News Analysis: Store wars

News Analysis: Store wars
Retail came in for strong criticism after a series of dramatic price cuts, as we reported last week (MCV 26/09).

With Morrisons slashing 50 per cent off the price of EA’s Mercenaries 2 and Asda trimming The Force Unleashed to £30 a week after release, the industry has already voiced concerns over the wisdom and impact of big price cuts.

Respected trade figures like Codemasters CEO Rod Cousens, Activision UK MD Andrew Brown and Sega UK MD Alan Pritchard blasted the price drops, questioning the sustainability of such an exercise, and the impact they will have on the rest of the industry.

With reduced margins and increased development costs, publishers questioned whether cuts were necessary in such a buoyant sector.

But retailers made it clear that they would continue to forge ahead with headline-grabbing price reductions, saying they are ‘inevitable’, in spite of criticism from key games publishers.

This week Mastertronic MD Andy Payne joins the critics, voicing his concern for developers while questioning the price structure behind games: “If the makers of the games don’t make money it is an issue. Ultimately games need to be good value for money – if they are not, people will not buy them. I think everyone needs to look at who takes what out of the price of the game sold, aside from Messrs Darling and Brown. Are there too many mouths to feed?,” Payne questions.

But despite strong criticism, some publishers admit retailers are under increasing pressure to make those cuts. Nintendo UK general manager David Yarnton tells MCV:

“As retailers continue to try and maintain footfall and secure share in the current difficult economic climate, this Christmas should see some interesting and very competitive retailer-led promotions.”

However, Yarnton did voice doubts as to whether games prices required price cuts: “The UK games industry continues to remain relatively buoyant when compared to other industries and entertainment forms that are currently suffering for whatever reasons.

“In terms of Nintendo’s business, we feel that Wii and Nintendo DS already represent great value for money. This combined with our focus on market expansion and bringing people of all ages to our products through making them smile and helping to enrich their lives, means that we currently see no need to drop the price on either of our formats this year.”

Meanwhile, NCsoft Europe CEO Geoff Heath tells MCV that he believes the drastic price cuts won’t continue into crucial Christmas period: “My reaction is that this is a time for retail to grab market share, but I am pretty sure prices will stay firm when the triple-A titles are released nearer Christmas.”

But while national retailers and grocers have the financial muscle to be able to implement serious price cuts, others are not so fortunate. City Interactive’s UK sales manager Leonard Harding voices his concerns: “There tends to be a price war every Christmas as far as back as I can remember. Will this year be any different? Probably not, but the issue is how far it goes. Independent retailers can’t always compete, so in that respect and from their perspective the ‘price war’ is a problem.”

ERA director general Kim Bayley says that talk of a price war might be premature: “Retailers are operating in an environment where consumers are cutting back and price conscious, therefore all retailers are looking for attractive pricing."

"Games form part of an overall entertainment mix and compete with a broad product range and all sectors are under pressure to attract consumers. However games’ popularity with consumers means that price is only one of many drivers and ERA does not anticipate a ‘price war’ in spite of keen market pricing."

Bayley adds: "Christmas always benefits e-tail and with the credit crunch, e-tail offers good prices and ease of shopping, so is likely perform well. Likewise the supermarket sector benefits from high footfall and good prices. However, ERA does not expect the mix to change hugely from what we’ve seen over previous years."

The ERA director general did criticise drastic price-cutting trends though, pointing out the damage they can inflict on the market: “Price wars inherently reduce prices and margins longer term. But whilst games prices may be under pressure in a price conscious market, no-one benefits long term from a price war and retailers will continue to strive to offer customers best value whilst maintaining their own business.”

Analysts have also had their say in the debate. Verdict Reseach retail analyst James Flower also believes that tightening purse strings have played their part in the frantic price cutting: “I am sure that gaming growth would be higher if the credit crunch wasn’t on-going, but customers still think gaming is worthwhile, plus a lot of gamers are teenagers, who aren’t worried about fuel or food prices.”

“People are still spending money, but because of the credit crunch they are wary. So it’s the job of the retailer to persuade customers into store. Discounting does stimulate sales, but of course it also squeezes margins,” Flower cautions.

“The recent cuts from the supermarkets are more tactical plots to pull customers into store, and that’s what happens when you have grocers in the market. But big price-cutting should be avoided because it would be really damaging to the sector,” he adds.

Mastertronic MD Andy Payne has strong views on the effect of the price war this Christmas: “The clear winners will be Nintendo, they consistently make the best games and have a strong business model. The losers – well potentially everyone else.”

James Flower concludes: “I can’t see a price war happening all the way to Christmas. Games retailers have seen double-digit growth while other sectors have struggled. So there’s just no need to cut prices. Of course, if there is a particularly congested release schedule, then that could result in a limited shelf life on certain titles.”

Undoubtedly video gaming has had one of its biggest years ever and while many firms in the industry have shared in that success, there have been casualties with pressures on all sides of the industry.

No-one needs reminding of the current economic difficuties facing the world, which has already seen two UK banks nationalised and the US government intervening on Wall Street, and while gaming has seemed immune to those troubles, some retailers and grocers have evidently felt the need to secure their market share and footfall with headline-grabbing price reductions.

But while pressure is being heaped on retailers, developers and publishers, the trade believes gaming can continue to stave off the credit crunch.

Whether that means retailers will resist the Christmas price-war that publishers want to avoid remains to be seen.

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