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Wal-Mart Price Cuts Savage GameStop Shares

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WalMart

A brewing price war over video games is taking its toll on the industry’s top specialty retailer.

GameStop shares were hammered Wednesday, falling more than 8 percent after Wal-Mart announced plans to lower the price of 25 of the most popular titles by up to 20 percent. The price cuts will remain in effect until Dec. 24—and could be matched by Amazon.com , which has been vigorously competing with Wal-Mart on pricing recently.

GameStop shares recovered some of the lost ground in after hours trading, climbing 0.5 percent.

In addition to the software price cuts, Wal-Mart is also offering a $50 gift card to shoppers who purchase a Nintendo Wii.

Analysts said they believed the tumble in GameStop share prices was an overreaction. GameStop has indicated that holiday sales to date have been somewhat better than expected, driven in part by the success of Activision’s “Modern Warfare 2”. That said, observers noted there was still cause for concern.

“There will be some blood from this fight,” said Ben Schachter, an analyst with Broadpoint AmTech.

Investors may be less scared about the short-term need for GameStop to cut prices to remain competitive—and more concerned about the long-term implications. Both Wal-Mart and Amazon have been aggressively pricing video games recently—and with so many eagerly anticipated titles due in early 2010, that price war could spill over into next year.

Wal-Mart is intent on stealing away part of Amazon’s online audience, so these cuts could be part of a larger strategy. If so, GameStop’s bottom line could get caught in the crossfire.

“If this is a one-time tactical decision around the holiday, then, yes it hurts, but it certainly does not warrant a 10 percent drop in GameStop’s stock,” says Schachter. “On the flip-side, if this is a new long-term strategy for Wal-Mart that breaks with long-standing unspoken industry rules around [minimum advertised pricing], then GameStop could have a more serious problem on its hands.

"Both Wal-Mart and Amazon have shown that they will not shy away from price wars, at least in the short-term. GameStop would certainly be significantly impacted if these and other retailers begin to use video games more aggressively as loss leaders, particularly around the holiday.”

GameStop, like many retailers, depends on the holiday period to generate the bulk of its sales for the year. The video game industry traditionally saves its biggest titles for the fourth quarter, which can result in a buying frenzy among gamers.

Among the games Wal-Mart has discounted are Sony’s “Uncharted 2: Among Thieves” and Microsoft’s “Halo 3: ODST”—both of which are now $10 below their usual price point. Pricing on the year’s top title—“Modern Warfare 2”—was not affected.

If the move is more than a seasonal one for the retail chain, it could put pressure on more than just GameStop. Because Wal-Mart is such a critical retail partner, publishers could be forced to lower their wholesale prices on many titles—which would negatively affect margins.

The industry is looking at negative sales in 2009—perhaps by double digits—and publishers are counting on early 2010 to mark the beginning of a recovery. Being pressured to lower prices while development costs remain high could stall forward momentum—and prevent a resurgence in share prices.