Saturday, January 21, 2017

The Struggle is Real (Tradecraft)

I've got five days of cash flow, a huge sales tax payment due, a massive credit card bill, payroll, and the need for a new cars worth of sales in the next ten days. This makes me happy.

"The struggle is real," is a popular meme, but the struggle is often the only "real" part of this business. Success is ill defined. Money in the bank, real money, capital expenditure money, is a rarity for most store owners, at least until they've become well established. The need for things far outstrips cash flow. Entropy is a bitch and she demands replacement fixtures and an endless flow of toilet paper.

We're poor because we just paid off tens of thousands of dollars of construction debt, enough to enter the new year with a sliver of a chance of making it through January without dipping into some form of debt. But it's a pleasant place to be, especially knowing I won't be writing some of those monthly checks ever again. It's mostly pleasant because it removes decisions from my life. You work, you get paid, you pay the bills. We sold the van and tweaked our insurance to save $400 a month. This is the comforting work of the ancestral merchants. Wash, rinse, repeat. Routine has a warm embrace.

It's far easier to obsess over what's in front of you than forecast the future. It's like that person whose always busy at work, who has to constantly work late to catch up with what's in front of them. Those of us who've gone beyond that level know they're just poor planners, that resources haven't been allocated, that they're poorly managed in one aspect or another. It's a weakness of sorts, a comforting one that enshrines them in long suffering work and avoids the complications of social interaction or happiness seeking.

What I should be doing is planning. I should be working on a marketing plan. I should be setting up our demo programs. I should be planning those mini cons I talk about wanting so badly. I should consider a path to a book, but I question the value of such things. I should really find a way to swing the GAMA Trade Show this year. What I really should do is go on vacation. But five days of cash flow, man. I better put my head in the sand and and get back to the grind.

Monday, January 16, 2017

Less is More (Tradecraft)

Much of the last several years has been more about dropping games than adding them. This particular post is about saying it's a viable strategy for a profitable store. Don't be afraid of making hard decisions. I'm not talking about culling the herd, dropping slow board games or low performing SKUs. I'm talking about identifying broken game trade participants and showing them the door. The end result has been slower sales growth, since it's turning your back on gross, but much higher net.

Our net income topped out in 2015 at an astonishing 11%, and that's without significant sales in used product or other (highly profitable) cheats. It was straight up game trade retail at MSRP. This does require you to stop the genitalia measuring, which is gross, as in gross sales. I've written about that before, so no need to go into the "nothing but net" mantra again. Gross is a lie. You can't pay your mortgage on gross.

This is, of course, one way to do things. It's saying it's not necessary to be the one stop shop for all things games, because all games are not worth it for you, personally, to carry. We're talking big titles like Yugioh and Warmachine and for you, it might even be Magic. There are no sacred cows. There is nobody worthy of your unquestioned loyalty. This is also about crafting your store identity, admitting to yourself where you stand in the marketplace, acknowledging the limitations of your demographics.

No publishers are immune. If Wizards of the Coast can't protect their brand value and you can't make a profit selling it, drop them. If Warmachine can't discontinue SKUs in their creep towards infinite models, well, let them go. If Konami can't address the violence inherent in the system, send them on their way, give up their low margin product and troublesome crowd. Also, because this is business, it's not personal, so don't take it that way (your customers will). Also because it's business, reconsider if companies change.

Focus on net and the slow roll to higher profitability. Like fertilizer, take the money you get from dropping the bad actors and spread it liberally where it's needed to enhance growth. What you'll likely find is a lot of pent up demand in cash starved areas. We put our Warmachine money into Game Workshop and it paid off wonderfully. You might do the exact opposite and have the same results. It's a weird field. What you'll likely find though is a lot less cash crunch, a lot more time to explore new opportunities, rather than the churn of low margin, high gross nonsense.

