Friday, November 8, 2019

Beach Fallacy

This month we celebrate our store's 15th anniversary. I am happy to report in year 15 I learned from failure. Failure means I'm still trying to innovate and change things up. This particular failure was one I recently realized while speaking with a friend who just sold his business. It comes down to this: The idea you can remotely manage your business with an installed manager is temporary at best. The 4-Hour Work Week may work for a turn key business, but most businesses are not even remotely turn key.

You may have a great manager, but they won't be there forever, and the process of getting a new one trained up, will be time consuming and not conducive to lying on a beach. So even if you have the skills to train them, how fast can they reasonably achieve mastery? In general, the concept of remote management for me has gone from something I might be able to do full time to something that may be possible half the time, that half determined by chaos in my business.

So I may be able to live in Mexico, for example, six months out of the year, a random six months at that, but I better have a place to stay when it all falls apart and I have to retrain staff for six months back home. The idea you can do this all remotely, living elsewhere, is a myth.

Here are the three areas that I see, that if I were a better owner or had magic powers, I would be able to solve to extend my six month theory. If you think you have skills in how to quickly train up candidates in these areas, this is where I would pay for a consultant:

  • Gross versus Net. A bad manager will spend your business into the ground with no apparent benefit. An alright manager will spend your money on long term investments that pay off later, but still leave you in the poor house right now, as they usually don't understand cash flow. A great manager will always spend cautiously and be conscious of the bottom line and the cash needs of the business.
I was not a "great manager" of cash until I had distributions from the net profit. I became incentivized to focus on net. Unless you can incentivize someone with bonuses for producing net profit, you'll always be watching your back (which you will always do regardless). Or you may train someone to be so overly cautious with your money, they take no chances at all.
  • Tight Employee Management. A good manager sets employee expectations via an accurate job description and solid training. The manager manages those expectations through the employees tenure by means of additional training and corrective action. Then they reward or penalize employee performance based on how those results are achieved. 
Most managers, most people, can't do this. They simply can't without some very good training, and even then it's not within most peoples personality range. I can tell you from the corporate world that most managers are untrained and awful. Training a manager to master this process will ensure you always have good people, but good luck finding someone skilled at this for what you can afford and good luck developing the skills in yourself when you've probably only had bad managers.
  • Inventory Accuracy. Does anyone other than you really care if your POS system is only 90% accurate? Inventory accuracy results in better buying practices, higher sales, lower taxes, and happier customers. Yet, it is very difficult to have a manager who cares about this accuracy as much as you. It is very much tied to net profit. If you find someone outraged at inaccuracy, and they have skill in the other two areas, find a way to groom that employee for manager. 

So those are the three areas that require an owner to be involved in a store on a near daily basis. This does not mean your store sucks if this is the case. In fact, there's no reason this should harm the value of your business if, say, you wanted to sell it. Someone with these three concerns will always need to have their hand on the wheel, but it's unlikely to be an employee for very long.

Tuesday, November 5, 2019

The End of Familiarity (Tradecraft)

When you walk into my store and look to the right, the designated direction Americans gaze when entering a store, you'll find a plethora of familiar game titles. Monopoly, Yahtzee, Scrabble, all the usual suspects. This is what is known as a "merchandising expense," games I stock that I would rather not, that indicate to the uninitiated that I am a safe place with things they are familiar with. This is a game store with games, you know, game games, as one customer recently described it. This practice is now coming to an end.

Here's how that works. First, hobby games have penetrated the mass market and they've been there now for a good, long time. Unless you're living under a rock, if you've been to Target and WalMart in the last decade and care even an inkling about games, enough to roll your red or blue cart past them, you've seen Settlers of Catan, Ticket to Ride, Carcassonne and other former hobby game store exclusive titles.

These titles have declined for us significantly since their introduction in mass market, with the promise they are gateways to good times for us later. Perhaps this is true, perhaps not, but board games are booming. These titles are now familiar to consumers. They've become evergreens on the shelf of mass market stores. This means hobby game stores don't need to work as hard with our garbage merchandising expenses to show familiarity. Chess sets and Hasborg products can be dropped, if you feel your community have these touchstones in their lives. And what community doesn't?

