books

Books, Music, Video, & Game Retailers

Industry Insight

Date February 2019

Projected Values - Books, Music, and Video Game Retailers

Current Trends

  • Video game sales are up, though major retailers have reached the tipping point for digital video game sales, generating more revenue from downloads than from physical sales
  • Sales of e-books are struggling while sales of print books have increased every year since 2013
  • Independent bookstores are thriving while national retailer Barnes & Noble continues to struggle despite generating positive comp stores sales for holiday 2018
  • Online music sales continue to lower demand for record stores

 

Approximate net recovery on cost

Synopsis

Digital gaming sales outpace physical sales: Through November 2018 year-to-date sales of video games were up 21 percent over last year, reaching approximately $10.5 billion, per Fortune. The third quarter of 2018 alone saw a 24 percent increase on total industry spending on video games in the United States, of which mobile games and digital content experienced the most growth. Due in part to consumers’ increasing reliance on mobile devices, sales of physical games are being outpaced by digital sales throughout the industry. Notwithstanding the trend away from physical games, GameStop posted its Q3 2018 report revealing an unexpectedly strong increase of 3.4 percent in total U.S. sales, followed by positive 3.6 percent comp store sales coming out of the holiday period. In January 2019 GameStop finalized the sale of its Spring Mobile business to Prime Communications for $700 million; proceeds will partially be used to reinvest in core video game and collectibles businesses to drive growth. It is also worth noting that the closure of all Toys “R” Us stores in 2018 caused some industry destabilization as competitors reacted in order to gain a share of its sales.

Looking forward, analysts at PiperJaffray have predicted that physical sales of video games could cease entirely as early as 2022. While other experts caution against taking the prediction factually, they agree that trends favor digital sales over physical sales. The increasing prevalence of digital distribution has allowed independent game developers to sell and distribute their games without having to negotiate deals with publishers. No longer required to rely on conventional physical retail sales, independent developers have seen success through the sale of games that normally would not be accepted by publishers for distribution. The PC and mobile platforms are the most prominent in regards to independent game distribution, with services such as GOG.com, GamersGate, Steam, and the iOS App Store providing ways to sell games with minimal to no distribution costs. Some digital distribution platforms exist specifically for indie game distribution, such as the Xbox Live Indie Games. 

Print books regaining traction: In December 2018, Vox reported that “Instagram is helping save the indie bookstore,” claiming that influencers on Instagram who participate in the #bookstagram hashtag by curating colorful and aesthetically appealing photos of books have helped to revive interest in physical books. While it is unlikely this is the only reason behind the trend, physical sales of books have increased every year since 2013.  More specifically, unit sales of print books for January through September of 2018 were up 2.5 percent over the same period in 2017. 

Not unlike what is happening in the video game sector, book sellers have faced a fast-changing landscape during the last decade. In particular, interest in e-books initially skyrocketed along with the advent of e-readers; analysts have spent years predicting that digital sales of e-books would eventually overtake print sales. However, digital sales have slowed considerably. In fact, according to Publishers Weekly, e-book sales fell approximately 10 percent in 2017, and trade revenue fell 3.9 percent in the first nine months of the year. To contrast, the Association of American Publishers (AAP) reported that hardback and paperback/mass market paperback sales charted 6.2 percent and 2.2 percent growth, respectively, during the first nine months of 2018. It should be noted that the AAP does not include small (independent) press or self-publishing figures. Additionally, Amazon does not report its book publishing figures. However, in a July 2018 statement, a spokesperson for the company reported: “Amazon’s U.S. and worldwide Kindle book sales grew in 2017, and continue to grow in 2018, with particular strength in Kindle Unlimited, Amazon Publishing, and independent publishing.” 

National vs. indie bookstores: In March 2018, NPR reported that the number of independent bookstores grew 35 percent during the “retail apocalypse” from 2009 and 2015, which has pitted Amazon against every retail outlet in the United States. According to the American Booksellers Association, a non-profit trade organization for indie book shops, its membership grew for the ninth year in a row in 2018, with stores operating in more than 2,400 locations. In addition, sales at independent bookstores are up approximately 5 percent over 2017. While this growth can be attributed to many different factors, part of indie bookstores’ new lease on life is due to the rising popularity of print books, communities’ push to shop locally, and Barnes & Noble’s own missteps. 

After the bankruptcy and closure of Barnes & Noble’s primary competitor, Borders, it became the last remaining national bookstore in the U.S. However, the company failed to keep pace with the race to develop a robust e-book device and accompanying digital library, and divested its Nook Media division from its retail store division in 2014. For fiscal 2018, the company posted a 5.4 percent decrease in comparable store sales over the prior year. In a letter to shareholders, management attributed the decline to low foot traffic in stores. Looking ahead at new opportunities, Barnes & Noble added toys to its assortment for holiday 2018, and subsequently generated positive comp store sales of +1.3 percent, which was the company’s best performance in several years.

Record stores on the decline: Record store sales have been contracting over the past few years under increasing pressure from online steaming services and competition from other outlets including discount stores and big-box retailers. Principally, digital audio and video distribution has proven to be a viable alternative to prerecorded content, causing many consumers to opt for streaming services or digital downloads over physical purchases of CDs and records. Per Nielsen Music’s latest U.S. music year-end report, on-demand streaming became the primary music consumption platform in 2017. As a result, industry revenue declined at an annualized rate of 8.6 percent through 2018 and is expected to decline an additional 7.6 percent through 2023.

Inventory mix drives value: 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 in books, music, and games 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 on books, games, and music inventory.