Thursday, January 12, 2017

Report to Stakeholders 2016

This is my second year writing this report, a public document meant for our various stakeholders, modeled after the Steve Jackson Games annual report. I hope it provides our stakeholders as well as the rest of the industry a view into how we do business, which is just one of many viable ways. 

A stakeholder includes employees, event coordinators, shareholders, distributors, publishers and, of course, our customers. This year, it includes private lenders who helped us finance our Game Center. We have four private lenders who lent us thousands of dollars to make the Game Center happen.

We are a single, brick and mortar store with no significant online sales. Online is where we go in the rare occasion we can’t sell something in store. With a highly developed system of clearancing old product, our online sales are something in the neighborhood of less than one half of one percent. 

We intentionally and entirely focus on our single brick and mortar store customers. We have no interest or desire to sell online to any degree, nor are there plans at this point to ever have multiple stores. One great store. That’s the model.

2016 Summary 

Sales for 2016 were flat, +/- half a percent, depending on how the accounting is jiggered. That’s good considering the trials of the year.

2016 was a very difficult year for us. April found us without a lease, still in negotiations for construction and new lease terms. At the time, there was a chance we would have to move, and a smaller chance we might shut down for a short time, if we couldn't come to an agreement. The risk was small, but it was there. I spent the first quarter scouting new locations.

I had been seeking conventional construction funding since January and was unable to secure a loan, so when we signed the lease agreement in April, including the build out, I was financially unprepared to begin right away. Construction was delayed about 10 days while I came up with the first payment of $20,000. I spent the following two months securing the rest of the construction money through private lenders. Although construction was delayed significantly, one reality of funding was I wouldn't have had the money if they had finished on time.

So how did we fund the second half of this $133,000 project? We found private lenders by mentioning our need for funding in a Kickstarter update. It made sense that we were able to find people in the estimated 20% of the 20% of people who used our game center (or supported the project), a really small number. For those wondering, we offered competitive interest rates, promissory notes, amortization tables, and a personal guarantee on each loan. Each loan was slightly different based on other perks we offered or requirements we had to provide. I don't think I would have been able to craft such deals earlier in my career.

It actually went up another $2K since I made this

Construction was scheduled to take 4-6 weeks but instead took an astonishing 6 months. The project scope was just poorly conceived by the project manager, along with some smaller delays. Our sales suffered pretty badly.

The project cost us an additional $15,000 more than planned at the end stage. Things that worked fine at the beginning of the project, often were found broken by the end. To help us make this up, we were given free rent from September through December. These rent concessions were critical in digging us out of a deep hole.

With strong holiday sales, we ended the year broke but happy, with all our “running debt” paid off and our invoices up to date. I had started using credit cards in the fourth quarter to pay distributor invoices, and by January, I had 100,000 new frequent flyer miles (which I've since used for my Summer vacation).

Rather than entering January with a nice bankroll, we now enter it poor but happy with a bunch of great product releases coming soon, along with strong events that come with increased sales. We saw some of this already. After construction completed, we saw a 20% sales increase in November. December was up 12%, making it our best month ever and Q4 our best quarter ever. January is projected to be slightly stronger than last year, with Star Wars Destiny re-releasing, a Magic pre-release and a Pokemon pre-release for the second half of the month.

Winners and Losers 

Sales numbers for this year are suspect, and not worth much, considering the store was in shambles for six months of the year. Some customers kept shopping with us during this time, with the miniature gamers being notable standouts, their department being the only one that went up during construction.

In the beginning of the year we dropped a game we opened with in 2004, Warmachine. The reality of our region is there aren’t enough miniature players beyond Warhammer 40K. There’s a core group that wishes it wasn’t so (as do we). I might bring Warmachine back if we can get a weekly event going, but honestly, the store has functioned much better without the cash flow drain and mediocre sales that have plagued us with this game, and the popular miniature game of the moment.

It’s my understanding that Privateer Press has addressed some of our issues last year, so there’s always a chance it comes back. However, decisions were made. Bridges were burned.