Second, even if I don't have this market penetration that breeds familiarity, there are now enough regular folks who play hobby games to where I need the space taken up by oversized merchandising inventory. I may lose the completely out of touch customer, but my overall base is so much larger than a decade ago, I can afford it. What I can't afford to do is stock quaint product for muggles when I've got educated consumers flocking to my business and demanding games now. They will just as easily, and without a moment of regret, buy it online, so it better be there now.

In general, if you don't know or are frightened by products like Dungeons & Dragons, Ticket to Ride, Pokemon and Magic: The Gathering, you are simply not worth any of my time whatsoever. Through mass market stores and the Internet, the public has been converted from suspects to prospects. In fact, it has turned many from prospects to customers, bypassing hobby game stores completely. I am at the tail end of this equation, taking in what I can of a cultural shift, in which a hurricane of customers have been created and I'm trying to fill up a thimble, arm outstretched into the clouds, while dying of thirst. As with all revolutions, you never know exactly your place in it until shots are fired.

Games in my parents guest room. One of these things is not like the other.

Sunday, September 8, 2019

Two Types of Game Stores

Hobby game stores are the tip of the iceberg. They were once the whole iceberg, introducing new customers, catering to veteran customers, and acting as taste makers. They did it all. The store owner decided which game you would play, and publishers would do their best to place ads in magazines or show things at conventions to convince customers otherwise. The stores were never powerful, but they were strong influencers and with little competition, they grew lazy. Epically so.

Right now, hobby game stores are as numerous and prosperous as they've ever been. However, the hobby has grown so huge in the last decade, and the Internet such a powerful force, they struggle to remain relevant. I struggle to just keep up with customer demands, and only occasionally flex my muscles as taste maker.

This is not to say brick and mortar stores are dying or having problems, which is their natural state, it just means they're trying to find their position in the changing marketplace, where Amazon has steadily gobbled up game trade market share and now owns, what 80%? Who really knows. Many game stores are selling on Amazon with a, "if you can't beat them, join them" strategy. So stores struggle with how to approach this perilous new world, where the Internet dominates as a sales channel, with Amazon and direct to consumer sales being the primary means of commerce. It's such a powerful force, it not only drives customers to us, but they arrive with a different idea of how the games are played.

There are two primary strategies to stay relevant as a hobby game store, serve the lowest common denominator or serve the highest common denominator. When I say highest, I refer to the intense amount of retail work required to bring in new customers, expose them to a broad variety of games, and later watch them wander off to Internet sales once educated. It's game store ownership as parenting. It's time consuming, expensive, and only works because nobody big is dumb enough to try. It's the full spectrum, high capitalization approach.

Deciding on being the highest common denominator requires a serious capital budget, strong sales training, and a local market where this is possible. Most scorched earth regions, characterized by close to free real estate and a customer based trained to pick apart newcomers, need not apply. There is a strength to this model, but there's also the eternal question of, if you have enough money to do this right, why would you do it at all? When I mention the scorched earth issue with scorched earth store owners, they have no idea what I'm talking about. Scorched earth is the game trade in many regions. It would be like asking a convention of ice cream store owners to consider a world without refrigeration. Sucky stores exist to serve a sucky market.

The lowest common denominator is serving the most profitable customers right now. It's a supremely logical business model, unlike the high store. You identify the lowest hanging fruit, the maximum value for the least effort, and you serve that. You serve it all the time in every way possible. You don't invest in fancy fixtures or worry too much about Kickstarter or Dungeons & Dragons table acreage. Every D&D table of players is worth one Magic player, and you make no bones about it. You serve the beast that feeds you. I should mention a good LCD store is just as well capitalized and the owners just as smart and clever as the HCD store. They just satisfy different needs in the marketplace.

The lowest common denominator store serves Magic to Magic players in every Magic configuration imaginable. You have events for every format, you sell tons of singles and have a war chest of cash reserves for buying cards from customers that would make a marijuana dispensary nervous. Where the high road store spent a small fortune on fixtures, trained staff and diverse inventory, the low road store has a shockingly large collection of used cardboard. That other expensive stuff? It's just not necessary. That means lots of singles sold in store and online and deep discount pricing on sealed product because you're essentially selling a commodity item, like soy beans. If you could buy stock in Lifetime Products, Inc., you would. You are not concerned with margin, only the market price.

