Retail

As the most visible part of the videogame publishing trail to the consumer, retail is rewarded handsomely with as much as 30% margin on a game sale. Many routes a game takes to a consumer's hands are not visible to the consumer, but certainly influence the game choices with which he's presented. For the purposes of this discussion, we examine primarily brick-and-mortar stores; online sales of packaged goods have steadily increased but are largely controlled by brick-and-mortar establishments. Long download times and insufficient storage on the client device continue to hamper commercial downloading of games over the Internet, excluding casual games with smaller file sizes. In practice, mass-market online distribution of games awaits greater penetration of broadband connections and further reduction of memory cost.

Distributors

Although it might seem odd to begin a discussion of retail with the middleman, it's useful to know that distributors enable smaller regional store chains, individual "mom and pop" stores, and other niche retail outlets to service their customer base uniquely in the face of stiff competition from national discount chains. Distributors buy nearly every game a publisher releases; their strengths are breadth of selection, close cost management, and the ability to sell to stores whose size or business practices preclude dealing directly with the publisher. In short, the distributor brings the publisher incremental sales more efficiently than if the publisher were to service those accounts directly.

Distributors might specialize in differing product lineups. Some distributors located closer to major population centers claim the advantage of quickest delivery of the latest releases. Although the service is frowned upon by publishers, distributors also try to boost their allocation of high-demand titles to supplement national retailers' supply in the critical days between sellout of the first shipment and arrival of the next. Others might focus on "closeouts"—marked-down or discontinued games that make their way from the publisher or retailer's warehouse to the bargain bin at a loss for the publisher but profit for the distributor and retailer. Some distributors focus on making games "rental-ready," repackaging games in sturdy cases for small rental chains. Some distributors act as publishers on import or other low-visibility titles, taking the financial risk on the hope that one might turn out a gem.

In its role of making the market for games more efficient, the distributor itself must be extremely efficient in order to secure its roughly 3% margin on sales. Generally, distributors secure massive warehouse space in low-rent areas, depend on the publisher for sales materials rather than creating their own, and pay their salespeople with heavy emphasis on commission. The clich of "making it up on volume" is possible for a distributor that works every angle to its benefit.

Manufacturers' Representatives

Manufacturer's representatives, or "rep groups," are a testament to the lasting power of relationships in a high-tech world. Usually small companies of just a few people, rep groups secure agreements allowing them to act as contracted salespeople on the publisher's behalf. They're responsible for knowing the product line, the target retailer's operation, publisher practices, and when to sell more versus mark down (although they must recommend the latter to their publisher first). For these services, the publisher pays them approximately 3% of net sales (all sales minus any returns).

Rep groups are usually of most value in situations where the rep group's relationship and credibility with a retailer is stronger than the publisher's. This includes launches of new product lines, a new publisher's entry into the market, or reaching out to a retailer not yet included in the publisher's existing retailer base. The rep group acts as go-between, advising both publisher and retailer on how to work through new processes on each side. Despite hard work and sincere commitment by leading rep groups, publisher sales executives constantly reexamine the wisdom of contracting external companies for such a vital task. Perhaps it's disappointing sales on a key product that prompts the initial questioning, or cost watchers eyeing the rep group's commission percentage. The result in either case, and the bane of every rep group, is the publisher's call informing them "we've decided to go direct."

Regional Retailers

Despite the increasing standardization of the retail experience nationwide, successful regional retailers have learned the keys to survival: know your customer, provide exactly what he wants, give great service, and offer occasional surprises. These precepts apply perfectly to the game market, where smaller videogame-only retailers and mom-and-pop stores can't compete on price or speedy availability of new releases. The smaller retailer can provide detailed knowledge on the latest game or on an obscure release from years back—and if the store manager or buyer is very good, he will know where to lay his hands on both.

The key to regional retailers' success is good relationships with both their distributor and, ideally, with each publisher as well. Although economies of scale prevent a publisher from servicing regional retailers directly, solid chains with several stores can attract the publisher's notice, either through the grapevine or via distributor's advocacy with the publisher on their behalf for things such as in-store merchandising items and, rarely, markdowns. Since regional chains are frequently staffed by hardcore gamers, publishers can use such chains to create word-of-mouth recommendations from "experts" for their latest releases.

Rental Retailers

Rental retailers such as Blockbuster Video and Hollywood Video have emerged from relative obscurity as a retail category to major drivers in the channel. Until recently, publishers treated rental retail with respect but not much attention; although the sell-in quantity "per door" was less than at traditional retailers, those units were never returned or marked down. Recently, however, industry market research from many sources has shown that the primary driver behind consumer purchase intent is hands-on experience with the game. As rentals can encourage sales of a good game, so also can they stop a bad game's sales dead at launch. As a result, publishers now work their lineup out carefully with rental retailers, evaluating rental retailers' value in advance promotion side by side with actual units sold.