2017 Plans 

With a 7 year lease in place and construction completed, the plan for 2017 is to heal. We still have projects to get the store into better shape. Our board game library is going to be greatly expanded. We have a demo program we plant to develop. However, we are cash poor, and need to better understand our new financial situation with construction loans and the like.

Events are our growth focus. We have space for new and expanded events. Some of these are beginning to blossom. Our board game nights have doubled. We have Magic events six nights a week. The new Star Wars Destiny events are drawing crowds.

We’re working on new concepts like mini cons and board game designer fairies. We’re hoping to see modest sales increases with event attendance and so far we’ve been pleasantly surprised.

For the long term, we plan to settle into this space for our lease term and expand inventory. We’re poor now, but future investment is inventory, inventory, inventory. There are a few things we still need for the store, like a sound system and an upstairs TV monitor, but those are minor items. The primary goal is to build our economic engine, the inventory. We could easily triple it in our existing space.

Finally, the long term plan is also to transition into what I would call a second stage store, complete with full time employees. We’ve ran the store as a scrappy start-up for years, something I credit Michael Parker for designing. As we grow with that model, we sacrifice sales and customer service. In the future, I’ll be looking at full time staff with a full time outlook. There’s nothing wrong with our current staff, there’s just a different outlook when you’re a 40 hour a week, full time employee.

2017 is looking pretty hopeful!

Wednesday, January 4, 2017

The Two Game Stores (Tradecraft)

When we talk privately about our stores, I sometimes feel I need an asterisk next to my name. The asterisk would denote something like "coastal" or a similar notation about geography. Why? There are two types of game stores out there, and their needs and problems are different. The issue is geography.

Most game stores in this country are in markets with unconstrained geography. This means there's plenty of flat space for commercial development and the only restriction is drive time. With near limitless space, rents can be dirt cheap. The barrier to entry for a new store is therefore quite low. This works like a tea kettle that releases steam when the pressure builds up (the Internet does this too).

Rather than boom times, game stores in most of the country instead face amateur competition from pop up game stores that rarely last 18 months, with more prospective owners happy to take their place upon their inevitable failure. With a handful of cash, these store owners see opportunity to make a quick buck, but also lack the skills to keep the business going. Sometimes there are dozens of these stores in local markets. Dozens. Let that sink in for a moment.

This is in stark contrast to coastal stores in states constrained by geography. Real estate is limited, the barrier to entry is high, and pop up stores are forced way out to the margins to where they can do no harm. Rather than a month to month lease with a handshake and a small deposit, coastal stores are looking at multi-year leases with credit checks, experience required, and perhaps $15-20K down to start, roughly the budget of the entire pop up store.  Also, these are not strict geographical terms. The SF Bay Area has coastal qualities, while Southern California does not. I'm sure there are heartland areas with coastal qualities as well.

Why does this matter? When discussing issues in the game trade, much of the problems facing game stores are other stores. While the coastal shops are working on professional marketing plans and looking for where to buy the best store fixtures, most stores are trying to work out why they should bother with a Magic pre-release because the new store down the street is running them at cost -- and that's just the most current new store for them in an endless cycle. This lack of barrier to entry is a game of whack-a-mole, where the new stores pop up, cause harm to the established store while they're busy failing like a chump, and are soon replaced by a new pop up. This is not a problem unique to any one area, the uniqueness is in the coastal stores with their rough real estate markets that insulate them from nuisance competitors.

Not all of these pop ups are nuisances and many excellent retailers will tell you they started with a handshake and some Ikea furniture. That's great! The problem is the vast majority of these stores have no idea what they're doing and they have one lever, one trick they know of to survive, and that's discounting, both in store and online. They race to the bottom because they know no other way. That's why you'll hear store owners talk about good and bad competitors.

Good competitors are knowledgeable and will create that rising tide that lifts all boats. Bad competitors are ignorant and will race to the bottom, dragging down the local market to sometimes permanent levels of devaluation that makes it impossible for good stores to succeed. Any area with a blanket 20% discount on all games is dead in my book. They've salted the earth. It means an owner can't make a proper living without running a crap store. This is the state of large swaths of the country. So for most customers out there, their idea of what a game store is to them, is rather crappy. You can't argue with them, because in their world, game stores are simply not very good.

