Thursday, June 16, 2016

Retailer Round Table (Tradecraft)

You can listen to a retailer round table talking about my blog post, Retail Headwinds and the Future Survivors. Click here.



Monday, June 13, 2016

Specialty Stores and the Risk of Snow Blindness (Tradecraft)

What do the failing of Sports Authority and Hastings have in common? Besides crippling debt, both lost focus and became department stores, unable to serve their customers as specialists. How does this happen? First you fill your space with a bewildering array of product in hopes of attracting customers, then you allow your staff to be overwhelmed by it, lacking enough expertise to serve them. I care about this because these stories turn into the inevitable failure of brick and mortar, when they are actually retailing cautionary tales.

The specialty store model is viable as long as you keep the special. Special means tightly focusing the store around expertise and avoiding tangents and chasing profit with unfocused merchandise. The desire for tangents is strong, especially if you're analytical.

Here's what plays in your head if you're an overly analytical store owner: X amount of inventory gets me 3X gross sales at 1/2 x 3X gross profit. That provides me 1/10th of 1/2 x 3X annual profits. Send in more X! You have strong desires to increase X to juke these formulas. That's your analytical mind. However, inventory is also subjective and deeply psychological. When I give my inventory management presentation, I start with the numbers, and half way through switch to the squishy, subjective stuff.

Human psychology doesn't care about X, it cares about human perception of coherency, variety and value. You can have too little of X and you lose coherency and your customers don't "see" you having that product line. You can have too much of X and you overwhelm customers who can't "see" the trees for the forest. You can have too many price points for X and customers can't "see" the value of each and make choices. Too much X and customers develop the equivalent of snow blindness. So much stuff they can't even see anymore.

Staff likewise develop snow blindness and become overwhelmed. They bunker in the cash wrap. They hope and wait for customers to wander into areas they understand. Some are openly hostile towards product lines they feel pushed into selling and let that hostility out on the customer, either passively or openly. Staff become demoralized and unhappy and every area of business suffers.

Specialty stores are about tightly matching the right product with the right customer to maximize their happiness. Specialty stores do this by hand, not through retail osmosis. Department stores are passive operations built around having a wide variety of things, available for the customer to come and select on their own.

The department store model is a 19th Century relic of the Industrial Revolution, from the era of paper catalogs, and has no place in modern society with informed consumers who have the world's products and information at their fingertips. Not even department stores want to be department stores anymore, and many have tried ways to individualize their department store experience to become more specialty. Turning your specialty store into a department store, therefore, is something you want to avoid and a concern always in the back of your mind.

The story of Sports Authority and Hastings is a cautionary tale. Carefully consider what you sell that makes your specialty store special. Train your staff on these products. More often than not, less is more. Every store has its "right size," and you should avoid expansion for expansions sake. Focus on being a better specialty store. Do what you do now, just better.

And avoid crippling debt.

Macy's NYC 1907

Saturday, June 11, 2016

The Loss Leader (Tradecraft)

A loss leader is an item sold below the market rate in hopes of spurring sales of other items at a higher market cost. A loss leader can also be a marketing experiment, selling well below market rates in hopes of bringing in new customers. In much of the country, mostly the flatlands where rent is cheap and customers are cheaper, Magic: The Gathering has become just such a loss leader for game stores.

However, once a customer comes to the store for these low prices, be it discounted product or events sold at a loss, game stores have no high margin item for the up-sell. Singles aren't high margin and most card suppliers aren't marked up enough to cover this. Once you get them in the door, you have no way to extract cash to re balance the transaction into something that looks like adult retail.

Worse is when the loss leader is a scarce product. If you're only going to get X amount of Eternal Masters, do you really need to discount it? If a pre release can only happen two days out of eternity, do you need to low ball the price of the event? Perhaps you're afraid of your customers. Do they scare you?

