The video game Call Of Duty: Modern Warfare 2 stormed on to the shelves last month and sold a staggering 4.7 million copies in America and Britain in just one day. The extraordinary success of the shoot-'em-up may have been a boon for some retailers but it was not enough to avert disappointing results from Game Group, which saw its shares plunge by more than 20 per cent yesterday.
Year-on-year sales at the specialist computer games retailer fell by 13.9 per cent in the 18 weeks to 5 December, and figures for the UK and Ireland were particularly disappointing. It was worse than the market expected, and further fears were raised by Game's caution about Christmas trading. Its executives were quick to point out that it had outperformed the UK market, which fell 25 per cent over the period, but that was not enough to stop the company's share price from dropping 28.2p to 116.4p at the close of play.
David Stoddart, an analyst at Altium Securities, said: "The major title launches for this season have now passed and like-for-like sales are nevertheless worse than expected. Even allowing for some benefit to cost lines as a result of lower activity, further downgrades, potentially substantial, appear likely."
Game said it suffered from tough comparatives following a record year for console sales in 2008, the underperformance of some titles and lower margins following console price cuts. The chairman, Peter Lewis, said that while the release of the latest Call Of Duty, as well as football game Fifa 10, broke sales records, "the exceptionally strong performance of these titles was in part offset by softer than expected sales of some other releases".
Game's console business was the worst hit. Despite Sony slashing the price of its PlayStation 3 and Microsoft releasing a cheaper Xbox 360, the retailer said the moves had "not offset the overall fall in hardware revenues". Lisa Morgan, chief executive of Game, added: "We are still seeing good demand for the hardware but we predicted value growth would be tough given the price declines. There were also steeper declines than expected at Nintendo."
In October Nintendo said its profits had been halved by a fall in sales of its Wii console, with talk that the the mid-price market was becoming saturated; more than six million Wii systems have been sold in the UK.
Ms Morgan said Game would target sales of higher-margin software and accessories, hoping that its position as a specialist would help to bring buyers through its doors. She said that with the number of third-generation consoles owned in the UK increasing to 27.2 million from 20.4 million this time last year, software sales should soar again. While Game has benefited from the closure of high-street rivals Woolworth and Zavvi, there is fierce competition from online retailers and supermarkets which often sell heavily discounted games. Mark Photiades, an analyst at Singer, warned of the "longer-term structural threats posed by internet retailers and digital distribution".
But Game hit back, saying it had improved its market share this year with customer loyalty cards and offers to trade in old games, as its lucrative pre-owned games business grew strongly "particularly in the current economic climate".
The next eight weeks are crucial because the Christmas period has historically brought in a quarter of Game's annual turnover. It has launched its biggest-ever marketing campaign to ensure sales remain robust.
Many analysts believe the industry is facing a transition, especially with the move to online play. Screen Digest magazine predicts that online gaming's market share will rise from 18 per cent to 40 per cent by 2013. PricewaterhouseCoopers estimates the global video games market will grow from $51.4bn last year to $73.5bn in 2013.
Britain is the largest video games market in Europe and the third-largest in the world, generating $4.7bn last year. PwC said the UK was an "important game-developing centre" but it was feared that other countries, especially France and Canada, will "lure developers away with tax incentives".
The Independent Game Developers' Association (Tiga) has urged the Chancellor to introduce tax breaks in his pre-Budget report to help the UK games industry. It believes such a move is crucial to saving 3,550 jobs, safeguarding £457m in development spending and saving £415m in tax receipts to drive growth in UK studios.