Rental retailers, in turn, have identified the game market as a potential growth segment of their business. Some chains are experimenting with revenue-sharing models. Other rental retailers are moving into sales as well; having created a potential buyer for a game through rental, such retailers have stopped sending the buyer to a competitor for the purchase. In short, rental retailing is transforming into a new service model for gaming consumers.

National Retailers

Finally, we come to the names that consumers know: Wal-Mart, Target, Best Buy, Toys-R-Us, Electronics Boutique, and Babbages. The lineup varies slightly from publisher to publisher, but this group of national retailers makes up the core of the industry's sales efforts, and represents the most cost-efficient way for publishers to get a game into a consumer's hands.

National retailers have direct relationships with the publisher, which means that that publisher provides them with:

• Games shipped directly to the retailer's warehouse, or direct to store if the retailer can accommodate.

• In-store merchandising materials, such as standees, posters, shelf talkers, and box fronts for display.

• Extensive sales materials on each title, usually including a direct pitch by the publisher's marketing and sales staff to the buyer.

• Generous terms on sales (average net 60, although retailers with clout stretch this as desired).

• Hands-on inventory management, including publisher sales staff poring over store-by-store inventory to increase sales efficiency.

• Various relationship-building perks, such as tickets to a local sports event or an expensive dinner after the sales call. (Wal-Mart is notably strict in its policy of "no freebies" to its buyers.)

• Credits against existing invoices or free goods to help the retailer mark down and move through stagnant inventory.

• Unique sales programs customized by retailers, whether a gift-with-purchase, instore event or celebrity appearance, or sales contest for in-store staff.

The retail buyer has great clout in the process of getting a game to consumers. The buyer is usually responsible for the entire videogame category, but depending on the relative importance of videogames to the retailer's revenue, videogame buyers might also be responsible for related categories such as video, electronics, or toys. The best buyers listen to the salespeople but also conduct their own research, accept the publisher's stance but listen to the needs of their own customers. The worst buyers pay little attention to videogames, failing to keep abreast of trends or failing to pass information along to store-level employees. Frequently, the difference between a coherent, well-stocked videogame department at one retailer and a disorganized jumble of last year's games at a different chain is directly attributable to the buyer.

For publishers, the buyer controls several elements that can mean sales success or failure: whether to stock a game at all, how deeply to stock it, "white space" or co-op advertising in retail circulars, and in-store pricing. The decision to pass on a game can mean forecast deficits of thousands of units if that retailer is responsible for 40% of a game's launch volume. Smaller publishers suffer from buyer "cherry picking" of the best titles only, while larger publishers and platform holders can benefit from the buyer's courtesy in taking the entire product line. A buyer's decision to stock a game in "gamer-heavy" stores in key locations, but not in minor secondary locations, is a strong sign to a publisher to redouble its in-store efforts, in order to achieve chainwide distribution. A buyer's decision to show a title in the retailer's "white space" circulars (usually bundled with the daily newspaper) creates a measurable sales spike the week the ad is viewed by millions of avid gamers watching for the next release. Finally, buyers have the authority to designate a key title as a loss-leader, pricing it below the usual $49 at launch to drive store traffic to higher-margin purchases. For hot releases, publishers designate a manufacturer's advertised price ("MAP") program, in which any retailer who reduces their advertised price below a certain level is denied co-op funding for the offending ad. However, this relatively weak penalty is only effective when combined with a strong buyer-salesperson relationship that neither party wishes to damage.

Much as "going direct" are two words rep groups dread, "no open to buy" are four words that bedevil publishers. "Open to buy" is the amount of money the buyer can spend buying games within a certain period, usually quarterly or 30 days. Essentially a budget, it's calculated from a combination of cost of inventory on hand, sales rate or "turnover" of that inventory, and revenue expected against that inventory for the period. Open to buy is very restricted around the Thanksgiving-Christmas holiday interval, when large numbers of games are expected to sell huge quantities. A publisher salesperson pitching an excellent game who receives the response "no open to buy" is chastised by his or her management for not pitching the buyer earlier on the game's quality. A salesperson hearing the phrase in response to a poor-quality game should understand this message: Your game isn't good enough to compete with the other releases during this time period. In short, if the publisher manages its retail relationships well, open-to-buy issues should be no surprise.

To manage such relationships to this degree, publishers require voluminous data quickly and frequently. Publishers can derive sales of their own games from internal sales information, of course, but sales data on competitive games or titles released during the same period puts an important context around one's own sales. For example, poor sales of a publisher's franchise platform title can mean anything; poor sales of the next platformer to appear might mean that that console's audience doesn't look for the platform genre; and poor sales of all games during that period might indicate overall industry softness, or poor supply of the hardware platform at retail. To fill this need for competitive data, a company called NPD publishes data called TRSTS in which major retailers report their weekly sales, which then get aggregated and sent back to publishers. Unfortunately, several retailers recently declined to send NPD their weekly numbers, rendering the sample invalid. The industry continues to benefit from NPD's monthly reports, but the weekly updates are sorely missed.