Wednesday, October 29, 2014

The Shrinking Middle (Tradecraft)

Wizards of the Coast announced something today that Magic players will likely never hear about. On December 29th, they'll reduce the discount for Magic product by 2%, increasing our costs by 4%. They're not raising prices, they're just reducing the discount, meaning retailers will pay more, but will sell for the same price. How much more? I estimate $3,000-$8,000 a year, from each store, will just evaporate from retailer coffers. WOTC costs have been steadily rising for us in the form of shipping surcharges, but this is the first time the discount has been changed since 2009.

The reasons for shrinking margins is the usual stated added increases in costs of doing business that every reduced margin publisher provides us, be it Wiz Kids, Paizo or the myriad of others. Often those programs disappear or are entirely forgotten, while the shrunken margin remains. Even when they still exist, what other industry adds the cost of their doing business to their retailers?

In the case of Wizards, they have not raised prices on Magic since 2006, when packs went from $3.69 to $3.99. Using an inflation calculator, the price for a Magic booster, keeping up with inflation, should be $4.71 right now. So why not raise the MSRP?

It doesn't need to go up a buck, but even a quarter is well within what they need to cover their increased costs. More than likely, this is because Wizards of the Coast doesn't want to risk upsetting their customer base. When you've got a golden goose, you don't change its feed. But retailers? Whadda they gonna do about it? Nothing, that's what. We lack our own trade organization and an after hours email saying you've just lost $2,000-$8,000 next year is not an unusual occurrence.

As I've mentioned many times, with both an MSRP system and a discount structure, there is no way for game stores to cope with rising costs. When our costs go up, we can't raise prices, so we find a way to eat it, and that way is usually less staff, poorer infrastructure, and cost cuts in uncomfortable areas, from toilet paper quality to how often we clean the carpets. It makes the game trade a backwater, an inflexible business model that is inherently down market. Publishers then scoff at us and our operation, a model of their own making. It would be nice if the 500 pound gorilla in the industry was at least more understanding of our plight. 

Thursday, October 23, 2014

Gamers and Gates

On Fridays, if I'm lucky, I go to the rifle range and shoot holes in circles. It's a relaxing thing I like to do and it's a kind of reward, a conceit, after a decade of running a successful business. It's my golf. There is tremendous guilt in this time away, but that's another story. I mention this because you will never see a more polite group of miscreants as the fine ladies and gentlemen of the rifle range.

Why? Mostly because they all have guns. That tends to engender politeness, despite what you might have been told. When there's yelling, it's because there's a violation of safety. I was yelled at last week for not noticing someone else's safety violation. It takes a village.

They also have a common cause. They're all members of a maligned sub culture. They have vastly, wildly divergent views on politics, religion, the way of the world, but they all agree on one thing. They all want to continue to punch holes in paper circles, and much of the world disagrees.

I mention this because gamers are also members of a maligned subculture. Sure, the video game market is literally 100 times larger than the hobby game market, but any attempt to distance myself from video gamers ends up with me throwing stones within my glass house.

Their games are violent. Check. They're a black hole of time. Check. It's predominantly a male pursuit with difficulty integrating women. Check. My male dominated murder hoboism, AKA my D&D group, meets all standards for which I dislike vidya games. There are great, beautiful, creative, and non violent themes in both genres, and we all strive towards those examples, but the criticisms, the examples of what's normative in the sub cultures, are mostly the same.

The one saving grace of hobby gaming sub culture, one difference from video game culture, is eventually, hopefully, we'll meet face to face. It's social gaming. We're not all holding guns to engender politeness, but we still get along well enough to kill the monsters and take their stuff. Yes, our online forums are just as virulent as the video game forums, but have you ever been on a firearms forum?

Oh geez, the amount of time people spend trying to convince you that one, one-hundredth of an inch is vitally critical to your survival is just staggering. Arguments get just as heated, although there's very rarely threats of violence for obvious reasons. There is no deterrence in gaming forums.