Both models work. However, imagine if you were trying to grow your market as a publisher. Do you want the image of where your game is played to be that of a dirty den of dudes or a professional enterprise that welcomes all new people? Do you want to be associated with a pawn shop or Neiman Marcus? You created the marketplace where the dirty dude model worked best, but you no longer need them to sell things, just act as an onramp to your hobby game. Your own child is a delinquent and now that they've grown up, you're tired of them hanging out at your house, eating your food.

The game trade is headed in a direction that rewards the highest common denominator store because publishers are primarily interested in image, not sales volume from this increasingly insignificant sales channel. The ability of a store to sell lots of a product is literally none of a publishers business, other than knowing people come to buy it there. Supporting stores is just a marketing expense now, not a requirement for economic survival, and nobody wants to spend money on representing a poor image. It does not mean the high stores will get any sort of real sales benefit, any guarantee of meat on the bone, but when there are bones thrown, they'll get them first.

We are at the point where there is a push to transform the lowest common denominator stores into something more presentable, while rewarding highest common denominator stores with perks to help showcase publisher brands in these locations. Again, sales are irrelevant other than a marketing indicator. Is it financially feasible to transform your store? Even a very good store might spend thousands of dollars to attain what's considered great, but will it result in stronger sales? Not necessarily, and although that might be the store owners goal, it's not the goal of the publisher.

Will customers appreciate the change. It turns out the answer is sometimes. The stores that catered to the hardcore Magic crowd most effectively are not usually the stores being rewarded in this new paradigm. Some hardcore customers, catered to by the lowest common denominator stores, are angry and resentful that these "Magic light" stores are getting bones. Sure, the casual players at the high road stores enjoy tablecloths and shiny trash cans, but they're not buying more because of it.

There's two points I want to make about this mismatch between hardcore players and high road stores. First, when someone is truly angry about a business, it means they need them. They want it one way, but it's the other. When a grognardy Magic player is resentful a product or event is being held by the high road store, that's a sign that stores strategy is working. They are needed and it rankles the mercenary customer. This was once reserved for pre releases, where I would see the once a quarter customer scowl at me for existing. How dare you offer something exclusive I need, you sell out.

Second, if you're playing a game from a publisher who doesn't seem to align with your interests, maybe it's because you no longer align with theirs. Maybe your mercenary nature means you'll find your way in the marketplace regardless and you no longer need to be served to such a high degree. Perhaps you've graduated. Perhaps the penalizing of the low road store and reward of the high road is a signal to the customer base that it's time to grow up.

Wednesday, August 21, 2019

Book Errata

I may have mentioned this before, but there's an error in the Open to Buy table on page 143 of Friendly Local Game Store. The calculations are wonky starting on the second line. Here's what it should look like, based on the data in that table:

The important calculation on each day is the Balance column.

2-27, is $1,000 (starting balance), plus COGS on 2/27, minus Purchases on 2/27.
2-28 is the Balance from 2/27, plus COGS on 2/28, minus Purchases on 2/28.
2-29 and on, just copy the formula from the Balance on 2/28.

Zen and Small Retail Management

I don't throw the term "Zen" around too often, as I've been a Zen Buddhist practitioner for a long while. However, there are some parallels with specialty retail management and I wanted to share them. When you're running a specialty retail business, there is a lot of confusion. I get questions all the time from new store owners about the minutiae of running a store, which is endless, idiosyncratic and practically unknowable. There are stores that have predictable sales patterns, but for the most part every month has been an adventure for me, without a lot of obvious patterns to help plan through the chaos. 

The same is true with Zen meditation, with a lot of working through chaos with no idea if there will be positive results. The faith in Buddhism is the faith there will be results to the work. The tree will bear fruit, one of an infinite number of agrarian metaphors. Sometimes you have a breakthrough and learn it was indicative but not important. One of my teachers referred to that as "walking by the garden." You're not in the garden, but you're garden adjacent. Good effort. Business can be the same way. You think you have success, but then the next month the whole thing falls apart. In Zen that's pretty typical, in business it makes you want to cry, especially when you see friends and families, employees, have a simple, predictable lifestyle. Life will never be simple or predictable again.

