Coming to Terms (tradecraft)

An employee was recently surprised to learn an order came in we hadn't paid for yet. Credit terms are pretty much the basis of my business, and how long those terms run will decide how much I buy from a vendor, when I buy it or whether I buy anything at all. New stores are advised to have cash on hand to pay for product purchases. Bite the bullet and pay those COD tags so you never get yourself in trouble. Established stores know that's kind of a suckers bet. You're not only paying a fee on every order, but you're not getting the benefit of the free use of that product before having to pay for it. It's an interest free loan.

The bottom line is I'll order a quantity of product based on the length of terms. The goal is to finish selling that product right as the bill is due. My longest terms are 45 days with Games Workshop, which means I can order deeper than my usual suppliers. If GW can carry me for 45 days, they get the benefit of my more liberal purchasing. I can stock pile new releases about 50% deeper than through my best distributor with 30 day terms. The staff often get nervous when they see me do this, but I have extra time and virtually risk free product. The up-side is I almost always have the new releases in their first 30 days, when customers are more likely to buy them.

In contrast, One of my tertiary suppliers has me on 7 day terms, which means I don't buy anything from them that I can't move in a week. I only buy sure things and exclusives from them. They are a good distributor with a wide selection, but their competitors have 30 day terms or accept American Express, the holy grail of purchasing (terms plus cash back). They have won on product availability, have average customer service, but have failed on price, in this case financing. Moving beyond those 7 day terms is onerous, so I just shop elsewhere. Imagine having great credit and getting a letter from a bank offering you a secured credit card, and then after you've proven yourself, a card with a $100 credit limit. Wouldn't you shred that letter? It's like that.

Most terms are somewhere in between those two extremes or via credit card, my preferred method of payment. Credit cards are a bad bet for distributors. Distributors start with a 10% gross margin, so to pay 1.5-2% to process my credit card is a massive hit. I don't blame them for not accepting them. Manufacturers selling direct are best suited for that, and it probably means their accounting staff can be smaller. The card goes through or it doesn't. No chasing deadbeats and late payers.

On the down side, credit cards are a bit unpredictable, since your terms vary depending on the closing date, from between 25 and 45 days. Believe me, I'm well aware of that closing date and will often wait patiently for the magic day to hit so I can place a big order and get those 45 day terms. Likewise I cringe whenever my Wizards of the Coast new Magic release order goes out on the day before! I just missed 20 days of free money. The big upside is either cash back or rewards. I'll be going to the Gama Trade Show next month and my room is paid for using my rewards card.

This method does require discipline. We're having a very good month now, but I'm a little concerned since we'll be paying the invoices from those games next month, when the bills are due and the sales are slower. This tests my "open to buy" or purchase budget. If I bought wisely, and I think I did, I should have the money sitting in my account now for next months bills. Occasionally, cash flow needs some massaging with other methods, like paying credit cards to vendors who prefer terms, or using savings for a few days until big sales days. When the stock market tanked a couple years ago, spooked customers stopped shopping for about six weeks, which caused our finances to suffer for several months while we caught up with our bills. If it had happened in the spring instead of the fall, we might have been in more serious trouble without holiday sales to get us back on track.

You can get yourself in trouble when you're rolling in dough and the bills haven't been paid. Flush with cash, you begin noticing all the things that need a fixin." You consider distributions to the owner and raises for the employees. In retail, it's dangerous when you're not selling, but far more dangerous when you are.

2010 in Review

I was inspired to write this from the Steve Jackson Games 2011 Report to Stakeholders, Posthuman Studios 2010 Year End Review and the many candid blog posts by Fred Hicks at Evil Hat Productions. If you read all these reports, you can get a kind of game industry pastiche of what's going on out there. I'm also inspired by our February sales, possibly our best non-December month ever. I'm a cocky bastard when things go my way.

Overview
Unlike a publisher, retailers are far more reluctant to share their sales numbers. If someone wants to compete against your cool RPG, good luck with that. Numbers are not going to help them to any great extent unless it's to better understand market potential. If someone wants to put a store a mile from you because you told them you're making money, or don't like a particular line of games, that was your mistake.

Nevertheless, I think some sharing can illustrate what kind of business we run and our scale. This can often be helpful for our stakeholders and has been instrumental in getting some love from several suppliers. I won't give exact numbers, but as you might have read, we converted Black Diamond Games from a California LLC to a California corporation in early 2010. We did this because of California's punitive LLC fee structure for companies grossing over $500,000, compared to the corporate structure, which taxes based on profit. California also treats their LLCs as their whipping boys and budget balancer and it seemed ridiculous to continue playing that game. California can generally bite me, but that's a whole different post. So you can safely surmise that in 2009 we grossed over $500K. The good news: sales in 2010 increased 6% over 2009, despite having a down Q4.

We accomplished this with four excellent part-time employees, along with myself working full time. We're open about 100 hours a week, to give you an idea of how we both achieve our sales numbers and the extent of our labor expense. When we opened in 2004, it was just me working seven days a week (around 60 hours) with a store less than a third the size. Times were simpler back then.