What loss leader retailers also fail to understand is loss leaders are meant to be a small part of your operation and should, after a time, stop. If you sell tires at a loss and make it up with expensive wheels, when tires are only 10% of your business, that's a pretty safe bet. Toy stores used to use diapers as a loss leader to get families to bring kids to the store, so they would buy toys at full margin. Diapers were not a significant part of their toy business. Diapers were a safe loss leader.

Magic stores aren't selling diapers, they're selling the number one brand in their trade ... at a significant discount, and often at a loss. What's scary is this broken model is so ingrained in their business understanding, they have no idea what will happen if they stop. What if you did stop?

Like stopping heroin cold turkey, you could die. Better would be to recognize your best product is being devalued by you and your competitors and instead of stopping cold, pivot. Diversify away. Re balance your inventory into healthier areas and wean yourself off the discount drug. It's going to be hard. You're not going to get the same potency from X-Wing as you did from discount Magic. You're going to fall down a lot and want to take a sweet hit of that old Five Dolla Eff En Em.

Eventually you'll get that monkey off your back. Or maybe not. Loss leader addiction is a slippery slope. But your model is weak. Your retailer fu is one move. It's time to kick the habit. It's time to be an adult.


Monday, June 6, 2016

Should You Get Investors? (Tradecraft)

TL:DR: No.

The game trade is booming right now and it would seem wise to extend yourself in various ways to expand or grow. As I've mentioned before, the trade has reached levels of normal, as in what normal businesses would do. Usually the game trade is a backwater, where we rob Peter to pay Paul for todays invoices and nobody in their right mind would want to get involved.

The Income Problem

The average store, this mythical business, rakes in about $200,000 a year in gross sales. This varies dramatically, but work with me here. If you pay yourself a salary as manager, that means you personally earn that salary plus profit on that $200K. Lets call it a $30K salary, and $18K (9% net) in profit distributions. $48K a year is a respectable income in such a business, although it's still below the median household income of $54K. In many parts of the country (not mine), you would be king at $48K a year.

As you begin to dilute your equity with partners and investors, this just alright number begins to fall. What we usually see are equal partners. A 50% partner is dropping your income to $39K, assuming you keep your manager position. The difference between $48K a year and $39K a year might be the difference between making a comfortable living and scraping by. Often what I see are two people working the store, splitting that manager's salary or not taking a salary at all, both making $24K a year and both living in poverty. So my point is, there's not much money here for more than one person to make a living, so adding investors or partners, even with small stakes, is not a great long term solution.

Also consider tax deductions. A typical small business owner will have a variety of expenses that will reduce their taxable income. Cell phone, auto expenses, travel and entertainment. When you have investors, they want to see profit and don't want to see a reduction of taxable income. They want you to show them the money. This will have a significant impact on your personal income and it's one of the better reasons to avoid partners and investors.

Consider Loans

We're working on a six figure expansion project at the moment. We funded this in various ways, one of which could have been a cash call, asking investors to pony up cash or erode their equity stake. I'm 75% owner and didn't have this cash, so instead I did what Kickstarter taught me to do, I begged for money.

Consider asking your friends, family, customers, anyone who will listen really, for a loan. Structure it with a promissory note with decent interest rates, amortization table, and penalties for late payments. Make it as above board as possible, in writing, witnessed, and signed in blood if you have to. If this makes you uncomfortable, congratulations on finding a new skill in need of development.

Our current lenders are on five year terms, with various interest rates based on what I offered them in return: security agreements, senior shares, games at cost, whatever it takes, but not an equity stake. In five years, they will go on their way, knowing they helped me out and made money doing it. I don't expect conversations on how I run my business, although I don't mind that so much. One of my investors is a long term customer. One is at the publisher level of the game trade and another is someone who reads my blog (hi!).

Loans are risky, since you're banking on your ability to generate income based on your new business or expansion and you don't know if you'll have the income to cover it. If you're loan agreement isn't posing significant risk to you, you didn't structure it properly. I found it safe to make sure my loan payments didn't exceed current profit levels. But if you're new? You're asking a lot from a personal lender and a bank won't help you without collateral (and not your store contents). It's only natural they want an equity stake with such a high risk loan.