Without a social outlet, video gamers have no social consequences to their douchebaggery, no deterrence. There is no convention or game store where they'll have to encounter each other and reconcile their differences. There's no rifle range of politeness.

I'm not a solutions guy, but if I had to guess, it would be more accountability and zero tolerance. More walled gardens and less Wild West. But I've got my hands full over here, trying to get my own hobby game house in order. Our basic guideline of Don't Be a Dick, Wheaton's Law, tends to work pretty well for us.

Wednesday, October 15, 2014

Fill Rates (Tradecraft)

Here's a little experiment. I'm taking my top 30 board games, which excludes expansions and card games, and checking availability from the largest three distributors at my local, West Coast warehouses. Over a quarter of this list includes Alliance exclusives (marked with an "x" for distributors that can't get those games), which pretty much guarantees I'll be shopping with Alliance. Lets look at the fill rates with these games, with Alliance being judged with their exclusives included. The other two distributors get a pass on those games.

Description ACD Alliance GTS
Pandemic: New Edition x Y x
Betrayal at House on the Hill N N N
Settlers of Catan Rev. x Y x
King of Tokyo Y Y Y
Small World x Y x
Ticket to Ride x Y x
Forbidden Desert Y Y Y
Smash Up N Y Y
Robinson Crusoe x Y x
Descent Journeys in the Dark 2E Y Y Y
Firefly: The Board Game Y N Y
Takenoko N N N
Arkham Horror Y Y Y
7 Wonders Y Y Y
Carcassonne x N x
Zombicide N N Y
Lords of Waterdeep Y Y Y
Castle Panic  Y Y Y
Star Wars X-wing  N Y Y
Super Dungeon Explore N Y Y
Red Dragon Inn Y Y Y
Elder Sign Y Y Y
Krosmaster: Arena Y N Y
Rampage N N Y
Shadows Over Camelot x N x
Agricola x Y x
Cosmic Encounter Y N Y
A Game Of Thrones Y Y Y
Mansions of Madness N N Y
Mice and Mystics Y Y Y
Total 22 30 22
Available 14 20 20
Fill Rate Percentage 63.6 66.7 90.9

Friday, October 10, 2014

Tradecraft: Problems You (Want/Don't Want) To Have

The new issue of ICV2 put the current game trade problems into context (the article isn't online yet). The game trade is booming. It has been booming for years now, but this year is one of the best in recent memory. Product availability, however, is poor. What am I talking about? The hottest games of the year, Marvel Dice Masters and X-Wing are gone. The D&D 5 Player's Handbook and the Pathfinder Advanced Class Guide are missing from our shelves. Board game mainstays like Betrayal at the House on the Hill and Carcassonne are gone, and worse, the new games, the ones we would like to build on, have disappeared without a trace in fire and forget fashion.

So who is at fault for this? Nobody. Everybody.  Retailers are told to order deeper. Publishers are either frustrated or elated by this increased demand. Some will call a sell out a victory, while others are seriously concerned with satisfying the market. If you're at a bake sale and you sell all your cookies, that's a clear win. You have the money and no need to take perishable cookies home.  If you're the guy in charge of selling the cookies, you're frustrated that you won't be taking in any more cookie money.

That's where retailers are right now. No more cookie money. The hottest games of the year are worth nothing to us if we can't put them on the shelves. We can't even call them hot, really, because we don't know the depth of the demand. Being the last man standing when it comes to inventory is great, but it doesn't build your confidence in a product line. There is a sense of a "ceiling of success" when there's a supply ceiling that can't satisfy demand. It's not greed, but a perceived limit to what's possible with hard work.

Will the next Dice Masters or X-Wing release be hot? Who knows? Some say Dice Masters is done. Some have massive pre-orders in. Not only do we not know our own depths of demand, but the lack of product overall perverts the local market, driving people to our store to suck up the last dice pack or space ship. When supply is plentiful, those people are not our customers. So without a way to plumb the depths, we're reluctant to take chances, to dive deep, on the next release, which means pre-orders are low, and the process repeats itself. Madness.

