Inventory Control

Some people are curious about the inner workings of retail. I know I am. The big picture strategy for Black Diamond Games 2.0 was about game space and diversification. Game space was a given, and I talked about that early on. Our game center model was primarily a store like Great Escape Games in Sacramento, with its open gaming and long hours. When it came to retail, the goal was diversification, primarily toys and comics. The concept (which I now don't agree with) was that the game industry was too fragile and seasonal to put all our eggs in one basket. That was before the toy industry tanked.

We tried comics during the summer of 2007 as a new store experiment. We learned early that it is a brutal, monopolistic, insider business that is not friendly to dabblers. You either know exactly what you're doing or you're dead in the water. We backed away from our promise of comics almost as soon as we announced our intent. It was that obvious. What has worked, to our surprise, was a focus on a set number of top trade paperbacks, about 125 books. Trade paperbacks are comic book compilations. If you're a comics customer, you won't be satisfied with this, because you'll never see anything new. For less serious customers, we steadily sell these "best of" comics products with regular re-stocks.

Unfortunately, we're stuck getting beyond this point because of our lack of comics expertise. Also, the margins in comics are actually punitive if you don't ramp up quickly, and we didn't. They give you a great promotional margin to begin and if you don't start placing serious orders the discount shrinks. A good number of comics have margins as low as 30% when you count shipping; totally unacceptable if it wasn't for the others with a 55% margin that make up for them. Comics are in a holding pattern of sorts, too good to drop, not good enough to expand. That's an uncomfortable place to be, honestly, when you're trying to be the best at something, and that's the problem in a nutshell with diversification.

Toys are a mixed bag. About 80% of the Melissa & Doug stuff works well for us, while we're trying hard to swap out the other 20%. Thomas has been a disaster, with many toy recalls and a poor toy season over the holidays. Our toy department is funny. It has worked like a store within a store. Unfortunately, it works like a first year store and not a fourth year store, like the game departments. It's a quarter of the store with 10% of sales. This means we'll have to put in our dues until we build up a toy clientèle. We're willing to do that, but with a lot of toy debt, we're quickly liquidating a lot of it, preferably to other retail stores, but right now focused on eBay. We're reducing store inventory by about 10%. Some of that will be games, in the usual ebb and flow of sales, but we're actively trying to blow out toys for the most part.

I just hit a certain point where I decided we weren't going further into debt, and that meant selling off inventory assets. It was initially a scary and painful decision. It felt like death, like the infamous inventory death spiral where you sell off too much and can't bring up your sales to cover expenses, so you sell off more to pay your bills, the cycle continuing until you're standing in an empty store with no money. However, with lots of control and a plan, it has turned out to be a very useful tool, one which I'll likely employ on a seasonal basis. It has worked out because after a lot of thought I realized we had just too much inventory. How did this happen? Game space is new to us, and we were unclear on how exactly it supercharged sales, but it did. So our existing inventory is performing much better than ever before and a lot of the additional inventory, especially the diversification, just wasn't necessary.

If you're a regular customer, what you'll notice is a lot of the depth of product has disappeared. There's not a lot of extra copies of things, which is actually normal for the season. Normally I would allow the overstock to sell itself down slowly over the next six months or so. In this case we've liquidated it at conventions and our auction. Games Workshop is the exception. It's a game we're actively building up because of it's tremendous growth and popularity. The brunt of our inventory reduction is toys, especially Thomas. By the dust gathering in the toy department, my guess is that most customers won't notice the reduction. One of the big problems with toys is that we're often required to buy in depth, so if I liquidate five boxes of a Thomas item and leave number six on the shelf, have I really changed much in the shopping experience?

Other embarrassing topics I could write posts about:

• What Isn't Nailed Down. How running a 1,000 square foot store left me completely unprepared to handle security and loss control in a 3,300 square foot store.
• Cash Flow. The numbers are huge compared to the last store. It can be baffling how I can have $30,000 sitting in the bank account but not have enough to pay the bills. Stores that don't give me favorable terms aren't even getting my business anymore. Cash flow is king, as my business partner once told me.
  
• Impersonal. How I need to find a way to connect with my customers again. People walking into a 3,300 square foot store don't feel the need to acknowledge your existence, let alone have a conversation with you. It's a mini Target rather than a mom & pop. It has an effect on things like security and hand selling. If you can't hand sell some games, they almost never get bought, despite being great games. That requires re-thinking how you sell things.