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Journal RogueyWon's Journal: GAME in administration - thoughts on consumer issues

I made a journal post a few weeks ago on the woes of Game Group, the UK's largest specialist high street games retailer. Yesterday, what looked like a strong possibility when I made that earlier entry became reality; Game Group went into administration. The administrators moved quickly to close about 40% of stores (sensibly focussing on stores which were located close to other branches) and several thousand people lost their jobs. Other stores remain open, but with very limited stock. Vouchers, loyalty cards and trade-in credit have all been suspended.

There's been a lot of online reaction, particularly focussed on Eurogamer and MCV-UK. However, I wanted to take a little space to set down some more detailed thoughts. I'll leave aside the reasons for the entry into administration for the moment; I don't have much to add to my earlier post. Eurogamer does have an interesting piece which quotes extensively from the administrators. There's some good analysis in that, though I think it is too narrow in its focus. Anyway, leaving aside the causes of the entry into administration, some wider thoughts on what this all means...

First of all, the staff deserve sympathy

A large portion of the company's workforce was made redundant yesterday. It appears that they will receive their wages for March, but may need to rely on statutory Government schemes for redundancy payments - the payouts from which will be low. The situation on this isn't entirely clear yet, though.

This is an awful time to find yourself thrown back into the job-market, particularly if, like many GAME staff, you don't have many qualifications and most or all of your work experience is in retail. As a sector, retail is not in the business of doing much hiring at the moment (other major UK retail chains have gone under in recent months/years and still more are at risk).

It's a common piety to absolve front line staff of all blame when a company goes under. I don't subscribe to that and there were undoubtedly some staff who were awful. There's certainly one particular branch of GAME that I avoid due to the staff - though I note with some dismay that it survived yesterday while others, with decent staff, didn't. However, aside from a minority of poor branches, most of the GAME staff I dealt with over the years were helpful, friendly and well-informed. I was particularly sad to note that the small branch in London's Victoria Station closed yesterday; its staff were consistently excellent (and perhaps somewhat wasted in such a small branch) and I hope that they are able to find new jobs swiftly.

Meanwhile, the staff in the branches that remain open are going to be dealing with a lot of unhappy customers over the next few days. The suspension of vouchers, loyalty cards and trade in credit will not go down well. Nor will the inability to refund pre-order deposits. Already, there are anecdotal but highly credible reports of angry scenes in some branches.

This all throws an interesting light on our relationship with major retailers

I was entertained (in a slightly bleak way) by the reaction on various sites (particularly Eurogamer) to the news about loyalty/trade-in/deposit credit yesterday. There were lots of complaints along the lines of "but they owe me money, surely this can't be legal?".

The reality of course is that not only is it entirely legal for GAME to refuse to honour credit to its customers while it's in administration, it is a legal requirement. A company in administration is required to deal with its creditors in a certain order. Secured creditors come first - essentially the banks who loaned the company money. After this come preferential creditors - basically staff with unpaid wages or other contractual requirements. Only after these have been paid off can the company make good on its obligations to unsecured creditors. Now, unsecured creditors is a large pool that includes the company's trade partners (such as suppliers), as well as customers who hold store-credit or who have loaned the company money in the form of a pre-order deposit.

As consumers, we are generally inclined to believe that the regulatory regime around retail exists to protect our interests. However, when it comes to a company in administration "our" interests are not at the top of the list. This isn't actually a bad thing - if secured creditors didn't get preferential treatment, then banks would be much more averse to providing businesses with credit and starting up a new business would be even harder than it is at the moment. But it clearly came as a bit of a shock to people yesterday to find that the consumer protections they are used to do not apply in cases of administration.

Smart consumers worry about credit as well as debt

We all know that getting into debt can be risky. This doesn't mean you should never do it - very few people would ever own a home if they didn't take out a mortgage. But most of us will think carefully before taking on debt (and those who don't usually get exactly what they deserve).