The next problem is organized play. If we were online retailers, no big deal. Sell whatcha got, blow it out or speculate, wash rinse repeat. In the case of game stores, publishers are expecting us to provide the value adds that we do so well, what differentiates us from everyone else. They want us to run organized play for their games, but think about that. Why would I run organized play for Dice Masters or X-Wing when I can't sell the product? Out of a sense of charity? Our customers certainly want that. So now we're in a jammed up position of wanting to satisfy customers, but not having financial incentive to do so.

There are bright spots of course. Besides miniature games, which generally have it together this year, there's Magic. Oh Magic, you savior of stores. We would run Magic events every day of the week, if we could. Wizards of the Coast almost always has supply. They provide wonderful organized play. The judges have it together. In fact, it's so easy right now, there's talk of game store blight, too many craptastic Magic only store stinking up the market and offering very little to their local communities. We're always lecturing them on diversification, but it's hard when the rest of the trade can't get their supply and demand formulas right.

So times are good, very good. Success is limited by the supply of products. I find it hard to blame anyone really. We're ordering what we think we need. They're making what seems a reasonable amount. Demand is outstripping supply. Future demand is hard to divine. If we could all just crack the code, there could be success at a much higher level. That potential is what's frustrating to retailers. Just don't call it a win.

Wednesday, October 8, 2014

Customized Service at Commoditized Prices

“All of us as consumers have gotten spoiled... We expect customized goods and services at commodity prices.  -Robert Rubin

This sums up modern retail quite well. We want things now, we want them exceptional, and we want them cheap. For the most part, you can have that. It comes in two flavors. The first flavor is mega corporation, because the only way to get this result is economies of scale, cutting out fat, as Robert Rubin goes on to say.

This is your Wal Mart, Target and Amazon. We expect these companies to be cheap, and they are. They can do this by squeezing their suppliers, paying their staff less, buying in bulk at reduced prices, using technology to increase efficiency, or in the case of Amazon, not making any money at all, much to the chagrin of their shareholders.

The second way retail addresses this is specialty retail. That's me! Specialty retail is about taking a small niche and hand serving a tiny customer base with customized goods and services. Customized goods and services means you can come to me needing a board game for an eight your old boy who likes trains and I can hand pick you a suitable game at a satisfactory price point in no time. Eight people can come to a miniatures event and pay $5 for store credit and we'll call that a win because of a complex ancillary micro sales model.

That's a niche I can fill that the mega corporation won't touch because of its fiddly complex nature and impossible to scale efficiencies. I do it by being small and nimble and having no fat whatsoever. We also have some big box characteristics, and despite the low tech nature of what we sell, we're extremely dependent on technology and sophisticated inventory processes.

There are reasons for more for less, but it would be wrong to claim it's all tech or pressuring suppliers. The way we've all been able to get customized goods and services and commoditized prices is almost entirely worker productivity. Our employees are pretty amazing, expected to master five times the tasks of a McDonald's employee for not a lot more money. That's been the trend over the years, expecting massive productivity increases, bit by bit, often a fraction of a percent in a quarter, but over many years.

The demand for more, better, right now at a low price has resulted in staggeringly high employee productivity. With unemployment falling, there's a concern in some quarters about increased inflation. However, the concern comes from an outdated concept that doesn't take into account the levels we've squeezed out productivity from today's workers. When employees are 50% more productive than they were just a short while ago, you can pay them more without feeling the pinch to the bottom line, which means inflation shouldn't rise. So we demand more with less, while we complain about income inequality, the shrinking middle class, and stagnant wages.

I am no exception here. One thing I tell my managers is if they can get through school, with the experience they're getting working for us, they'll be golden. Why? Because they work really damn hard, smart, and fast. Anyone who can master that in my employ is destined for success with a degree in hand.

Monday, September 29, 2014

The Pocket Knife

My son passed his knife safety "whittling chip" class at scout camp this weekend. They learn the "blood circle," how to safely pass your knife to someone else, and how to sharpen and store their knife when not in use. He's nine years old and he took this deadly seriously, as he should. Then they practiced whittling on soap bars.