I am not arguing for artificial barriers to entry. That's not a solution. If I thought there was a solution, and I'm doubtful of this, it would to educate prospective store owners. Unfortunately, with that nonexistent barrier, that's practically educating our customers.

Monday, December 26, 2016

GMROI4U (Tradecraft)

It's my day off, what should I work on.... Hmmm....

Oh yeah, that post I wanted to write on GMROI.  I've never done Gross Margin Return on Investment, but someone on Facebook asked me how to fine tune their inventory beyond turn rates, and a more business savvy store owner stepped in with this helpful calculation. It made me want to investigate further.

GMROI means gross margin return on investment. I think inventory turns are good enough for calculating efficiency, if your margins are relatively stable across categories. My average gross margin is close to 45% in nearly every department, so it never occurred to me to want to know more than turns. In fact, when I calculated my GMROI for the first time (a few moments ago), it basically tracked with my turn rates. It can still inform decisions, even in my case, as we'll learn below.

Where GMROI becomes especially helpful is if you're selling a lot of product with a wider variety of margins. If you sell a lot of used games (high margins), Magic singles (could be high, could be low), or you sell a lot of CCGs at a high discount (low margin), GMROI might be an eye opener. It's a measure of inventory productivity, and if you have a choice, you may decide to shift inventory dollars to more productive areas. A lot of store owners, especially Magic shops, have no choice. But you're reading about GMROI, so you're smarter than them.

Using the linked GMROI article from the Retail Owners Institute, which you should read after this post, here is the GMROI formula:

GMROI% = Annual Sales $ divided by Average Inventory @Cost $ times Gross Margin %

This number tells you the amount of dollars you're grossing on every dollar you invest in that category. Your gross margin return on investment. 

Can I learn anything from GMROI? Even though my turns and my GMROI track closely, lets look at some of my troublesome departments and see if I can draw any new conclusions: 

Toys is a troublesome little department, with most of it on perpetual clearance. It has a high turn rate, but I know not to trust that. However, the GMROI is respectable. For every dollar I invested in this troublesome category, I grossed $2.50. Rather than dump toys, I probably want to continue with them, struggling to dial in the right mix, as long as it's not too time consuming (the sales are hardly worth the effort). Since we sold down most toys in December, perhaps I might consider them seasonal. I wouldn't have considered this without GMROI.

A different example of where GMROI is informative in the other direction is Classic Games. It has a turn rate of around 2, which is not good, but not normally bad enough to dump them (it was as low as one turn in past years). However, my GMROI is .9, meaning for every $1 I invested in classic games, I grossed $.90 back. That's terrible. It's a high opportunity cost and a waste of money. It might be time to drop Classic Games entirely. Although there are soft calculations too, such as seeing them as a merchandising expense (yuck).

Since Classic Games don't have a particularly unusual margin, this gives me a more solid cost to my abstract turn rate. Two or less turns is wasting money, rather than just being low. So if I have $50 to spend on chess sets or $50 to spend on some Funko vinyl figures, an area that has been nothing but trouble (I thought),  I'll gross $125 on the Funko versus $45 on a chess set (losing $5). Of course, I should really just put that $50 into Magic, if at all possible, since CCGs (not shown) has an 11 GMROI ($550 gross).

So GMROI is easy enough to calculate, especially if you're already laying out calculations for turn rates. Give it a shot and see if you learn anything. It might be even more useful at the game category level or individual game level.

Thursday, December 22, 2016

Online for Less (Tradecraft)

Occasionally a customer will make a big purchase and mention they could have bought it online for cheaper, but they wanted to support us. I tend to be an analytical person, so a statement like that gets my wheels turning. What is my value proposition? Did they weigh the pros and cons of the purchase and consciously deicide to shop with us? 70% of their purchase stays in the community with a local store, while only 45% circulates otherwise.