Investor Structuring

If you're going to have investors, you need to decide on a legal structure for your business. A sole proprietorship is not going to cut it. You want an LLC or corporation. These structures not only dictate how equity is determined and profits are distributed but they protect investors from lawsuits, provided they're not working in the company. When a customer slips and falls and sues your company, a proper LLC or corporation protects your investors. Nobody should invest in a small business that doesn't offer this level of protection, and if you aren't sure the small business you've invested in has such a corporate structure, you should find out and insist they form one.

Shareholder Agreement
A typical Nolo Form Your Own Money Losing Corporation book is shockingly sparse when it comes to forming a corporation or LLC. It's just the bare bones legal requirements. I highly recommend creating a shareholder agreement with an attorney. Such an agreement handles the thorny issues that come up in the life of a corporation or LLC. How do I value my shares? What happens if an investor gets divorced or dies? How do we wind down a corporation in an equitable, moral and legal fashion? You want a lawyer to help you with this because a lot of these "how to" questions are governed by law. Often they're either legal requirements or best practices. It's also an excellent document to point to when trying to get a loan. Personal lenders want to know what happens in a worst case scenario. This document dictates that.

My Own Experience
I started an LLC twelve years ago with a friend who invested 25%. I used a Nolo book and it was a piece of cake. He needed cash to start his own business, so I divested him down to 10%, with lots of thorny discussions of what his shares were worth, because we had no such understanding in our LLC Agreement. I then added three more investors to cover his missing 15%, to bring up investor levels to 25% again. Then I saw California's LLC punitive taxes on gross sales and converted the business to a C corporation (difficult, with lots of thorny problems). Then because I prefer pass through taxation like with my LLC, I converted the C corporation to an S corporation (super easy). Only last year did I have an attorney help me draft a shareholder agreement on how the corporation operates, something I should have done on day one.

Got More Questions?
Ask them in the comments. This stuff all sounds very complicated, but it comes down to one shareholder meeting a year and following best practices.

Sunday, June 5, 2016

The Good Fit (Tradecraft)

This is about employees, people who do us the great service of advancing our businesses in exchange for a small amount of compensation. This is not about my situation right now, a disclaimer for my own folks.

Sometimes employees simply don't fit. There are those who steal and those who don't do their job, but for the most part, "problem" employees often just don't fit the organization. One advantage of having been a manager in business before owning a store is I can look at a problem employee and imagine an environment where they would fit.

Invariably, that environment is a setting with stronger management and more employees. They would make good steadies, excellent cogs in a well oiled machine, often performing one role. In retail, you have to perform many roles. Specialization is a luxury we don't have room for, either for them or for me. "Steadies" make up maybe a third of the workforce, they say. Everyone looks like an alpha employee on their resume, so hiring a steady is something that just tends to happen.

You can be great at running events, while being bad at customer service. Or great at customer service, but terrible at cash handling. In a larger organization, we could take that person, put them in a narrower position and they would shine. We wouldn't care that Bob can't handle money, because damn he can organize events like a pro. In fast food, the cashier rarely flips the burgers.

Likewise, a star employee is always one who can perform in multiple areas with great aptitude. That jack of all trades all star employee is the holy grail of retail, but in an office environment, they would likely be stifled. Nobody needs a jack of all trades accounts receivable clerk. Just watch the AR clerk make suggestions to IT and you'll see how much the jack of all trades is appreciated.

The big difference between a star employee and someone you want for a manager? They have vision. They take their skills, see where the business needs to go, and they have the initiative to move the business forward without your urging. They channel your energy.  

My last manager got his job by helping me move to our new location and taking up responsibilities when I needed help. He asked. I was relieved to get the help. My current manager started by cleaning the bathrooms and quickly took an office manager role, organizing and moving us forward in that area. These people move the ball down the field, to use a sportsball analogy. They don't need to score touchdowns, just move it a few yards further. I've had frustrated potential managers who didn't understand this.