We're much less inclined to consider the risks associated with credit - at least when we're engaging in a proper commercial transaction. If a friend asks to borrow £20 from you, you might pause to consider whether you're likely to get the money back (what happened last time he did this?). But when it comes to going into credit with a large commercial organisation, we don't often even think of it in those terms. A lot of people seem to think that when they deposit money in their bank account, the bank goes and puts it in a box somewhere. In reality, the bank takes the money and invests it elsewhere - just giving you a promise to pay the money back when you require it. When a bank goes bust, it is no longer able to honour this promise - which is why banking collapses tend to be preceded by a "run" on the bank in question, as creditors belatedly realise this. The consequences of a bank collapsing are such that many Governments opted to bail them out in recent years, rather than allowing the market to run its course.

Now, in GAME's case, the credit owed to members of the public is much smaller - even in the largest cases, we will be talking about a few hundred pounds. If I were to guess, I would say that most people held less than £20 in credit with GAME at any one time. That said, it's quite plausible that there are still people out there sitting on a pile of vouchers they got for Christmas - after all, GAME hasn't been able to put out many of the big releases since then.

A common conversation on forums over the last few days has gone (random obscenities deleted):

Person A - I'm sure glad I saw this coming and used up all of my loyalty/trade in points. I don't see how anybody could have failed to do the same after all the news we've seen since the start of February.

Person B - That's great for you, but a lot of people don't follow the news, or would have assumed that they'd get compensated for their credit if the company went bust. In fact, staff in stores were telling people that there was no hurry to spend their points.

The thing with that discussion is - both participants are correct. The writing has been on the wall for GAME for at least 2 months now. First its insurance was withdrawn, then suppliers stopped dealing with it, then its share price fell to junk levels. Put yourself in the shoes of a credit rating agency and ask yourself how you'd rate the company. Would you advise people to lend it money? Of course not.

If you held credit with GAME, then the course of action to take was clear - claim it while you can. Convert it into a tangible asset by buying a game. Or if there's nothing you want, trade it for credit with another, more secure company, by buying an XBL/PSN/Nintendo Network points card. Neither MS, Sony nor Nintendo is in imminent danger of going bust (though it never hurts to keep an eye on them if they owe you money).

But at the same time, it's true that an awful lot of people don't seem to think like this. They should - but the gap between "should" and "do" remains huge. As mentioned before, they assume that the "little guy" will be looked after, and don't understand that when a company has no money left, it really does have no money left. It's also true that staff have, in some cases, given misleading advice on this issue (I overheard it myself in that particular branch of Game that I mentioned before as NOT having good staff). Frontline staff are not experts on corporate insolvency. They shouldn't be giving advice on this issue (unless they have been issued with a factually correct line), but even if they are, people should understand not to take it as gospel.

Of course, cashing in your credit is only going to make the collapse of the company more likely - but once the writing is on the wall, I think it's fair that people act to protect their own interests.

So what might this mean for store credit going forwards?

First of all, I would hope - though probably in vain - that this might help to spell the end for store vouchers. I have never understood the point of these. You take a £20 note, backed by the Bank of England and exchange it for a piece of paper or plastic backed to the value of £20 by a single company. And yet people continue to buy them - GAME vouchers, in particular, tend to be big business around Christmas. I would hope that this might be a very public signal that vouchers are not only pointless, they are also risky.

For trade-in credit, I think the implications are more complicated. I have long maintained that GAME offered horrible value for both buyers and sellers on used games - and that a savvy consumer would use eBay instead. This is true - but I was also missing part of the wider picture.

What I hadn't appreciated was the extent to which GAME was committed to paying for pretty much any stock for current-gen consoles people threw at them, regardless of whether they're ever likely to sell it. See, if GAME can pay some kid £5 for a nearly-new copy of FIFA and then sell it on for £30 a few days later, they're laughing all the way to the bank. That kid could probably have sold his game for £15 on eBay - he'd have got more money for the game and somebody else would have got it cheaper. Instead, he gave GAME a huge cut on it.

On the other hand, when I took my old UMD PSP games in a few days before the release of the Vita, I got, on average, £2 of store credit each for them. Most of these games were many years old and the PSP had been, to all intents and purposes, a dead platform in the UK for more than a year (probably closer to two). If I'd stuck those games on eBay - they wouldn't have sold. I got credit (and consequently a very cheap Vita) and GAME got a stack of games that ultimately, they'd have to send to landfill.

