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.

Monday, September 22, 2014

The Disclaimer

Only in the game trade do we sometimes feel compelled to apologize for making money. There were concerns with my last post that some might get the idea that there's easy money in this whole game store endeavor. This post is to let you know that's not the case. Let me tell you how I've done.

I made no money for the first three years. It wasn't until the financial crisis, when my personal net worth cratered, that I got serious about running the business. Before then, it was just a thing I did while my house appreciated at an astronomical level. I was still one of the lucky ones.

56% of small businesses fail by year four, according to the SBA. So most make nothing and end up with years of debt. When you skip on your lease, which for us is worth nearly a million dollars, they tend to come looking for you. Everything you do as a small business is under your name, not some protective corporate entity.

Those that survive into profitability can expect a 5-8% net profit. So that $25 per head pre-release, seating 45 people per session, for 5 sessions, gives you gross sales of $2,644. How does that translate to net profit? It could be as low as $132. One of our bathroom sinks broke during our pre-release. Do you think you can get a new sink installed by a plumber for $132? Not unless the sink came from the sink fairy and the plumber got it installed within an hour.

So how is it being successful long term? We've invested a lot of money to develop a world class store. Our return on investment (ROI), is looking to be 10 years. That's right. If you gave me $10,000, ten years ago, I'm just finishing paying you back ... $10,000. I must have gone to business school with Jeff Bezos of Amazon!  What a crappy return!

If you had put that $10,000 into an S&P 500 index fund, it would now be worth $17,950. They (we, me) gave up $7,950 so I could run a game store. Has their game store investment appreciated 80% since we began? Good question. If I sold today, I would probably get 10 cents on the dollar for my inventory and close to nothing for the furniture fixtures and equipment. It's like that for most everyone.

So if you manage to be in the minority and not fail by year four, and if you were smart enough to have a shorter ROI, like five years, what can you look forward to? First, most store owners can't afford staff, so they're taking their managers salary, when they take anything at all. That salary is usually $30,000-35,000 a year. That's significantly less by almost half what they could make managing a mainstream store.

And their profit from this endeavor? The average store grosses around $200,000 a year. The owner will make their salary, plus the net profit from that $200K. In the 5% example, that's a measly $10,000. So we'll call the successful store owners take home pay in the $40,000-45,000 range. That's below the median household income in the US of around $52,000. That's why I'm always joking about having a WWGJ: Wife With A Good Job. Although I'm happy to say nowadays it's increasingly likely to be a HWGJ.

That's the basic economics, but it gets far worse when you consider the opportunity costs. If you're gainfully employed and have a career, you're likely in your 30's or 40's and you will be forgoing your peak earning period to run this store. Based on my last job and modest salary increases, compared to my very meager game store manager salary, combined with profits from those years, I figure I've forgone over $678,000 in income. That doesn't include any of the amazing benefits I did without as well, which would probably balloon that number by 30% or so. It's something my father warned about before I started, but it didn't seem important at the time.

So, you see, it's dumb. When I talk money and margins, it's to keep us below median salary, workaholic, control freaks from crashing and burning. If you get a fascinating inside look into that, all the better. Just don't quit your day job.

Sunday, September 21, 2014

Pre-release Pricing

Today I publicly discuss the incredibly touchy subject of pricing. Not just any pricing, the pricing for Magic pre-releases. This is Magic pre-release weekend, one of several times of the year that equate to game retailer Black Friday. We've had three Khans of Tarkir events so far, and each hit capacity, perhaps for the first time since the super popular set, Return to Ravnica. The importance of pre-release money can't be underestimated. It's a huge event.

Pre-releases are special. There are few "products" as exclusive as a Magic pre-release, other examples being other exclusive Magic products. Yet retailers are all over the board on pricing, and many are in a race to the bottom. What's special about a pre-release is this: Every serious Magic player has to go.

When I say has to go, I mean they can't buy it online. Because it's a brick and mortar exclusive, a game retailer unicorn of sorts, we get to see customers who don't normally visit. We see the guy who comes in after each release and buys $100 worth of sleeves for the three cases he bought from, or the downright resentful customer who hates that we somehow still have a role in his Magic equation. So with what's essentially a captive audience, how do most retailers price their pre-release?