Thursday, June 2, 2016

Stress Test

Our Game Center construction is moving along. We're expecting completion this month, most likely towards the end. Behind the scenes, this project was called The House That Magic Built, since it was originally fueled by Magic money, for Magic events. Since we started this project over two years ago, Magic has waned a bit in popularity as well as cash flow, so we're not really sure how much Magic space we need nowadays, and Magic definitely hasn't been paying for construction of late. In fact, it's more accurately, The House That Board Games Built.

The best parts of one of my favorite shows, Bar Rescue, is when they do a make over and then have a stress test. They pretty much invite the neighborhood inside and push the business processes to the break point. Sometimes they do fine. Sometimes they apologize and send everyone home and people lose their jobs. The important thing is they learn a lot about how to improve. We're doing a stress test for our next Magic pre-release.

Our stress test will be for only one run of our Eldritch Moon pre-release, July 16th at 11am. Normally our pre releases are $30, but this one event will be $15 and includes lunch (probably pizza, maybe sandwiches, oh god how do I feet 120+ people?). The goal is to hit capacity, around 120 people, and carefully watch what's going on. We'll be filming it as well, so we can watch it later like a disgraced football team.

The new Game Center will be entirely up to code with restrooms, air conditioning, and fire marshall approved attendance capacity. It's got mixed retail-assembly use approval. I'm not expecting a Bar Rescue fiasco, and we would never clear the room unless it was for safety reasons, but I am wondering how we'll do with judging, staffing, fixtures, and procedures.

This is also a test to see if we can hit that 120 capacity through great effort. Are there 120 people who want to play Magic? Can they be enticed to come to an event that's at cost, with a free lunch? We not only give up $1,800 in income on a guaranteed event to make this happen, we buy them lunch. We're also doing an advertising blitz to get the word out. I consider this an advertising expense for the new space.

If we don't hit capacity, it will say a lot about how we divide up events going forward and if we actually host those big regional Magic events we talk about.

I signed up with Eventbrite today so we can do online ticket sales. You can buy your $15 ticket here. Eventbrite takes $1.84 for every ticket sold,  in case you were wondering how that worked. Eventbrite hooks into Facebook, which allowed us to create an event and advertise it. Hopefully this is a model we can use further in the future, albeit with events that actually don't lose money. I prefer Eventbrite to other solutions because they have an app both for hosting the event and for your ticket. Smartphones are the Internet for many people nowadays.

Now we see if what they see is true: If you build it, they will come.

Lower restrooms and framing for the rear staircase and storage



Monday, May 30, 2016

Chicken Little Post (Tradecraft)

As World of Warcraft spun down and lost its balance on its axis, a million people a month were spun off into space. These people were gamer geeks. They may not have started as gamer geeks (although many did), but they were certainly gamer geeks now. A million gamer geeks a month were spun off into the void. They sought entertainment.

They didn't want movies and first person shooters, because although they might have have been muggles before, WoW changed them forever. They discovered (or sometimes re-discovered) Magic: The Gathering, and as WoW spun down, Magic took off, doubling in revenue in just a few years time and continuing to grow. This is a narrative I weave with no justification in objective fact. It's observational and greatly simplified.

Magic continues to grow, and I would suggest, to a frothy level. Retailers talk incessantly about card values and online sales methods. Margins on singles sold online have shrunk down to the level of a commoditized product. Magic judges are insisting they get paid, like employees. Small stores are subsisting entirely on their singles market, shoe boxes of sleeved cards worth tens of thousands of dollars.

Are we at the stage of "irrational exuberance?" When will the Gaming Goat's tax dodge description of "It's just cardboard, it has no monetary value" come around? Is Magic big enough that a collapse will mean a spin down rather than a sharp crash? Will there be a "return to the mean" or total destruction? Are we looking at the housing market or Beanie Babies? When will the blow off start? Is there a thing that will attract that jettisoned WoW player once again? Some say it will come in the form of virtual reality.

The chart below was designed by economist Dr. Jean-Paul Rodrigue to describe investment bubbles. All the talk I hear from store owners seems an awful lot like "New Paradigm" discussions.