Target Looking for Piece of Used Video Game Market

Another big-box retailer is looking for a cut of the lucrative used video game market.

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Target has kicked off a pilot program in Northern California allowing customers to trade in their used games, as well as old electronics devices, for store credit. By year’s end, the company plans to expand the program to 850 locations.

The used game market is valued at between $2-3 billion annually. While there are several retailers currently fighting for a piece of that action, the vast majority each year goes to GameStop, which holds a strong position with core gamers and has so far managed to withstand all competitors in the space. Used games actually make up more than 50 percent of the company’s revenues.

Wal-Mart, Best Buy, Toys R Us and Amazon have all tried their hand at selling used games, but have so far only had limited success. GameStop’s share of the market continues to grow and the company has regularly said it has not felt any pressure from the competition.

“There have been several big-box competitors who have launched used business,” said CEO Paul Raines in the company's most recent earnings call. “And we measure the run rates and impacts of used sales of all the stores adjacent to them, and we simply have not seen an impact.

"Of course, we take them seriously. We watch them closely. Believe us, a lot of the traffic in those competitor stores are our guys testing the process etcetera. So we're all over that,” Raines added.

The model of those competing stores, which is the same one Target uses, is customers can trade in games and use the resulting credit for any item in the store—not just other games.

Initially, Target does not plan to re-sell the titles at its brick and mortar locations. That could change after it hits certain inventory levels or the company could decide to sell them exclusively through its website, as Wal-Mart does.

It’s an uphill battle either way. Used games are certainly lucrative, but they’re also much more complicated than they might appear. Allocating inventory among stores can quickly become a logistics nightmare. And predicting which games will have a high resale value requires an in-depth forecasting model.

It’s also labor intense. Store clerks also need to know how to examine a disc to determine if it’s damaged—and even among people who are trained in that, it’s an inexact science. GameStop says it has to fix approximately 14 million used games each year before reselling them.

GameStop stock felt pressure earlier this month when it announced second quarter used game sales fell far short of analyst expectations. While they were 1 percent higher than a year ago, analysts were looking for a 5 percent jump. That slowdown could be just a temporary bump, though. The company forecast used game growth of 7-9 percent in the third quarter.

Because they sell for $5 to $10 less than a new copy of a game, used games are popular among budget-conscious consumers. Game makers, though, aren’t as fond of them, since they don’t see any of the revenue from those sales.

Recently, several publishers, including Electronic Arts, Microsoft , Sony and THQ have instituted policies meant to combat used sales. Consumers who buy a game new find a one-use code included that unlocks a game’s online multiplayer mode or, sometimes, important levels of the game. People who purchase a used copy, however, must pay an additional fee directly to the publisher for those elements, usually in the range of $10, but sometimes as much as $20.