Eventually you have a legitimate breakthrough in business as in meditation, and how are you rewarded? That's right, with more work. You struggle again, thinking you'll never make it, you've hit your peak. You know what? You might be right. There's no guarantee you'll get anywhere, and it's a combination of effort and wisdom that gets you to the next level. If you have effort and no wisdom? You'll be there a long time, languishing. The good news is pain can provide wisdom, so there's always hope. I remember several years where I wished my business would just fail already, since it couldn't seem to plateau to the next level. But eventually it did, through persistent effort and continuing to try different things until I found success (wisdom).

If you are struggling now, more than likely you're working your way to that next plateau. If you think the work will be over soon, you're mistaken. You can certainly decide not to continue the climb, but everyone, at every level, is working to get a little further up that mountain. Even multi million dollar businesses are faced with plateaus and what to do next. The higher up you climb, the more costly the mistakes too.

The "beach house in Maui" is the example a Harvard Business School report described that final ascent. You have three options as you approach the summit: you can plug away, content in your success, you can risk it all on that final ascent, or you can distract yourself because you're clearly not one to be content. You plan to build a beach house in Maui. Or build a Jeep to travel the world. Or whatever else smart people with money do to distract themselves. The beach house in Maui is true at every level, although you might decide to stop because you finally bought a house or finally have a steady income for retirement savings.  It's up to you to decide when you've had enough. You could work until the day you die, and increasingly I know those folks. Much of what's written about meditation practice is getting you to break through that complacent plateau. In business, you can always decide you're at a comfortable altitude.

Age is a big factor, as you spend ten, twenty, thirty years climbing that business peak, do you really have time to fix a mistake if it all crumbles? You're probably unemployable, either because you have no marketable skills or you're incapable of working for someone else. You have a mortgage and kids and college funds and retirement plans. You can do this until you've had enough. When is enough? Age and income is the answer. Do you have time to start another climb? Does it sound appealing? Without money, you gotta do something. Maybe just visit Maui and see if there are any lots for sale. I'm sure it won't lead to anything.

Finally, the "how do I know?" question, of whether you're in the garden or garden adjacent. A teacher as guide is helpful with a meditation practice. In business it's much easier to see the results. It's not hard. It's money in the bank. If you're sitting on a pile of money and wondering where you're at, you've probably plateaued. If you don't have a big pile of money, you're probably walking by the garden.

Monday, August 5, 2019

Cleaning Up the Books (Tradecraft)

I am not an accountant. I can barely keep up during my annual conversation with my accountant. I had a year of accounting in high school, probably to avoid some nastier math requirement. I know just enough to understand double entry and the difference between receivables and payables. From talking with my accountant and a business broker, there are a few areas I'm now a bit more cognizant about, things that show value or indicate problems that are often about something simple, like categorization of expenses in your accounting software. That's the exciting topic for today. Let's clean up your books.

Cost of Goods used to be my dump stat. If you have a high cost of goods, it shows your business is not very efficient. It indicates maybe you don't have a handle on shrink, or you haven't negotiated good terms with your suppliers. It might mean you're a bad buyer. A high cost of goods may indicate an industry problem, which is bad if you're trying to sell your hobby game store to someone uninitiated as a kind of toy store thingy with tables.

I actually track my cost of goods daily, so when I saw the difference between my real, spreadsheet cost of goods, and my fake, Quickbooks cost of goods, I had to figure this out (also Quickbooks is always realler). When I presented my income statement, my business broker gave me a disapproving look with my high COGS. What happened? What happened was I was dumping miscellaneous charges into cost of goods, which is a major no no. Be extra careful about what goes in this category, since it indicates so many possible problems with your business. If you have to dump something into a category, do it into a discretionary one like office supplies.

Office Supplies are pretty discretionary. Everyone thinks they could come in as a new owner and reduce waste of office supplies. My accountant encourages me to put anything consumable, anything not clearly durable, into office supplies. Office supplies also gets depreciated immediately, unlike durable goods, which are depreciated over years. so if it's in a gray area, it's office supplies. Not sure what it is? Office supply. Never use miscellaneous. Miscellaneous is a question mark. You don't want questions in your books. Answer the question!

