Leading retailer Wal-Mart recently unveiled some pretty aggressive video game deals this week, and investors were quick to react as video game retailer GameStop saw its shares fall nearly 10% in trading today. As of this writing it's down 8.26% to $21.87.
While you could argue that GameStop serves a more hardcore gaming consumer, whereas Wal-Mart goes after the casuals and mom and pops, in the end pricing matters. Ben Schachter of Broadpoint AmTech believes that if Wal-Mart makes this new pricing a longer-term strategy, it could hurt GameStop's business.
"Walmart's video game discounting is hitting GME hard today. Our initial reaction is that investors are overreacting, but there will be some blood from this fight. These discounts will impact GME this holiday and the company will have to react," he said. "Having said that, keep in mind that while Walmart discounts are very meaningful, they do NOT cover all the Top 25 software titles. Nevertheless, the affected titles are indeed 25 important games that will sell this holiday. The $50 gift card for a Wii console purchase will also impact GME, but it is the attached software sales where GME will get hurt. We will have to see what the reaction is from GME before we make any adjustments to our model/estimates, but we would expect some downward pressure to numbers, all else equal. However, we also believe that GME has been taking share through this point in the holiday season. In addition, we believe the company's Thanksgiving period sales have been better than expected, so the overall near-term model may not change significantly."
Schachter continued, "The real issue raised by these discounts is what does this mean, if anything, for the future long-term Walmart video game strategy? If this is a one-time tactical decision around the holiday, then, yes it hurts, but it certainly does not warrant a 10% drop in GME's stock. On the flip-side, if this is a new long-term strategy for WMT that breaks with long-standing unspoken industry rules around MAP pricing, then GME could have a more serious problem on its hands. Both Walmart and Amazon have shown that they will not shy away from price wars, at least in the short-term. GME would certainly be significantly impacted if these and other retailers begin to use video games more aggressively as loss leaders, particularly around the holiday. However, and this is a key point, it is entirely unclear that video games will be used more in that way (or that it would even be effective), or that publishers would enable certain retailers to consistently undercut the value proposition over the long-term."
He concluded, "The bottom line is that Walmart's very aggressive discounting in the category is a serious issue in the near-term. However, the long-term implications, and therefore, the potential impact to the GME model, are much less clear. We think that investors willing to stomach the uncertainty should use this weakness to buy GME shares. Aggressive discounting is and always has been an issue for GME and the video game industry, and though Walmart's move is somewhat more aggressive than expected, GME can more than stand its ground (even if it gets a bloody nose)."
Update: It doesn't appear that GameStop is too concerned or that the retailer is about to respond with any price cuts. A spokesperson commented to Bloomberg, “We believe consumers will always rely on GameStop for the best values, the broadest selection, unparalleled product availability and knowledgeable game advisors they can count on.”