If GAME comes out of administration as a going concern, then I think the new owners need to implement a much smarter pre-owned policy. Ideally, I think they'd maintain an "approved list" of games that they accept - and turn away all others. This would require a bit of head office time and resource (or could alternatively be delegated to individual stores), but I think it would be a huge cost saving in the longer term.

From the customer's point of view, I think that people may be less likely to "sit on" trade-in credit for a substantial time. That's a bad thing for retailers - it hurts their cash-flow and interest.

I nearly got stung on this myself (well, maybe not "nearly", but still closer than I would have liked). The Vita launched on a Wednesday, if I remember. On the Sunday before its launch, I took my old PSP, a stack of UMD games and a few obsolete 360 games (such as Forza 2 and 3, which were rendered obsolete by Forza 4) into the store and traded them in. I thought it would be better to do it then, rather than in a busy store on launch day. From the Sunday to the Wednesday, I had £180 of credit on my trade-in card. During that period, the news broke that GAME wouldn't be able to carry all of the Vita launch titles. It was clear that the company's end was not far off. As it happens, it was still some way from administration at that point in time, but I still got to sweat for a few days. I won't be doing that again.

Pre-orders might also be affected. GAME doesn't require a deposit for a pre-order on every title, but for hardware and collectors' editions of games, it would require deposits anywhere from £5 through to £20. GAME had already cancelled a lot of its pre-orders and refunded deposits before it went into administration, but there will still be lots outstanding. This one is really going to rankle. In all honesty, if customers end up out of pocket over this one, then I suspect this means the end of deposit-backed pre-orders for games in the UK (not that many other retailers insist on deposits anyway).

Pre-orders are extremely useful for a high-street specialist retailer. They make ordering and managing stock much easier and help avoid expensive overstock and understock incidents. This is why the staff are instructed to give a push on them - and why GAME used to reward them with extra loyalty card points. I've generally been happy to pre-order, particularly around collectors' editions or obscure niche titles which may be in short supply. That GAME shifted to requiring deposits for many pre-orders probably indicates that they were suffering from a poor pick-up rate on at least some portion of their pre-orders. Losing the ability to firm this up via deposits would be painful.

Finally, there are loyalty cards. I don't see these being affected much. There is an element of "money for nothing" attached to these. You are, in essence, being rewarded for paying GAME's slightly higher prices - but there are other benefits to shopping at GAME (at least in theory), such as a better range of stock than the supermarkets and the lack of a delay while you wait for your postal delivery. I don't honestly think people could feel too aggrieved about the loss of this - though GAME may choose to be less generous with points in future if it comes out of administration.

And finally - a more optimistic note

A lot of the above - and a lot of the discussion on forums - is predicated on a total collapse of GAME. That isn't the current situation; a lot of stores have closed, but others remain open for business. The administrators seem to be confident of finding a buyer. Indeed, while there are challenges, there's no reason to believe that, without some of GAME's more obvious lunacy, there can't be a future for specialist high street games retail in the UK.

If a buyer does move in and take over the company, it will be in the buyer's interests to get the company performing well as quickly as possible. The administrators have already shed many of the uncommercial stores, which is perhaps the biggest single issue resolved. Pre-owned policies can be changed. Prices can be tweaked. Marketing and branding can all be changed. A lot that was wrong about the pre-administration company can be fixed.

The new owners will also need to ensure that they have the support of customers. While they might not be obliged to (IANAL), one of the biggest ways they could do this would be by choosing to honour all previous committments around vouchers, loyalty cards, trade-in cards and pre-order deposits. If they didn't do this, they'd lose a lot of customer credibility and make recovering the company all the more difficult.

It's quite possible, therefore, that customers who are currently owed credit by GAME will end up getting away with only the mild inconvenience of being locked out of their balance for a couple of weeks. For the moment, therefore, the key words might be "DON'T PANIC".
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GAME in administration - thoughts on consumer issues

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