Why Kmart, Target And Big W Are Getting Out Of Video Games

Australia’s shock gaming news of the week was first Target and then Kmart deciding to stop selling Grand Theft Auto V down under in response to online petitions. But the biggest surprise isn’t really that this happened: it’s that those big chain stores are still selling games at all. The smart money, and their own announced strategies, suggest that they won’t be doing that in a few years’ time.

Mark Serrels has already offered a detailed analysis of the complex issues involved in the Grand Theft Auto decisions as they relate to the games community. I’ve taken a more corporate view.

What struck me when I heard the news was how relatively easy that decision would have been for managers at Kmart and Target — and indeed how easily it could happen at Big W, the other “discount department store” on the Australian scene. Having spent some time looking at their annual reports and strategic plans, it’s evident that selling games is not part of their long-term focus in any way.

That’s not because of any major moral panic; it’s just not an effective way for them to make money. Selling one less title really won’t make a big difference to the bottom line in businesses that are pegging their future survival on a constantly changing range of cheap fashions, not brand-name goods.

In considering this from a business perspective, it’s first worth remembering that Kmart, Target and Big W are not independent retail entities charting their own destinies. Kmart and Target are owned by Wesfarmers, which also owns Coles and Bunnings and various liquor chains. Big W is owned by Woolworths, which also owns Dan Murphy’s and Masters. Woolworths used to own Dick Smith Electronics until it sold it off in November 2012, arguing that electronics weren’t profitable within its business structure — a telling point in itself when it comes to games.

Why that matters is that a single product category in a single store is only a drop in the conglomerate ocean for these chains. If the stores can’t make money from that category — either directly, or by using the product to attract shoppers to buy other, more profitable products — then it will disappear. And the evidence suggests that games fall increasingly into that bucket.

This is what the Wesfarmers annual report, issued in August, had to say about Kmart and games:

Strong sales growth performance was achieved across the apparel and home categories, partially offset by declines in video games and DVDs in the entertainment category.

Things haven’t improved since then. According to Wesfarmer’s first-quarter sales figures, Kmart’s overall store sales are growing, but entertainment sales continue to decline. Games, therefore, matter less and less. It’s about clothes and cheap merchandise.

Target was singled out as the biggest problem child for Wesfarmers in the annual report. Target’s official strategy is now described as “first price, right price”. What that means is that it doesn’t want to get involved in endless price matching — it figures it can do better by stocking the right items (mainly in clothes), aiming to ensure they’re not widely replicated in other stores (through exclusive brand partnerships), and selling them at a cheap but profitable price.

Games retailing is not like that. It’s a market where the chains have traditionally competed by offering discounts or bundles, because the products are always going to be available elsewhere. For Target, it’s already a distraction when it is having trouble making money at the rate demanded by its corporate overlords. Add a controversy, and it’s easier to walk away (regardless of the merits of the argument over the title itself).

Target has already reduced the number of stock keeping units (SKUs) in its stores by 22 per cent this year, and plans to cut them by 40 per cent by the end of 2016. Put simply: it wants to sell a smaller range of products. Inevitably, that means it will sell fewer game titles.

That would have happened even without the Grand Theft Auto issue flaring up this week — but when that happened, choosing to dump it would have been a ridiculously easy decision. If you’re facing the prospect of trimming your range anyway, a controversial product is not going to survive for long. You might not think that ethical, but big business rarely is.

As I write this, Big W hasn’t joined the GTA exodus, but its enthusiasm for gaming is just as lukewarm. It describes entertainment as a “non-core category” and will be “rationalising space” in that area. In other words — less space and fewer titles, again. (The floor space will be used for more shoes, apparently.)

If you grew up in an era where Big W or Kmart or Target happened to be one of the stores you purchased games (perhaps after shopping around for a good deal), this may seem disturbing. But retail changes, and in the era of Internet competition, it changes faster than ever. It’s hard to offer a bargain price when you’re paying a bricks-and-mortar retail overhead.

The future of gaming retail in Australia is very mixed, and the lurching won’t stop for a while. On PC, it’s already largely a digital universe, complete with the gigantic patches and hyper-discounted Steam sales that entails. Consoles are also painfully moving in that direction, but for A-list titles on consoles, physical release is still important. But the chances that many of those titles will end up in any physical stores in Australia other than EB Games and JB Hi-Fi and Harvey Norman seem slimmer than ever.