Then there's how I'm supposed to feel about such a statement. The only response to something like this is a sincere "thank you," but imagine if you lived your life with such comments. Divorce is more expensive, so I'm spending my life with you. I could send your job to Mexico, but I guess I'll keep paying you. Everybody wants to be judged on their worth, to make their way in the world on their own steam. I mean thanks, really, but how can I do this without you doing me a favor? So this kind of statement tends to undermine your self worth. 

Then my friend Robert Pace brought up a good point. Robert is the kind of friend who likes to poke holes in my narratives. I'll see some data, weave a story, and tell myself the world is a certain way as every small business owner does. Sometimes Robert will walk by and pop my bullshit narrative bubble with a bit of pointed truth or data. This time Robert explained to me that such a statement about buying from me regardless of cheaper options means my value proposition is shaky. I may be satisfying the customer today, but they're letting me know, consciously or unconsciously, we're kind of borderline. Our relationship is not strong.

Instead of questioning what this means to me, with my massive ego involvement and occasional entitlement, the question is more about the customer feeling valued. It sounds like that feeling is waning. It occurred to me this is the perfect opportunity for engagement. You have someone who just handed you money, who accepts your premise, the best type of customer really, but they're wavering and letting you know. A good question might be: What can we do better to continue earning your business? 

We're doing some things right, but perhaps not all the things. In the future I'll be sure to ask. 

Friday, December 16, 2016

Invest in Yourself (Tradecraft)

We borrowed tens of thousands of dollars from individuals to partially finance our new Game Center. One conversation I had several time with other store owners was whether it was worth giving us a loan versus investing in themselves. We offered a pretty good interest rate, but invariably they would go back, crunch some numbers, and realize they could make a lot more money investing in themselves. I wholeheartedly agreed. I didn't get those loans.

How does that work? Your retail operation is an economic engine and increasing the size of that operation naturally increases its performance. In the car world, there's a saying: There's no replacement for displacement. There's no better way to get more power than going bigger, and that's true of inventory as well. More inventory means more profit and it's often just fine tuning to maximize that profit.

Even poor inventory performance has return on investment far greater than most loans. lets run some numbers using a single turn. I drop product at one turn. One turn inventory is dead to me.  However, one turn is only bad relative to higher turns. Here's how that works.

Inventory value: $10,000
MSRP of $10,000: $18,181 (using a 55% cost of goods)
Sales at 1 Turn over a Year: $18,181 (you sold that inventory an average of once over a year)
Net Profit: $909-1,818 (5-10% is about average in this trade)

So what annual interest rate would I need to pay a retailer to match the performance of his bad inventory? In other words, you may be out of ideas on what to buy as a retailer, but just plowing that money into junk will get you at least that one turn.

Using an online loan calculator, at the bottom end, a $909 profit is the interest paid on a $16.4% loan. Getting to $1,818, the top end of your inventory net profit, would mean I would have to entice you away with a 32% loan. This is also why small business owners receive offers for insanely high interest loans. You look at a 32% loan and think, well, that's only one turn. I could do far better than that. Sounds like trouble.

So you should definitely plow all your money back into your business. Well, except for the fact that your $10,000 of inventory is worth somewhere between $500 and $1000 when you attempt to get out of your business. Anyone who spends a lot of money on their cars knows it's a one way trip. The money going into a car to customize it, will never be a significant part of the resale value of the car. The same is true with your small business.

Short and mid term thinking means there's really no better return than investing in yourself. Long term thinking? You better have a clear exit strategy, which means diversification into the real world for when you're done with your labor. That's the dilemma for most small business owners, as 40% retire with no savings. Only 10% have a 401K or similar vehicle.  Here is where I would pitch you a loan, but honestly, I want nothing more than to pay off the ones I have now ... using inventory turns.

Generic inventory graphic to see if Facebook will let me promote this post