Wednesday, December 22, 2010

Deserve (To Do With It, Has Nothing)

I was reading a very information post over at the Avalanche Press website about the costs involved in producing a board game. Getting their costs to line up with the correct retail price while staying in business is really hard. But you know what? It's hard for everyone involved in the game trade. Costs are rising faster than sales and there are only so many ways to save money before you have to make serious structural changes to your business. So what caught my attention was a mention of the discount structure for games.

As described in the article, the publisher gets 40% of the MSRP, the distributor 10%, and the retailer 50%. Let me address that from a retailer perspective. First, that 50% retailer take has eroded over time. The main US distributor, Alliance, caps the discount for Avalanche Press to 49%. Established stores get that 49% but stores with less volume get a lower discount (or margin), probably starting at around 44%. Many product lines, like Games Workshop or Days of Wonder are at around 45%. Some product lines are even lower. In fact, my general, overall "gross" cost, for everything we sell in the store, is around 45%. The difference between that 50% and 45% might not seem like much money, but we're talking about a business with an overall profit margin in single digits.

So how does a $64.99 board game break down for the retailer? First, $6.01 in addition to this goes directly to sales tax, supporting our local community. I'll throw that in there since many online shoppers evade this tax and our local communities are starving. It took two hours for the police to arrive to bust a shoplifter this week and our local DA has announced he won't be prosecuting assaults. Go ahead, punch me in the mouth. Nobody cares. Yeah, we're in good shape locally. Now brag to me about your Amazon purchase.

Breaking up the $64.99 MSRP, we see that $33.14 (51%) was our cost of goods, assuming I'm at the top of the discount tier (I am with another distributor). That goes back into the purchasing budget to buy another copy of this game. That leaves $31.85 for the retailer. Should we go have dinner on this new found profit?  Oh no, we're just getting started.

Here's how we spend that remaining $31.85:
  • $9.81 Rent, which goes up a contractual 4% a year. If you want to start talking about "deserve," start here.
  • 9.75 Wages for the four, part-time guys and myself who sell these games. Wages are fairly stagnant right now, but a 3% rise a year is not uncommon.
  • 1.91 Utilities and insurance. All utilities and insurance rise at a steady rate. We work constantly to find ways to cut costs here, like SmartMeters, constantly brainstorming about the optimal temperature for our game center (which I just calculated adds about $250/month to our heating/cooling bill).
  • 1.49 losses due to shoplifting, shelf wear or internal errors. This can range dramatically between stores.  Ours is approaching the higher end due to our higher crime area.
  • 1.18 banking fees. This includes the very expensive credit card transaction fees we spend along with other bank related fees. One of these days I'll have to figure out what a "cash handling fee" is. I thought that's why I use a bank. Perhaps I should add a "game selling fee" to all our purchases.
  • .95 loan payments for our expansion into our beautiful store and its additional inventory. This is where we gnash our teeth the most and hope to transform those payments into profit one day.
  • .39 licenses, taxes, and other misc expenses. Corporate taxes, business license fees, office supplies, broken chairs, outside services like our once a year accountant or specialized IT support. A wizards spell book has nothing on the arcane notes our POS support people have for Microsoft.
  • .22 advertising. This is one that we've cut way, way back on, but lately it shows and we need to ramp it up again. If game manufacturers did enough advertising, especially free (in money, not time) social media marketing, we wouldn't have to work so hard at this. In the past this has been as high as $1.30.
So where's the profit? Where is my boat payment? $6.15 is how much I made on this game (before my personal taxes). That's actually not so bad. However, because manufacturers have felt pinched over the last decade, they've demanded higher margins and have increased our cost of goods an additional 4% more (on average) beyond what Avalanche Press demands. How do we pay for that? They don't care. So now, on average I'm working with $29.24 before expenses, which brings the total profit down to $3.54, or 5.4%.  That $2.61 was the difference between success and failure for many stores. I propose we call this the "tap dance difference."

Good stores (not crummy stores on the margins) that have survived this far have perfected a sort of "tap dance," in which they have some clever trickery, superior marketing or other technique they use to keep their doors open. These stores are generally fantastic. So what? All businesses need to be creative, right? Sure, but these very good stores are treading water instead of excelling like they should. The water is rising, the deck chairs have been re-arranged in innumerable configurations, yet they keep tap dancing. They love what they do. It's more than should be expected of them. They all know this. The crummy stores cut costs so deep that they're now in poor locations, with employees paid in Magic cards, with no advertising budget and questionable tax payment concepts.

So talking about margin and who deserves what is an unfortunate way of looking at this. This is the business we're in. If brick and mortar stores cease being relevant to you, feel free to sell direct. Feel free to shop online (but watch for that punch in the mouth). If your property manager is comprised of a group of money grubbing attorneys who inflate their fees, go buy a building. Don't like paying staff? Work longer hours. Find a cheaper bank. Move your production from China to Vietnam. Start tap dancing.

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