What will the VAT increase mean for games retail?

OPINION

Hey there Patrick, you're late to the forum aren't you? We were discussing this ever since the increase in VAT got announced...

Okay, okay. I realise that this is not an entirely new issue but I thought I'd write up a short piece as several retailers and indies have made their voices heard regarding the matter and I figured I would contribute my opinion on the impending situation.

So, we all know (with some trepidation) that on January 4^th next year the VAT rate is being increased by 2.5% to 20%. This will be spread across everything in the UK and with pending cuts also announced by the government, morale is down and people are on the defensive as they save in order to prepare for the worst case scenario for the upcoming year. But enough about what every breathing person in the UK knows already. What we need to consider are the knock-on effects of the VAT increase.

Distributors are passing on the increased cost price to retailers, meaning that their profit margins will be narrowed even more so than before come next year unless they are willing to increase the RRPs they regularly sell games at. Given the already fierce competition the high street faces from online retail it is understandable why they are reluctant to do so. However, successful businesses need to be able to make money, and if possible, profit. If it sounds like retailers' backs are against the wall, well just look at the quarterly and yearly financials for 09/10 for companies such as GAME and HMV. Those companies' profits are not on the up recently, that's for sure.

If the current situation with major retailers is a tough one, what of that with indie stores? Perhaps at the top of indie chains pyramid is high-street retailer Grainger Games who despite the current climate has expanded its store count and its retail presence. Another retailer, CEX, seems to be surviving in the current volatile climate although whether it is generating profit or breaking even remains to be seen. Many other indie stores and chains are having to fight for what they can get and it is understandable that they are feeling marginalised with the VAT increase. Unlike larger retailers, chain stores or supermarkets, they can't afford to sell at a loss lest they don't have the funds to keep the shop and the business running, let alone retain and maintain customer loyalty.

It has been interesting to observe internet commenters who have voiced their opinions o the matter. It is easy enough for them to say on forums and Comments sections “If you can't make it work, pack up shop and get down the Job Centre like everyone else.” To some people, the continuation of the business is as important as healthy maintenance of the family unit or relationships with friends. A greater understanding of why retailers and indies are highly concerned about the VAT increase is essential to having a more rounded and well-informed view of the current and situation and the next 12 months.

There is also the argument that retailers didn't pass on any of the profits made whilst the VAT rate was reduced to 15% back in 2009. Again, it is necessary to understand the key reasons as to why this was done (mainly to encourage and increase consumer spending together with helping companies return to profit). If the argument being presented is that retailers kept the profits for themselves, well they are businesses after all! It should also be remembered that this was enforced in a period of ongoing economic downturn and decline as well. It is hard to see this argument stand up when the reality around us everyday suggests otherwise.

What are your opinions on the upcoming VAT increase an how it will affect games retail, online an offline? And do you make your game purchases online only or split them between the internet and the high street? Finally, how would you react if game RRPs were increased? Any thoughts, feel free to post them in the Comments down below.