Payroll should be broken into multiple categories. Payroll expense, taxes, payroll processing and insurance. Each of these have different tax consequences. Each expense can be attacked to drive them down in a different way. Speaking of payroll, have you given yourself a raise recently? Your pay is a discretionary expense so brokers don't care. It reduces your end of year tax burden and saves for your retirement with social security payments. It forces your business to compensate you first, unlike profit distributions which happen last, when it's convenient. You deserve a raise. You're welcome.

Rent is one category that should only ever include rent expenses. Your business value is backstopped or dragged down by your lease. No successful business can predict continued success if it has to make a costly and unpredictable move, and if your rent expense is dragging you down, there's likely nothing to be done about it. Personally, I can't imagine any business would sell with a month to month lease. I would insist on a lease as long as your earnings multiple from the valuation. If your business is valued at 3x your earnings, I would want to see at least three years left on the years. I wouldn't invest in a business until I saw a copy of the lease. Someone believed in you to be around for years. I want to see that. Heck, I want to at least see your name on that contract, especially if I have to approach the landlord to assume it.

The main take aways here are be meticulous with your books. Make sure fixed expenses and discretionary expenses are not mixed. It's easy to get sloppy. My credit card bill averages around $15,000 a month and it's painstaking to make sure every line item is categorized properly. I download reports, try to figure out each charge, and I'm especially careful with those cost of goods, since they can look like other things. It doesn't really matter if it's just you in the business, if you ever want to sell or bring on partners, you'll want to be meticulous and you'll wish you had done it years before.

Saturday, August 3, 2019

Tumultuous with a T

My store has had a tumultuous year so far. Our sales are up 23%, with net income up 230%, which is easy to do when we were at a negative net income a year ago at this time. The San Francisco Bay Area is on fire, thankfully only figuratively. The Bay Area would be the world’s 19th largest economy, if it were tracked that way. I just want to crow about how well we’re doing, how well everyone here is doing, so this post doesn’t sound like a pity party.

We have transitioned nearly our entire staff this year, a staff that averages a turnover every three years. It has been a huge hit to our institutional knowledge, which means training has been a huge expense. Training means overlapping, unproductive shifts, and it’s is our single largest expense this year, when you also include the tremendous wage inflation we've got here in California (at the bottom tier of employment). Starting wages for part timers are going up a dollar a year, but it’s not fast enough for many, who criticize us for not having every job starting at a living wage (likely in the $20+ range). We’ll get there Felicia, just give it a minute. Enthusiastic new staff are a strong reason for that 23% growth, most of it really, so you get what you pay for.

I will refer to 2019 as my Year of Entropy, assuming my store makes it out alive. Besides expensive staff transitions, our drink cooler died ($2,000). One of our two, multi ton air conditioning units gave up the ghost a couple weeks ago, requiring a new compressor ($3,000). By the end of the year, we’ll need two new computers, including a replacement of our six year old POS system which will need the POS software and hardware reinstalled ($5,000). Overall, add these expenses to the usual entropy of plumbing problems and CAM increase and it’s about $20,000 out of pocket.

We’re still a profitable business. About half that profit goes towards construction loans, so I feel we’re investing in the business each month when those checks get processed, even if nothing new arrives. I’m thankful to have windfall profits in a year with crazy high expenses. Imagine having flat sales and all these expenses start beating you down. It’s why the threat of failure never goes away for small businesses, never reduces the chance of closing no matter how many years you’ve been in business. 

Are new expenses hitting us while we’re on an upward trajectory or downward? It becomes a simple calculation. Should we cut bait or cast out again? Some of our competitors disappeared this year after doing that calculation. This has added a lot of unexpected energy to our store as the displaced seek new homes. Thankfully there’s light at the end of the tunnel. We haven’t really been walking in darkness, since it's a profitable business. Having debt while encountering the usual entropy is like walking through a dim tunnel while bats fly overhead and muss your hair. You’ll make it, it’s just disconcerting.

Meanwhile we’ll enjoy a little money thrown at re-branding and selling our updated image. We’ve had enthusiasm for our new logo, sold some stickers, and talked with people who were unaware of our previous brand identity, which is currently limited to our website and business cards.