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Niche Retailing Online in a World of Wal-Marts: VPGames.com Case Study (pt. 1)

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VP Games, a happy Nextopia site search customer

Here is the first of a two-part interview with Stefan Von Imhof, a business graduate of the University of Massachusetts (and proud Minuteman) who turned his love of video gaming into a thriving online retailing operation. He found some time from the craziness of holiday retailing to talk to us about why physically stocking video games is financial suicide, how independent retailers can compete against chain stores, and why your grandma may actually love to receive The Beatles Rock Band on Christmas morning.

Give us an overview of VP Games, your operations, and markets.
We started Vista Gaming Products, Inc. in 2005. I was selling a lot on eBay at the time and was looking for a solid market to get into. The Xbox 360 had just been introduced and there was huge demand for consoles. We bought two premium bundled units for about $500, and sold them on eBay for around $2,000 each. The economy and eBay were both, well, in a bubble at the time, so it was a good time to come up. We saw an opportunity and jumped in headfirst. I knew the retro gaming world pretty well so we started our product line around those products.

Santa Barbara is about 100 miles from Los Angeles, which just happens to be the mecca of the entire video game industry. I got some contacts there and told them I wanted to start selling their products. We sell products for all major gaming platforms, including Nintendo Wii, DS, Xbox 360, Playstation 3, PSP, Retro gaming platforms, and plenty more. After several years of continual growth, we’ve ended up with the 7-8 suppliers that we currently use. We have seven full-time employees and hire additional seasonal staff each October. Next year we plan on expanding our selection of toys, cell phone accessories, and BlackBerry/iPhone accessories.

Are you a video gamer?
I was big into electronic gaming as a teenager. I call it retro gaming but really, the definition of retro depends on your age. For some people, retro means Intellivision from the early 1980s. For others it is good old Nintendo. My definition of retro gaming is about the era of Sega Genesis to Super Nintendo. I include first generation Gameboys in this group, too. I was in college when Playstation came out, towards the end of my time at UMass the PS2 was pretty big, but I didn’t play very much because I was too busy. The industry has always been one of growth, but the first big explosion in electronic gaming came with the introduction of the Xbox 360. It was a huge event and though it seems like ages ago, it really isn’t. The Xbox 360 graphics were so much better than anything else that had come before, it was just groundbreaking. PlayStation 3 continued the growth of electronic gaming. But what really blew gaming into the stratosphere, though, was the Nintendo Wii. It introduced gaming to millions of people who had never played, and it brought people back into gaming who had given it up. Since 2005-2006, the industry has been booming.

What is the gaming industry like?
The gaming industry is very, very competitive. You can divide it into a number of product categories: consoles and systems, games and software, accessories and parts. Many of our competitors focus on games where the demand is highest but the margins are very small. A $60 game at retail will cost about $50 at wholesale. There is so little markup in new video game software and so much competition that it is insane to even try to compete on price for us. Everyone in the industry buys the games for the same price so there is little difference between what Gamestop, the leader in brick and mortar retailing, can buy a game for and what smaller retailers like we can. Furthermore, consumers know what they are getting with a new video game, so there is very little opportunity for differentiating yourself.

While we offer games as upsell items, the two primary areas we focus on are video game accessories and repair parts. Accessories provides a less competitive market, much higher margins, and a good opportunity to compete against large retailers like Wal-mart. Modding or customizing your gaming console is really popular so that’s one area where we concentrate our efforts.

Repair parts are another great area. Gaming consoles are expensive computers and can break in lots of ways. At one point, the Xbox 360 had nearly a forty percent defect rate! Although they are essentially computers, you can’t really take those things to a regular PC repair shop. You either find a video game repair shop or do it yourself. There is a huge market for repair parts and margins are very good. Parts and repair kits are a specialty item, and not widely available in brick and mortar or big box stores. They’re also generally very small and cheap to ship so they are an ideal category to sell online.

