books

Books, Music, Video, & Game Retailers

Industry Insight

Date November 2015

Approximate net recovery on cost

Synopsis

Current trends

  • Major retailers have begun reaching the tipping point for digital video game sales, generating more revenue from downloads than from physical sales
  • Growth in e-book sales has unexpectedly declined, and paperback books are gaining ground

Key statistics

  • Industry revenues: $11 billion (U.S. bookstores), $450 million (U.S. home video games and electronic toys manufacturing)
  • Major product categories: Traditional books, e-readers, CDs, DVDs, games
  • Significant companies: Barnes & Noble, Trans World Entertainment (FYE), Best Buy, GameStop
  • Market share of top: The top 50 companies generate the majority of industry revenue
  • Recent sales trends: U.S. retail sales for sporting goods, hobby, book and music stores increased 5.9 percent in the first 10 months of 2015 compared to the same period in 2014

In gaming, digital sales outpacing physical sales: Following in the footsteps of specialty retailers including Blockbuster and Radio Shack, GameStop is the latest to feel the pain of falling sales, which may ultimately lead to expense cutbacks or even store closures. Per Bloomberg Business, GameStop Corp., the largest video-game specialty retailer, posted third-quarter earnings that missed analysts’ estimates as physical sales of titles including Halo 5 (Microsoft’s most-popular gaming franchise) and the much-anticipated Star Wars: Battlefront were weaker than expected. In addition, sales of the new Assassin’s Creed game were also lower than anticipated. Consequently, GameStop reported a decrease in comparable store sales of 1.1 percent for the third quarter. Industry competitor Trans World Entertainment managed to remain flat for the same period; however, the outlook seems clear. Due to consumers’ increasing reliance on mobile devices, sales of physical games are being outpaced by digital sales throughout the industry. During the past year, three of the top five publishers generated more revenue from downloads than from discs.

Referring to the Halo 5 game release, Mike Hickey, an analyst at Benchmark Co. LLC, notes, “It did deliver. What it didn’t deliver is physical.” Lower than-expected software and hardware sales as well as delays in store openings also affected GameStop’s results. Though the holiday season tends to bring more shoppers to stores, the chain reported weak Black Friday sales during November 2014. The company noted in its Q3 2015 financial summary that new hardware sales in its new game segments declined 20 percent in the third quarter, while new software sales fell 9.3 percent because of a “tough overlap of Destiny and Super Smash Bros. in Q3 2014.” On a positive note, Star Wars collectible products are selling well. Despite a slow start to sales for Star Wars: Battlefront, the company expects the new game to be ‘one of the strongest titles for the holiday season,’ as the already hugely popular new movie installment opens in theaters on December 18, 2015. It is important to note that declining sales of physical games during the normal course of business may translate to lower gross recoveries for this category in a liquidation.

The sales shift toward electronic and away from brick-and-mortar shopping is nothing new for retailers across many segments. As evidence that consumers are becoming less willing to tackle crowds and fight for bargains in person, spending in stores fell 10 percent from last year on both Thanksgiving and Black Friday 2015, according to retailing research firm ShopperTrak. Thanksgiving sales in stores fell from slightly more than $2 billion last year to $1.8 billion this year, and Black Friday sales were off more than $1 billion, from $11.6 billion a year ago to $10.4 billion this year. By contrast, online Thanksgiving and Black Friday sales tracked by Adobe Digital Index were $4.47 billion, up 18 percent from a year earlier and higher than its expectation of $4.35 billion. As demand for omni-channel retailing continues to gain ground, running the internet channel as part of retail brick-and-mortar liquidation events will likely continue to grow. For the retail sector in general, gaining the advantage of capturing additional sales to maximize gross recovery while potentially saving on expense outlay (as four-wall expenses are often higher on a per-store weekly basis) makes e-commerce a viable option to drive improving net recovery values for gaming stores.

Bookstores rethinking inventory mix: Not unlike what is going on in the video game sector, book sellers have faced a fast-changing landscape during the last decade. Interest in e-books has skyrocketed along with the advent of e-readers. In turn, analysts have attempted to predict when the tipping point will arrive, when digital sales overtake print. Some thought it would be here already, but instead of continuing on that trajectory, digital sales have slowed. The Association of American Publishers reported that e-book sales fell 11 percent during the first seven months of the year while paperback sales charted double-digit growth. Brick-and-mortar retailers are reading opportunity in those numbers. After announcing disappointing second-quarter results in which sales fell 4.5 percent, Barnes & Noble CEO Ron Boire told shareholders that the company intends to redefine itself as a “lifestyle brand” by putting more emphasis on sales of toys, games, gadgets and gifts and creating events that attract people to stores. Revenue for toys and games at the company grew nearly 15 percent during the second quarter. Barnes & Noble is already testing this new model by organizing coloring events, hosting a Mini Maker Faire and promoting vinyl records and turntables at various locations.

Lenders should be sure that appraisals reflect any recent changes in mix and that discounts are reflective of current inventory categories. As would be expected, current best-selling titles are typically the highest recovering on a gross basis, with older, less mainstream titles requiring steeper discounts to sell through in liquidation. Stock-to-sales balancing and maintaining limits on aged inventory are critical factors to the success of gross recovery values in the books and printed media space.