NJ5 said:
Reduce the gross margin to 20 or 25% and that's still enough to make a healthy profit, for a company which only spends money on rent and low-wage hourly employees. Provided you have a decent sales volume of course, because if you're selling 20 games a day you might as well file for bankruptcy immediately.
Historically there have been plenty of stores which only sold new games. Just because Gamestop is big and sells used games doesn't mean they need it to make a profit.
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Well, I'll start by saying that 20% is the correct margin. Since some of the miscellaneous figures I have are a few years old, I'm going to use the prior gen for numbers.
Rent in the mall for my local Gamestop was $2500/month. Assuming 2 employees on duty at all times (which is low, as during busy times, it's usually 3), at an average pay of $7/hr each, in a store open 79 hours a week, plus 1 extra hour for opening and closing procedures per day, is $1204/week in payroll. (A 4 week month gives you $4816.) However, a store will also have probably 2 full-time employees with benefits, which are also paid by the company. I'll figure about another $600/month for these, based on costs lower than what my company paid for me. Then come utilities. I do not have exact numbers, but based on a store of similar size, electric is ~$500/month. Commercial phone lines are also not cheap, and I'd estimate that cost at $200 per month for a 2-line system. Temperature, water, and external security was covered by the mall, so I don't have to factor those. Total cost for 1 month: $8616.
Okay, so this figure should seem doable, right? A $50 game wholesaled for $40, leaving $10 for the merchant. So we need to sell 862 games in the month, or almost 31 of these games each day, to break even. But now that you're open, there's more costs. What if a game is stolen? You'll need to sell 4 more copies just to recoup that loss. (This is why many stores have games in a secure encasement.) But secure encasements, be it like Best Buy's plastic boxes, or Gamestop's locked drawers, can break, and need replacing. I can't estimate costs of this, as there are too many variables. If a customer pays with a credit card, anywhere from 1.9% to 3.9% (dependant on the issuer) plus 30 cents, of the total purchase price is charged as a fee. Oh, and did I mention that part of that total purchase price is tax you may have to collect on the customer? So, a $49.99 game, with a 5% tax rate, purchased with American Express (3.9% rate for larger businesses), has a total fee of $2.35, or almost 1/4 of your profit. Let's keep going, with returns. If this game is returned, you get to keep none of that money, you are not refunded the initial purchase fee, AND you have to pay another transaction fee on the return!
And there's still more costs of doing business. You need price stickers, plastic bags for purchases, receipt paper (or old paper receipts), etc, for things that are sold. While these costs may be negligible per transaction, they do add up to more costs. But you still have the worst cost of all: employee theft and errors. Ideally, your cost would be $0 here. But one day, the drawer is $20 short, because someone miscounted. Consider that a few more lost sales. Was it theft, or an honest mistake? All you can do is watch them in the future, or, if in setup (a completely different set of costs), you have a camera that you can pull the tape on, review that. But it did turn out to be a mistake. There are laws in place that prevent you from charging the employee for it. (Conversely, you wouldn't want to set the standard of letting an employee keep any overages, either, lest they start shortchanging your customers.)
So all's well and good; I sell 60 games per day on average- easily enough to cover the daily costs. Then tax time comes. Uncle Sam sees that you made $X in the year, but you have expenses $Y and $Z. Only $Y is tax-deductable, so you are taxed on $X-Y, and $Z is also directly removed from your margin. You may now be looking at paper-thin profits for the year. It may not be enough for you to live on, and it certainly won't be enough to pay that fatcat executive. Expansion? Don't even think about it on this store; it's not happening in your lifetime!
All of this also ignores one other simplification I made- there are new games below $50. But for the most part, 5 $20 games is equal to 2 $50 games. (You may have to worry about more of the 30 cent CC fees, and the "negligible" costs, though.) So yeah, you need to sell even more games. Given that the standardized margin on MAG in Gamestop right now is $32.99 ($22 trade-in credit, $54.99 selling price), or the Edge margin of $25.29 ($24.20 trade-in, $49.49 sold), it's really easy to see why they moved to used games. Sure, they could probably stay open (with fewer stores) on just new games, but then one would have to wonder if it's worth it for the owner (and fatcats) to do all that paperwork for such little money. I could also go into games sold at a loss, but that's also quite hard to predict, and may have different margins on each game.