VPGames-Screenshot-1

What makes the video gaming industry unique?
I can’t think of any other industry where inventory risk is as high. Video games are probably the fastest depreciating asset in the world. Most games lose their value immediately after sale. Three months after a game has been released, it can already have lost as much 30% of its value. Within a year, the value can drop by half. Can you think of anything else that loses half of its value in 12 months? As the last thing you want to do in this industry is risk money in inventory, you want to drop ship almost all gaming titles. Although we sell about 5,500 games, we actually only keep about 30 in stock at any given time. Accessories are a completely different animal in that they don’t have such a short lifespan, don’t depreciate as quickly (or in some cases at all), and have a much higher resale value when used.

How do you stand out in the marketplace as a small retailer in a very competitive category?
Firstly, if people think small retailers can’t compete against the big guys – that’s baloney. Today there are many ways to carve out a competitive advantage. Focusing on accessories and repair parts rather than gaming software is one way. We’ve definitely developed both product categories over the years. We didn’t plan on it but both have really contributed to our bottom line revenue. The accessories market is driven by online activity. Big box stores really only carry a small variety of parts and accessories. They typically carry basic bundles that are really expensive. In contrast, we have a really large selection of controllers, cables, adapters, cases, skins, memory units, cradles, docks, and other cool stuff. A lot of “long-tail” inventory that big box stores don’t carry because they take up so much room, don’t move quickly, and are expensive to house.

In general, we’re much cheaper. It might be tough to believe if you don’t shop online, but yeah, most online retailers are just plain cheaper than brick and mortar stores – much cheaper than Gamestop, for example. Not everyone lives near a shop that sells video games, and not everyone can afford to pay brick and mortar prices. So if you look online, you’ll find us. We use Adwords, Yahoo Search Marketing, Bing Cashback, eBay, and Amazon. We do a lot of comparison shopping engine feeds, coupon websites, affiliate marketing and loyalty marketing.

How has your customer base been affected by the economic downturn?
There is no question it has affected spending. Some people think that gaming is recession proof but a more accurate description would be that it is recession resistant. People are not buying games like they used to and new games are selling slower. The used game market is, unsurprisingly, doing phenomenally well.

Has consumers’ reduction in purchasing affected your growth plans?
We’ve cut back on a lot on expenses. We reduced labor and sent a lot of human interface tasks and database work to India and Chile, taking advantage of the global economic workforce. Next year we are looking to outsource more of our customer service overseas.

What did you do to prepare for this holiday season?
Video games are a huge part of Christmas gifting and the annual craziness gets going with Black Friday. From then on, it is absolutely crazy until the end of the year. 18 hour days and coffee bean breakfasts are the norm. It’s so important to us that we literally start preparing for the next shopping season the day after Christmas. We truly prepare all year long because holiday revenue is so incredibly important to our business.

One of the biggest things we’ve done this year is really refine the search functionality at vpgames.com. We have about 9,000 SKUs and we need to ensure that customers are finding what they are looking for quickly and easily. An intelligent site search solution (like the one we have from Nextopia) is absolutely critical.

Let’s talk product. The Beatles Rock Band. What do you think of it? Is it a popular item?
It is awesome. The reason I think it is selling so well is that it transcends age groups. It brings people together and is something that families can play. Everyone in the family can have a role and everyone knows Beatles songs. Games like Guitar Hero and Rock Band have been huge in bringing even more people into the gaming industry.

What else do you think will be hot this year?
The big games this season are Super Mario Brothers for Wii, Call of Duty Modern Warfare 2,  and DJ Hero. All completely different games, all extremely popular. Video games are like movies or music: there is something for everyone. I love electronic music so I really like DJ hero. I just wish I had more time to play it!

Thanks Stefan. Come back for the second half of our interview in which he discusses the real value of Twitter for a retailer and why Black Hat SEO just isn’t worth it.

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