'Games retail is unsustainable' says supermarket giant TESCO. But why is it going so wrong?

Note: This article is based on UK examples, but the implications are the same worldwide

Supermarket giant TESCO's entertainment chief, Rob Salter, has told MCV: "I think there is little doubt that the current commercial model for games as packaged goods is unsustainable." That's not good. In fact, it's the latest in a long line of gloomy news stories of late, especially in the UK thanks to GAME's struggles and ultimate lifeline (GAME not dead - jobs and stores saved as high street retailer finds buyer). Something is seriously broken – but does anyone have the answer?

As countless small businesses will tell you, TESCO is clearly very good at nudging out the competition. So it's little wonder it's seen GAME on the ropes and started putting the boot in with offers like Mass Effect 3 or SSX for a mere £24.91, along with Street Fighter X Tekken and Saints Row: The Third for a crazy-low £21.91 each. It's hard to see how GAME can compete with that. Truth is, it probably can't. And while that may be harsh and ruthless, this is only business. TESCO's seen its golden opportunity to remove a key competitor from the market, so it's hitting GAME's weak point for massive damage.

Above: TESCO is the master of real-time weapon change - we're seeing it right now

As our Business Studies teacher told us, these rock-bottom prices are almost certainly what's called 'loss leaders'. These are products that a business deliberately sells at a loss, literally losing money on every sale but with the aim of winning over customers in other areas. So a supermarket might sell Cola cheaper than it costs to buy in, but hoping the customers will stay in the shop and spend £50 on other groceries. In this instance, it's more to do with pricing GAME out of business. Make a loss in the short term, gain market share in the long term. Clever.

To add insult to injury, TESCO's even started calling itself 'The home of gaming', which sounds ridiculous, but isn't an outlandish claim when you consider its offering 'the largest number of gaming stores in the UK', '393 stores open at midnight for new game releases' and a 'pre-order price promise'.

Sounds great, right? However...

As wonderful as this sounds, TESCO is still unhappy with the situation it's found itself in, which is where we come back to that dramatic headline. "The current commercial model for games as packaged goods is unsustainable." And Rob's reasons are worryingly hard to argue with. They are:

"In determining how resources are allocated, space for example, a retailer looks at key factors like market growth, margin, cost to serve and ease of operation, shrink risk, returns and exit protection, and broader traffic and spend driving properties.

"Video games currently scores poorly on every one, and that cannot be good for anyone involved in the games business and for its long term future."

But what can be done to make things better? It's been rumoured that the next generation of consoles will be 'always on' in terms of internet connectivity (Xbox 720 will be a powerhouse, require always-on internet connection [Rumor]), with the very real possibility that every new game will be forever tied to a single user account. It could happen. I think it needs to happen. Hit page 2 and I'll tell you why.