to the company. But when a consumer turns around and sells that game back to the company, the company can keep all the profits for itself.

But it's also a complex business that requires systems to track and manage used product inventory and pricing and the ability to refurbish products and restock stores appropriately to balance supply and demand. In fact, Wal-Mart tried a video trade-in program from 2009 to 2010 using kiosks in stores, but that was not a success. The company said it has found a better system that will make the process more efficient.

Still, Sterne Agee analyst Arvind Bhatia said GameStop has advantages that Wal-Mart does not: a large refurbishment facility in Dallas, pricing algorithms and experience developed over a decade.

"It makes sense and feels natural that various retailers that offer new video games would try to offer trade-ins as well," Bhatia said. "However, as many retailers have discovered in the past, buying product from merchants in bulk is quite different than buying one disc at a time from customers."

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