Is UK games retail a 'joke'?

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Controversial US analyst Michael Pachter slammed the UK games market last week, insisting that it's impossible for retailers to make money. Was he right?

Predicting anything in this industry can be a dangerous game.

After Farmville, Zynga was going to be the biggest games corporation in the world. During the GameCube era, Nintendo's demise was a forgone conclusion. OnLive was going to change the world in 2009.

But despite the industry's habit to change radically on a regular basis, US analyst Michael Pachter has made his name out of predicting the future of games.

He, like the rest of us, is wrong more often as he is right. But there's no denying that he knows his stuff. And when he decided to look beyond his US homeland he had some critical things to say about UK games retail.

In a Digital Spy article on games retail (which reheated stories that MCV?has been running all year) he said that UK games retail was a ‘joke', that it can't make any money due to price discounting, and that US retailer GameStop has avoided the UK market for that very reason.

We asked him to clarify his statement.

By ‘joke' I mean that the competitive landscape has put conventional specialty retailers in a position of being unable to make a profit,” he explained.

Some of this is due to operating costs, some due to the price of games relative to average income, some due to slowing traffic in light of the lingering recession. The larger impact is that used games aren't as popular in the UK as the US. GameStop averages over 20 per cent of sales as used. GAME averages around 10 per cent. The margins make up the difference between profit and loss.

By joke, I was referring to supermarket pricing, and how that plus high costs have prevented GameStop from expanding into the market. Eventually, consumers will have fewer choices if specialty retailers go away.”

"The larger impact is that used games aren't as popular
in the UK as the US. GameStop averages over
20 per cent of sales as used. GAME averages
around 10 per cent."

Michael Pachter

It's easy to dismiss Pachter's opinion. He's a US analyst for one, what does he know of our market? And his information is out-of-date. The days of supermarkets cutting prices to sub 30 hasn't happened to years.

But his point does stand.

He is 100 per cent correct, as he quite rightly points to the debris left on the High Street as proof of his argument,” says CHIPS boss Don McCabe, who has had to close many of his shops during the recent market downturn. But will it make a difference?”

John Lewis has also found selling games a challenging task. Games buyer Robert Hennessey told MCV: I agree with Pachter. Profitability threatens the long term viabity of UK games retail.”

It's certainly not easy for games retail. But impossible to make money? ‘A joke'?

ShopTo has grown in recent years, but the online firm's CEO Igor Cipolletta insists success should not be restricted to etailers.

Some retailers may choose to retail below cost. But to say UK retail is a joke is to oversimplify the situation.

Stating that it's impossible to make a profit suggests a retailer's inability to provide the expected service level, coupled with appropriate pricing, stock level and variety, or it suggests that their overheads are too high.

If etailers are still able to turn a profit, there's no excuse for a High Street retailer not to, especially as we survive without the cash cow of preowned.

Many High Street chains may finally be waking to the realisation that overpaid executives are a millstone around the neck of large. And they're notoriously slow to react to market changes and customer expectations.”

Michael Pachter's point about the popularity of pre-owned in the US and the low prices in the UK may be linked. New game prices are low in this country, but surely that's because consumers don't agree with the current pricing? Hence why so many US gamers are buying used.

And if pre-owned really is being blocked with the next consoles, then software pricing will likely come under even more pressure, and not just in the UK

Historically, the release of next gen has reinvigorated the industry,” added Cipolletta.

But gamers have reacted negatively to whispers that the new machines may not be capable of playing preowned titles. And coupled with the stagnating economy, moreso than ever the price of the hardware as well as the software will dictate whether the new generation will ensure retail enjoys a healthy holiday season.”