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PLAYING TO WIN

Fast-growing video-game chains battle it out in open-air centers

BY FRAN LEFORT

Pac-Man has nothing on GameStop Corp. Last month the video game retailer said it would gobble up its archrival, Electronics Boutique, for $1.44 billion. The deal will create a powerful national GameStop banner, with 3,800 stores worldwide and annual revenue of $3.8 billion. It will also underscore the phenomenal growth this tenant segment has undergone since Pac-Man’s heyday.

Since their debut in the 1970s, electronic games have evolved into a $16.7 billion industry of fast-moving high-tech formats with lifelike figures and scenery. Their retail venues, too, have evolved — from department stores such as Sears into a posse of specialty stores in malls and open-air centers.

“Before 2003 [the video-game market] was not active at all, but in 2003 and 2004, it’s just totally picked up,” said Jenny Hess, premier customer-initiatives manager at Jacksonville, Fla.-based Regency Centers.

The presence of such video-game platforms as Sony’s PlayStation and Microsoft’s Xbox in 81 percent of U.S. households with school-age children has translated into a saturation of the regional mall sector. Now these retailers are targeting the open-air format.

Electronics Boutique, for example, opened 449 stores last year and says it plans to roll out an additional 400 this year. The West Chester, Pa.-based company’s total revenues climbed 20.5 percent last year to $809 million. Most of its new stores are popping up in community, neighborhood and power centers because “unless they open new malls, we’ve run out of mall opportunities,” said Paul Koulogeorge, Electronics Boutique’s vice president of marketing. Those stores will convert to the GameStop banner once the merger is completed.

GameStop, which was recently spun off from Barnes & Noble, has been growing on its own too. The Grapevine, Texas-based retailer opened 72 stores in the third quarter of 2004 alone and saw a 22 percent jump in sales of video-game software for the year. GameStop also publishes Game Informer, a popular monthly magazine.

Most regional malls can support just one such video-games-only retailer to maximum potential, says Dane F. Smith, CLS, senior vice president of leasing at The Macerich Co. But the stores do bring in shoppers both male and young, he adds. “While male teens go to the malls a lot, the primary customer for most malls is still women,” Smith says. “We’re spending more time and money on stores for the young market than we ever have before.”

Into the open
Because GameStop, FYE and the like have already snapped up many of the prime spaces in top malls, expansion-minded chains must focus on other property types now. Indeed, Electronics Boutique itself, which started out as a mall kiosk in 1977 and today operates 1,869 specialty stores, has been moving into open-air centers under the EB Games banner.

Regency has 15 EB Games stores in its properties, including 12 that opened just last year, as well as 10 GameStop stores, of which five opened last year.

“Somebody goes to the grocery store two to three times a week, and if they have their kids with them, it’s like, ‘Can we run in there and see what is new?’ ” said Hess. “So they’re seeing the EB Games more often than if you go into a mall. The average visit for a mall is once every three weeks.” The stores also fit in nicely with other tenants, such as Starbucks or Smoothie King, she says.

Even open-air staple Blockbuster Video is ramping up its game. The video-rental titan has launched Game Rush, a store-within-a-store concept that offers new and used video games, interactive stations and knowledgeable staff to provide technical assistance. There are now about 400 such units, spanning between 900 and 1,500 square feet, inside Blockbuster stores in 20 markets. And Blockbuster says it plans to open about 450 more of them this year.

“We are growing Game Rush stores like crazy,” said Diane Bendle, Game Rush marketing director, who described the new concept as a destination for the video-game community. “The Blockbuster stores are all about the convenience. The Game Rush store is all about the experience. This is really a section of the store that speaks directly to the gamers. It’s really our future with games. We found out that if we could go out there and link trading to buying, that we could have a core business, an extension that was a definitely growth platform for us.”

GameStop’s double threat
In-store boutiques like Blockbuster’s are a growing part of the market, but video-games-only stores still hold nearly half the pie, says Tony Gikas, a senior research analyst at Piper Jaffray, which conducted a national survey last fall of teen video-game usage (story, Hack and slash). Electronics Boutique and GameStop between them are the biggest video-game sellers, Gikas says.

“They’re doing a terrific job of merchandising, and the fact that you can trade in product and buy at reduced price is a huge advantage,” he said.

Nearly 20 percent of survey respondents said they bought their software at GameStop, while nearly 19 percent cited Electronics Boutique. Target and Wal-Mart were close behind, at 15.9 percent and 15 percent, respectively. Best Buy had 5.8 percent, and Circuit City 1.5 percent. Some 23 percent of respondents said they bought their games at “other” stores, with Blockbuster being the most commonly cited of those.

So when the GameStop-Electronics Boutique merger is completed, the new entity will have a firm hold on the top spot. But that does not mean the competition will end. Retailers are constantly tweaking their product and marketing to grab maximum share. More stores now allow trade-ins of pre-owned games, for instance, something that never used to happen at mall stores.

Price-conscious teens are driving sales of these pre-owned games, which sell at a discount and which players can trade in for credit toward the latest release. Fifty-one percent of teens in the Piper Jaffray survey said they buy used games, up from 44.6 percent in the previous survey done last spring.

Koulogeorge would not break down the percentage of used games that Electronics Boutique carries, but he says it is a fast-growing segment.

“It’s a strong-performing part of our business, especially since part of our business strategy is that we’re opening more and more strip stores and the strip stores are the heaviest in that trade-in market,” he said. “Strip centers get a little bit more of a mix, but more often you’ll see the casual gamer who will wait a few weeks to buy it used.”

Still, most games are bought new — 67.9 percent, versus 32.1 percent used, the survey says. “The majority of games are sold at a full price,” said Koulogeorge. “They won’t do it on every purchase, but at some point in the year, our loyal heavy gamer will come in and trade in something.”

Nearly 75 percent of teens said they buy pre-owned games because they are cheaper, not for trade-in or store-credit opportunities. Depending on the software’s age and type, players can buy a used game for anywhere from $10 to $45.

“Cost is a big factor for these kids,” Gikas said. “If a kid can save $5 or $10 for a video game, that’s a lot of money to a kid.”

“The pre-played market is definitely growing, not only for ourselves but also the other specialty retailers,” said Koulogeorge. “Look at the rise of video-movie-rental stores who are now getting into the video-game business. As part of that strategy, they have a lot of used products.”