I must admit that this is one of the more unbelievable MCV headlines. Tescos, for instance, have been involved in price wars for decades and we can all see the harm it has done them!
What has happened here is that games have recently switched from being a specialist item at retail to being a commodity. And as a commodity the only thing that matters at retail is price. Obviously some industry management, rooted in the past, have not adapted to this change.
Supermarkets offer an immense advantage over specialists shops at retail. Which is why specialist shops in so many product areas have disappeared. At a supermarket the customer can just pick up a game on their weekly shop and throw it in their trolley. Often this will be an impulse purchase. Contrast this with having to make a special visit to a specialist retailer, which massively reduces the potential for impulse purchases and you can see the huge sales advantage to the games industry of being in supermarkets.
Supermarkets have always competed on price as their main marketing tool to drive traffic. Customers are not going to visit several supermarkets in a week, so once a customer is through the door you have their money. This is why loss leaders are so tempting. The customer comes to the store specifically for the one very low priced item, on which the supermarket is happy to make a loss. This is because the customer will buy a lot more stuff on the visit that is profitable enough to more than cancel the effect of the loss leader.
And video games are a perfect loss leader. They are a commodity, so are identical wherever they are bought. They are a sexy, high profile product. And most households now buy them.
The game industry benefits when games are used as loss leaders in several ways
- Simple price elasticity of demand. If a commodity is cheaper it sells more. This is a proven economic reality.
- The supermarkets need to market their loss leaders. This creates huge extra exposure for the games involved.
- People love something that appears to be a bargain, so the level of impulse purchases of games will rise massively.
So the industry should be celebrating our new status as loss leader of choice amongst the retail giants. But instead there is a lot of whingeing going on that I don’t understand. Alan Prichard, the UK MD of Sega said “Development costs are not getting cheaper so it is important for retailers to sustain full SRP points”. This is self evidently ridiculous. The price Sega sell to the supermarkets at is the same, whatever the supermarkets then choose to retail at. So how does discounting at retail have any negative effect on funding development? Surely the reverse is true, more games will be sold and Sega will have smaller losses.
Rod Cousens, CEO of Codemasters, said “Price cuts in an industry which shines above the gloom can only be the strategy of those concerned that their mode of delivery to the consumer is facing threats, and they are doing their best to accelerate their own demise.” This again is patently absurd. Yes, digital distribution is taking over from retail, but it has little to do with retail price point. In fact discounting and price wars at retail will prolong their relevance. The exact opposite of what Rod has said.
What we have here is a situation where most people win from this discounting. The retailer wins because they get more traffic. The game publisher wins because they sell more games. The customer wins because they pay less for their games. The only loser is the specialist retailer who, inevitably, loses sales. But specialist retail was always going to go the way of the Dodo because of digital distribution. All supermarket discounting does is to speed up that demise.
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Another few things to consider when thinking about the impact that supermarkets have on the games industry:
1. Pretty much all non-specialist B&M retailers don’t stock a wide range of games. Chances are, if it’s not been in the top twenty in the past few months, you’re not going to find it on the shelf in Asda. If we do get a scenario where Supermarkets continue to increase their share of the video games market, then it could have a negative impact on smaller publishers or smaller games.
2. Even when they do have loss leaders (with exception of the recent Morrisons deal) they are rarely the very cheapest place to get games from. More often than not, an online retailer will have a better price at release, if you are willing to look. Obviously, this has no bearing on impulse purchasing, but it’s worth bearing in mind.
3. (Some) People like buying used games and trading games in. As far as I am aware, non of the major retailers have branched into dealing with used games, but it wouldn’t surprise me if that did happen at some point in the future.
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Be careful Bruce, I shared a similiar view over at MCV, and was lynched by the hordes of indies that inhabit that place. I’m not being flippant, its obviously not fun when your livelihood is being threatened (i would love to run an Indie store) but in my view, the slow demise of the indie store began over 10yrs ago. This is evidenced by the fact that the bulk of them (not saying all indie stores do this, but ALL did round my way) began “chipping” PS1/PS2’s and flogging pirates under the counter to “special” customers.
Made the same point, Supermarkets but the game at the same price as others, If they sell it at a loss, so why should Sega care. People that should be worried are GAME etc.
As for the independant developers, I think digital will come to save them. The same way that people have to buy foreign films that arent part of the “hollywood make-up” online, people will buy the niche or indie games via digital distribution.
Anyway, as a consumer, Im not moaning, and what with the way the economy is going, I think these supermarkets will continue to make progress.
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Hi Bruce
“The price Sega sell to the supermarkets at is the same, whatever the supermarkets then choose to retail at. ”
Sorry, but that’s just not the case, as anyone who’s dealt with retail chains will tell you.
What actually happens is that they reduce the price, sometimes come back to the publisher demanding a retrospective price reduction on that stock (they phrase it nicely ie ‘could you help us out with this?’). If you don’t reduce your price, you’re unlikely to be stocked again.
Even if they don’t demand a reduction on this particular stock, the consumer expectation becomes that games are much cheaper, and so the accepted price point lowers dramatically.
Next time around, the stores will demand their ‘usual margin’ (which is generally twice what US retailers would get), ie you have to reduce your selling price in order to allow them to make the same margin they always want.
Specialists also do this (demanding retrospective price protection and sale or return), along with their heavy demands for in-store/catalogue marketing. At least they don’t generally loss lead on brand new titles though.
So while, in the short term, this is good for consumers, it drives down the margins for publishers and developers, and has now done so to the point where development of retail console games is becoming unviable. Like your piracy argument, the long term effect of this revenue reduction is not a good thing for consumers who like games. Witness the struggles of so many good developers and publishers alongside Game’s recent record profits.
The good news is, when you do the maths, it all works again once you eliminate retail from the equation and go direct to consumer electronically.
If you do a breakdown of a (profitable) £40 game at retail, it works like this (figures are obviously rough, vary a fair bit and, due to it being before 9am may well have all manner of errors in them):
VAT – approx £6
Retailer selling price (after VAT) – £34
Retailer profit (40% margin) – £13.60
Distribution and warehousing – £3
Publisher selling price (to distribution) – £17.40
Publisher cost of goods (Xbox, Sony) – £7.40
Publisher net revenues – £10
Marketing contribution – £1.50
Publisher net revenues after marketing – £8.50
Developer (let’s say 20% royalty, which is high these days) – £1.70
So, the payment to the game developer (assuming it recoups its advance royalty, which they generally don’t of course) is £1.70 per unit. That’s 4.25% of the price to the consumer.
Strip out ALL of those layers in the middle (except VAT), use an iPhone type model where the content creator gets 70% of revenues:
Consumer pays: £5
VAT: £0.74
Net receipts: £4.26
Slice to developer (70%) – £2.98
Let’s then have the developer spend £1.28 of that in marketing, not that different to the marketing spend per unit of the boxed product – and we’re not having to spend a load on in-store marketing!
Developer gets – £1.70 per unit.
So, we’re looking at a similar marketing spend, same revenue per unit to the developer, and a sales price 8 times lower than the boxed product. At this price, and with an online model, games will have a much longer tail than boxed product, and can seek out more niche audiences than is feasible when you’re competing for shelf space. The games themselves can be smaller and cheaper to develop.
That, I think, is very good for consumers, who might just tolerate not being able to sell second hand when games are costing them eight times less money.
More variety, cheaper prices, and the convenience of online delivery. Such an exciting time to be in this industry!