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Retailers Expand Video Game Shelf Space

24 Jun, 2005 By: John Gaudiosi

Retailers will increase the square footage they devote to games by 50 percent to 55 percent by 2007, according to a recent report from investment firm Piper Jaffray.

That year price points of next generation consoles will likely fall closer to mass market prices and a larger number of games will be available for the new consoles, the study says. Jaffray expects the shelf space increase to come gradually with an estimated 26 percent growth this year, 54 percent growth in 2006 and an additional 20 percent growth in 2007.

“Our analysis assumes approximately 55 percent of the increase in footage will come from new store rollouts at leading retailers like Wal-Mart, Target, Best Buy and Circuit City,” said senior research analyst Anthony Gikas. “The remaining 45 percent of the increase reflects more footage in stores and an increased commitment to the category.”

While retail margins on new hardware and software average 5 percent and 20 percent, respectively, retailers view video games as a leading traffic driver, according to Gikas. Next generation systems promise a leap in technology and gameplay that retailers believe translates into increased adoption of higher-margin HDTVs, audio equipment, and ancillary home media devices. Xbox 360, which launches this November, will support HD gaming, while PlayStation 3, which is expected to launch in the United States next fall, will support HD gaming and the HD movie format Blu-ray Disc.

Gikas believes Best Buy and Target will lead in-store expansion with increases in footage of nearly 50 percent during the next three years. Wal-Mart and Circuit City will likely follow suit with similar increases in reactionary moves.

“Comments from mass and electronics retailers suggest a slimming of the CD-based music and portable DVD categories in favor of increased space devoted to video games,” Gikas said.

While video games, DVDs and CDs represent 21 percent of Best Buy sales, CDs have been a declining category for the past few years, according to Gikas. Half of all transactions have an entertainment software attachment. Gikas believes Best Buy will target young, early adopter and hardcore gamers with its new “Buzz” format in its customer-tailored stores. The retailer has committed to 150 to 200 new such market-tailored stores in 2006.

Target is expected to increase its video game square footage by 50 percent. The store currently devotes 3 percent of its square footage to games, which account for 6 percent to 8 percent of its overall sales.

He added that specialty retailers GameStop and EB Games, which are in the process of merging, will increase footage per store by 5 percent to 10 percent through new fixtures, merchandising, and a focus on slightly larger-sized strip center expansion, versus stores in malls.

“We estimate home entertainment retailers Blockbuster, Movie Gallery, and Hollywood Video will conservatively grow their buy/sell/trade footage by 10 percent to 15 percent over the next three years,” Gikas said.

This commitment to additional retail space comes as the transition to next generation technology, and the expansion of current consoles to a broader demographic, further expands the gaming audience. Gikas believes that Best Buy, EB Games and GameStop will be the early next generation winners as hardcore gamers buy new consoles, games and accessories from these stores in 2005 and 2006. But beginning in 2007, the mass market retailers will have plenty of shelf space to devote to video games, just in time for a wider audience to make the plunge into the new console technology.

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