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Fri, 30 Jan 2009

Games: What about retail?

The decline of traditional retail is a topic which has been discussed, on and off, for around a decade now. It's a conversation which is particularly relevant to videogames and other digital media, where direct online distribution is possible, but online shopping has affected almost every retail sector - even clothes and food, the backbone of the high street.

In spite of this lengthy discussion, it's still something of a shock to see two large retail chains, both of them very active in the videogames sector, shutting down in the space of a couple of months. Woolworths has been a fixture of towns around the UK for a century, and in recent years has been a key outlet for videogames, especially at the casual and family-oriented end of the market. Zavvi, the new name of the Virgin Megastores chain, occupies some of the best retail property in the UK and was determined to focus the core of its business around videogames.

Now they're both gone, or are on the way out. With no buyers in sight for either chain, both have suffered the fate of stock liquidations, massive job losses and the sale of their individual retail locations.

After years of discussion and dire predictions regarding the future of high street retail, should these closures be seen as support for those arguments? Is this, as much of the commentary has indicated, a clear sign that the high street is entering its latter days?

Too much weight can be placed on those conclusions, and it's important to consider that there are special circumstances surrounding the collapse of both Woolworths and Zavvi. In the case of Woolworths, the company has been facing trouble for many years, and found little succour in the buoyant economic conditions of the past decade. Ironically, its low-cost, "cheap and cheerful" approach (many would debate the use of the word "cheerful", in fact) might have resonated better with consumers in a recession. It'll never have a chance to find out, however.

Zavvi, meanwhile, has slid out of view protesting all the while that it's a victim of circumstance. Its sales through 2008, the company says, were healthy - but when Woolworths went down, it also spelled the end for Entertainment UK, a distribution outfit which supplied Zavvi with much of its stock. With tens of millions of pounds of debt suddenly being called in and deep concerns over how to keep key items (especially games) in stock over Christmas, Zavvi promptly ended up being dragged down by the Woolworths disaster.

Just unlucky, then? Woolworths, caught short by the timing of the economic cycle; Zavvi, a victim of pure circumstance, mere collateral damage in Woolworths' implosion?

That's one interpretation, and it's one to which many in the high street retail business have flocked. There's certainly an element of truth here - but in dismissing these dramatic collapses as mere circumstance, we risk blindly ignoring the important lessons and indicators which they provide.

The fact is that very few corporate collapses are marked by graceful, textbook descents as sales slide, profits fall, and the whole operation is wound down by administrators. As managers (and eventually administrators) attempt to rescue businesses facing difficulties, they often take gambles which result in far more dramatic collapses. Weakened businesses are also easy prey for hiccups in the economy of any description, which can result in a seemingly sudden demise rather than a slow decline.

In other words, yes - the collapses of Woolworths and Zavvi are definitely the product of circumstance. However, there is an important argument here which says that those circumstances could only sink these large companies because there are bigger, underlying problems in play.

The harsh reality is that high street retailers are increasingly being burned by trying to play in the same markets as successful online stores. Online retail has squeezed profit margins significantly, even to the extent that many online stores such as Amazon and Play can make a profit at prices which would drive bricks-and-mortar stores into the red. It's extremely telling that even in the depths of Zavvi's closing down sale, the store had few bargains on offer which weren't already cheaper online.

Moreover, with those profit margins so tightly reined in, bricks and mortar enterprises find themselves more vulnerable than ever to the kind of bumps in the road I mentioned a moment ago. They become heavily reliant on day to day cashflow, which can be seriously impacted by supply problems. In order to paper over those cracks, they need a healthy credit relationship with the banks - and right now, one doesn't utter the phrase "healthy credit relationship" within a mile of the City of London without eliciting bitter laughter and angry stares.

It's also extremely telling that nobody actually wanted to step in and buy Zavvi, let alone Woolworths. HMV has picked up a handful of stores in order to extend its network around the UK, but even at that, some of Zavvi's choicest retail locations - such as its enormous London store on Oxford Street and the hugely prestigious Piccadilly Circus store, formerly occupied by Tower Records - look set to leave the media retail sector entirely. They're most likely to end up selling budget clothing for the next few years.

If Zavvi's sales were growing and the company had a good plan going forward, why didn't anyone buy them? In part, of course, it's down to the fact that with the banks sitting in the corner sulking and refusing to play, it's rather hard for the mergers and acquisitions game to continue.

It doesn't help, however, that sentiment about the future of Zavvi's entire market sector is almost entirely negative. It's not just that you can buy CDs, DVDs and games more cheaply online - many in the industry are still reeling from just how quickly digital distribution is replacing CDs. Five years ago it was expected to take decades to move consumers away from physical products; today, we're already past the tipping point in some markets. Who can blame the business world for looking nervously at the boxed movie and videogame markets and wondering how long they'll be around for?

All of which, of course, causes us to cast a questioning eye in the direction of the remaining retail giants of this sector - which in the UK means Game and HMV. They're likely to enjoy something of an upwards push from the demise of Woolworths and Zavvi, since there'll be less high street competition - and it helps that their sector, the relatively low-cost home entertainment market, is also likely to thrive in an economic depression.

In the medium term, however, what future is there for these businesses? If consumers increasingly go online - either for mail order or digitally distributed product - what justification can there be for the massive overheads involved in maintaining their enormous store networks? Perhaps its telling that both firms are committing themselves to second hand sales, much to the annoyance of the game publishing industry - this, after all, is a USP which online simply can't replicate.

In itself, that's a sobering vision of the future for the high street - media stores simply filled with second hand product that was originally bought online. Yet the bleak choices facing high street media retailers in the next five years may be to resign themselves to being second hand thrift stores, or to go the way of Zavvi. This recession won't kill them - but the march of consumer buying habits and preferences will leave them behind.

(www.gamesindustry.biz)

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