While watching my boy with a butter knife, responsibly, slowly whittling bits of Irish Spring into the shape of a sports car, I decided he had earned the privilege of carrying a folding blade knife. I wanted his first knife to come from his dad.

That's when I became conflicted. Retail has changed my brain chemistry to where "buying things" the activity that I facilitate for the vast majority of my waking hours, is never an easy thing.

Where should I buy this pocket knife? As a brick and mortar retailer, surviving on very thin profit margins, it pains me to pay full price for anything. I am not cheap, because I tend to buy top of the line products, another retailer trait. I buy top quality because I don't want to buy it again. It's a "buy once, cry once" mentality that comes from not having the resources to replace stuff most of the time (It's also a bit of a Gen X trait as well; fewer things of the highest quality). Looking at "return on investment" isn't a conscious thing any longer, it's how my mind works. But being frugal, not wanting to spend a lot, that's different. It's a bit paradoxical.

It's paradoxical because I know where the cheapest price resides, and it's not with brethren brick and mortar store owners like myself. It's in the small store killers like Amazon and Wal-Mart. It's difficult not to give them my money without being a total sell out, but often I have no choice when my tastes outstrip local resources.

We went to a very good army-navy store. Victory Stores has been in Vallejo nearly forever. The owner is a solid guy, the kind who bends over backwards to help, has mastered special orders (despite it being on a notepad), and sincerely thanks you every time you make a purchase. The rest of the staff is just as professional. I wanted my son to experience this store. I wanted this even though the knife I wanted to buy him was much cheaper online.

When we entered, I announced my intentions to the owner and he assigned us a staff member, an older gentleman, to help us select a knife. We had many requirements, including price, the opening and closing mechanism, the blade style and length, and a knife that would fit his small hand. There was no good way to figure all this stuff out online. Knives that seemed perfect had locking mechanisms he couldn't disengage. One was perfectly balanced for me but was far too heavy for him. And again, I wanted him to have that now rare experience of solid customer service. I would be giving him his first blade, but he would be choosing it. They would be expertly facilitating that choice. It would have more meaning this way.

If you've ever seen the movie, The Matrix, that's how I see retail stores, especially ones I know well. The zeroes and ones make up the various product lines, the quick sellers, the long tail items, the mid level merchandise and what passes for top quality. It's all on display systematically, on endcaps and gondolas and gridwall, terms I didn't know a decade ago. It's also not uncommon to find me in someone else's store, re-shelving goods, organizing products, or helping customers. I don't intend to do it. It's kind of an affliction. I wouldn't have gone ten years owning a store if there wasn't some personal satisfaction in that.

We found his pocket knife. The owner said he had just put it on sale for 20% off, which felt good. He thanked us sincerely for our business. We thanked him and the gentleman who assisted us. It was good to know you could still have that experience. It was really good to know that store was still there.

Friday, September 26, 2014

The Magic Box

Around a third of all hobby game sales are of one product line. This game has releases quarterly, and as it fluctuates in popularity, businesses ebb and flow, including game distributors and every hobby game store. Stores choose their POS systems based on how well it handles this one product. Business plans, if they exist, focus on how to feature and support this one product.

It's such a popular product, that it's saved, hoarded, and tracked like currency over decades. It's the original Bitcoin. It's not inconceivable to forgo the stock market in favor of collecting this product. Thieves regularly break into game stores to steal it. It's published in ten different languages and we carry product for seven of them. Other than a couple games in Spanish, there's nothing else like it in our store. I'm referring to Magic the Gathering, of course. Today is the release date of Khans of Tarkir, the hottest set in at least a couple years for the hottest game in the world.

I previously discussed the Magic pre-release. It's a product of limited supply, with a huge demand, tied to an event that can only happen on two days ever, at a location with limited seating. It's a unicorn of sorts, with incredibly tight sales parameters that inevitably leads to profitability in a trade joked about for its lack of profitability. Magic the Gathering booster boxes are the exact opposite of this.