Magic pre-release pricing is all over the place, but it's not where you would think. At one end of the spectrum, a few are doing it at close to cost, hoping to make it up in Magic singles, or volume, or some other mythical crack addled equation. The baseline is about $25. At the other end of the spectrum is a flat $30. I don't know of anyone higher than that. In between is a dizzying array of value adds, such as early sign up discounts, included food, extra prize support, and in some cases, a combination of all of these which I honestly couldn't unravel. There is no MSRP on a pre-release, so it's interesting to see what individuals come up with, but for the most part, they didn't choose the obvious answer. I'll get to that.

The cost of the pre-release just went up in price. My guess is most game stores didn't even notice. This was a surprise to many retailers and it wasn't announced. In fact, many retailers had already sold pre-release spots at their original price before other retailers noticed this jump in price and alerted them. That was a bit irresponsible on Wizards of the Coasts part and my guess is it happened because they don't actually understand the calculus that goes into pre-release pricing. It's clear to me other retailers don't understand it as well, and most just do what others do or react to their local market. For their sake (really because I was curious), I made this handy chart:

The chart is helpful as a means to compare one price to another. For example a $30 pre-release makes roughly the same amount of money with 25 people as the $25 pre-release store makes with 35 people and the $23 pre-release store makes with 45. These are the kinds of equations smart retailers use all the time with pricing of things like Magic boxes. Yes, competitor, you sold 100 boxes at ten dollars over cost, but you still made less money than my 30 boxes at twenty over. If you're hitting capacity every time in your small store, you might especially consider supply and demand in this equation and bump up your pricing.

$20 pre-release stores don't even make it on this chart. They would need a whopping 62 participants to make the same amount of money as the $30 store makes with 25 participants.  This is a captive audience. This is a hotel room model, where every empty slot is a potential lost sales, either because its empty or because its full. We only have so many packs and so much space to pack people. There is a very tight supply and demand in these equations. So why lowball it? Why don't retailers discuss this stuff more often?

It mostly comes down to misplaced attitudes towards customer satisfaction and the need to be liked, especially with glorified hobbyists who start a store. And not having a chart showing you'll be just fine holding the line. As a business model, it's choosing to fail. Or worse, it's choosing to ignore all the things you need money for in a small business. It's not being able to afford furniture, fixtures and equipment and the staff necessary for a store. It's the stuff that keeps a small game store in "gamer pit" territory and keeps it from breaking out into the mainstream. The thing is, most retailers don't have the tools to understand this, both at this micro level and the overall macro level.

Lets talk margin for a minute. A game store has traditionally thrived at around a 50% margin. This is part history, part folklore, but it's how things used to be, back on the Earth that was. The reality nowadays is you're lucky if you can get an overall margin of 45%. In our tenth year, we've managed to bump that as high as 47%, but with a lot of higher margin used items that have trade offs in other areas, like slow turns.

I've written about how game stores are stuck between MSRP and a discount model that squeezes them on both ends, making the game trade a retail swamp of its own making. So why would the vast majority of game stores, with a captive audience with this one product, sell it below a 50% margin? At the average of $25, they're getting a 47% margin. $26.50 would be keystoning it for that 50% margin, and it wouldn't be crazy in this situation to go a bit higher.

We've been doing $30 in the past and decided to add a food component to our pre-release this time. It was more as a thank you to our loyal base, who have many other options, but I think it will be part of our equation going forward. My food budget is $3.50 per head to get to my $26.50 keystone number. If you were wondering why there's a $26.50 on the chart, this is why. I'll also mention there was nothing wrong with our $30 price point. Heck there's nothing wrong with $35, if you can do it, but I bet there's bacon involved.

If you're reading this as a Magic player and you're howling in anger, disgust and alarm, know this is an attempt to keep the doors open. Nobody is getting rich here. Nobody will ever even get well off in the game trade again, thanks to the steam releasing valve of the Internet and micro supplies of hot products. In fact, these are the kinds of events that keep many a game store's doors open. Now go find the best value out there for your pre-release, and make sure you include things like staff quality, cleanliness, and the likelihood that business will be there to keep your hobby growing for years to come. You want to play with passionate players. You want your game store owner staying up at night worrying about how to keep you perpetually entertained.