Are Brick-and-Mortar Video-Game Stores Endangered?

Independent retailers aren't just nervous about their big-box competitors—they're worried about the increasing hard-drive space on consoles that can download games.

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Albert Min stands behind the counter in a downtown Brooklyn outpost of the independent, family-owned video game store Game Champ. A New York institution, it's been around for 25 years with branches throughout the city—"We've been doing this way before anyone else," Min brags, "since like the first generation of Nintendo."

Being established doesn't mean his work is easy. Wearing a black hoodie and baseball cap, nervously shuffling from one foot to the other, Min offers his opinion of selling video games: "This is a tough business. I wouldn't recommend anyone to do this."

Min is the manager of this location, a small storefront under an awning covered in drawings of a Mario. It's tucked between a beauty supply store and a newsstand on a narrow street that juts off at a crazy angle from a highly-trafficked six-lane road not far from one of the three bridges connecting Manhattan to Brooklyn. Related distantly to the family who owns this local chain, Min was forthcoming and frank about the difficulties facing independent retailers in America's biggest city. He sees lots of problems in his future. And GameStop isn't one of them.

* * *

In 2011, American consumers spent $17 billion on video games according to data compiled by industry research organization NPD Group—almost twice as much as they spent going to the movies ($10.2 billion), and almost three times as much as they spent on music ($6.2 billion). Still, this was actually a decline of 8 percent from the 2010 number of $18.6 billion, and a continuation of a longer decrease in revenue. The future for even the biggest retailers—like GameStop—is far from certain.

In the second quarter of 2012, GameStop's earnings were down 11 percent from the previous year. The end of the current generation of consoles and a lack of true blockbuster releases were the major culprits. Really, though, the headlines have hardly changed in years: "GameStop Gaining Market Share As Industry Sales Decline," said Investors.com in 2010; "GameStop Earnings: Still Increasing Market Share" said Wall St. Cheat Sheet in August of this year. Investors remain optimistic about the company's future, but largely based on hypotheticals: next-generation consoles may re-invigorate sales, its online hub Kongreagate, which allows users to play simple online games for free, may grow into a well-trafficked and profitable venture, and it may continue to be a popular place to buy video physical video games online. Honestly, many of these assumptions seem to rest on not understanding video game consumers very well.

Min doesn't have that luxury. With razor-thin margins and a shifting retail landscape, he lives and dies by his instincts, and is worried by trends he sees developing in the sector as a whole.

He has to trust his gut when buying games, ordering just enough of new titles. Making a point, he reaches to the wall of games behind him and picks up this year's mildly tongue-in-cheek boobs and zombies title, Lollipop Chainsaw. "Think about it—something like this, " he says. "It came out for $60. This game is not even three months old. Now, look at the price drop—it's $40. I purchased this for like $51.50. When there's a price drop like this, we don't get price protection. When it drops to $40, let's say I have six left in the store ... let's do the math. I'm losing like $12 a pop." This happens every week, he explains, when he receives new prices for his games from his distributors. He's in a bind—he doesn't want to lose the money, but every other retailer has gotten the same memo. There's nothing to do but lose money and hope that other titles will be more successful.

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New hardware, often the most expensive item in a game store, is also is far from a cash cow. Min explains that he makes only $5 profit selling a system. Say the wholesale cost is $195, and its suggested retail price $199. Min has priced systems at $189.99, a loss of $6, just to bring in customers.

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