Booster boxes are often called commodity items, as in ubiquitous items of nearly unlimited supply. However, booster boxes fail the fungibility test, as in only Wizards of the Coast produces them. So they're not quite a commodity item, but they are widely available, nearly limitless in supply, and in high enough demand that the price of one is rarely the MSRP.

If you're a casual Magic player, you may not be aware that Magic boosters come from booster boxes. There are 36 packs in each box and there is nothing especially magical about the price of a booster box. A booster box doesn't really have an MSRP from Wizards of the Coast, they just sell us packs that happen to come in boxes.
1,728 boosters, which we then use a calculator to add to our system as 48 boxes (which the system then breaks out as pack again, go figure). And what's with Huey?
Every other product in the store is sold at roughly MSRP. So you would expect a Magic box to be 36 packs times the cost per pack. Since packs have an MSRP of $3.99 that should result in a Magic box price of $143.64. So is that the price? With a nearly unlimited supply and an enormous demand of this near commodity item, nope.

Khans of Tarkir, the hottest set in years, on the release day, right now, with a box cost of $73.08 ($2.03 a pack x 36) can be bought online for as little as $100 plus free shipping. Ignoring shipping, that's a roughly 37% margin for this industry driving, super hot product. With Priority Mail shipping, it's more like a 20% margin for that retailer or a $15 gross profit on a box that "should" sell for $145.
We know why the box is sold at such a low price, because of the market forces. But what is a retailer to do? How does a retailer know how to price this value price eroded product that makes up such a frightening portion of their sales?

First, lets get something straight. If you're not a box "flipper," as in a low box cost, high volume seller of Magic boxes, the vast majority of your pack sales are to casual players. Casual players are the backbone of this product. They allow you to have margins high enough so you can give deep discounts to the serious box buyers. If you're a casual Magic player, know that you're supporting this model. I've always felt bad for you guys. Without you, there would not be the profit that drives the game trade, as a 20% margin doesn't take you very far in a trade that agrees it needs 50% to prosper.

I should also mention the casual player is a very different market than the serious player. They find the concept of a $100 booster box just as obscene and inconceivable as a $145 box. They will not be buying boxes, possibly ever, and what you sell your box for is of no concern to them. These two customer bases are entirely different. Nobody has ever said, "Wait a minute, you're ripping me off by not giving me volume pricing on my booster pack purchase!"

Here's where I would like to be able to show you a chart (below) that demonstrated selling boxes at a higher price is far more beneficial than a lower price, but that's not realistic. The market price is the price. That incredible demand with unlimited supply sets the price and you just need to slot yourself into that equation to maximize your profit. There is no perfect information in the marketplace, no right price for everyone, just a right price for you to sell the most number of boxes at the best price possible.

That number is something you need to experiment with. The first few years of having a store, I sold Magic boxes at $145. Hold that line! When I say I sold them at $145, I really mean I sold one box, two if I was lucky, from each release. I wasn't really participating in the market. I had the wrong price. Since then, I've experimented with $125, $115, and low pre-order prices in the $100 range. By doing this, you start to see your supply and demand curve.

What you're looking for is that equilibrium point, where the price perfectly matches the supply and demand. That price is going to move as well and I suggest you freely adjust your box prices up and down as the supply and demand waxes and wanes. If a set is out of print or in short supply, move it up. If you're sitting on a ton of crappy product (Born of the Gods), mark it down. There's no fear of eroding brand value because the brand is already at near commodity levels. The brand has no absolute value.

If you're a retailer, contact Lincoln Erickson, who gave a presentation on exactly this two years ago at the Gama Trade Show. He experimented with box prices, created supply and demand curves and came up with a price that was right for him. Our price happens to be around $115. That's where I sell the most amount of boxes for the most amount of money. It's a price determined by the local market, the worldwide market and lots of trial and error. At $125, sales drop off. At $100, they don't increase appreciably and I'm giving away money.