Scale
From what I know, this puts us in the top five stores in Northern California, perhaps top three. I refer to these stores as the "alpha" stores, the ones likely to have a full spectrum of games in a variety of departments and are generally on the cutting edge of new releases and game industry trends.

Both scale and gross sales of these alpha stores are not hard to guess for experienced retailers. Anyone who knows their stuff can walk into a game store and get a general idea of sales volume based on the quality of their inventory and the sophistication of their operation (such as its muggle appeal). I've seen others do it (I'm looking at you Chris Shorb). Some of those stores have shared their numbers with me as well, since none are direct competitors.

Show Me the Money
So did we make money? Kinda. We made investments in 2010, like those Yugioh Duel Terminals, now our number one selling item in the store. Then there are the expected unexpected expenses, like how we got hosed by PG&E with their graduated billing and had to pay a couple grand in accumulated power bills to get off it. There's always something, like the previous years enormous common area maintenance bill. We mostly paid off a lot of debt from our expansion with our profits. With left over discretionary income, we invested in loss control technology, AKA new display cases, along with expanded staffing to prevent theft. 2010 could best be characterized by the request: "stop stealing my stuff."

Staff hours increased by 24% in 2010 as we beefed up coverage and attempted to jump start events with staff organizers. One of the few but consistent complaints about the store was how we were understaffed during peak hours (yes, I learned this from Yelp). We honestly couldn't afford it, but I wanted to see if better staffing increased sales. We spent a lot of money addressing that issue. So that's my way of saying we didn't really make money, but we made the store better. My investors seem to like that reasoning ... for now.


The Winners
If you want a reason to be diversified, check out the big swings in the winners and losers:

Role-Playing Games +15%
Board Games +10%
Collectible Card Games +10%
CCG Supplies +8%
Snacks +3%
Puzzles +1%

The Losers
Collectible Miniatures -42%
Classic Games -22%
Miniatures -17%
Used Games -6%
Paint -5%
Dice -3%
Tactical Miniature Games -1%


The Narrative
All store owners weave a narrative from their numbers. What's my narrative for the winners? RPGs made a blazing come back thanks to both Pathfinder and the explosion of FATE based games. CCGs had a banner year with strong Magic releases and fantastic Yugioh sales, thanks primarily to our fantastic organizers and the number one item in the store, the Yugioh Duel Terminals. Euro board games continue their popularity and we had a big sales increase (around 55%) with Fantasy Flight Games over the holidays, thanks to deeper stock and their AV program.

My winners narrative is probably more accurate than that of the losers. I tend to be harder on them. Collectible miniatures are dead in our region, and we saw the cancellation of D&D miniatures and Heroscape, with Axis & Allies miniatures in the doldrums. We do plan to support Heroclix with their next release, so I am stubborn, if nothing else. Despite doubling our classic game selection in 2010, they continued to slide. I felt I was practically daring customers to buy the twenty different backgammon sets and fifteen cribbage boards of various sizes and quality, but they refused to take that dare. I do believe this section of the public can be safely ignored.

Miniatures were way down, but partially because we've stopped taking a lot of chances on them, meaning we have leaner inventory and higher efficiency, which doesn't help sales. I just got tired of baskets full of "dead lead." Thus paint also took a hit. Finally, miniature games were slow in 2010. Games Workshop reported lower sales (down 4%) with their lackluster releases and on top of that we dropped Flames of War, which caused a lot of short term pain in 2010, but left us healthier overall. Tactical miniatures would have been lower if we hadn't put a lot of effort into staff run miniature events.

In reality, my narrative is self selecting with the variables I considered important at the time being paramount. After all, a lot of this is dependent on what we did the year before. If we sold a ton of dice at a convention in 2009, we shouldn't be surprised when sales are slightly down in 2010. It's easier to remember some minor detail instead, like how a manufacturer brought out lackluster releases or how we stopped carrying a product line.

Plans for 2011
You know all those businesses that refuse to expand and instead are debt phobic? That's us. We'll bring in all the new hot stuff, but as you probably know, that's a zero sum game that requires slow stuff to get moved out. Honestly, at our business scale, there's very little we can't decide to bring in on a whim. You just don't get a lot of those whim purchases without feeling the pain. I believe our store could expand inventory by about 30% with our available space, which is why we'll likely extend our lease another five years, if we can come to an arrangement this year.

We could use more event space, but we honestly have a scheduling crisis rather than a space crisis. All businesses have problems, but there are good problems and bad problems and our impacted events are in the category of good problems to have. We'll be tightening up our events in 2011. We hope to do more tournaments for our CCG crowd, enhance our monthly RPG club and develop some new miniature events. I swear half the effort in the store goes to events.

What else? With plans not to do anything dramatic in 2011, we've been re-examining some of our procedures. Our new employee, Pat, has been pointing out procedural holes that need filling, mostly areas that I've ignored because they don't interest me, but are glaringly obvious and highly annoying when they're delegated. Things like special order procedure, event documentation and standardization, logging damages and returns and all sorts of yawn inspiring business junk. I hate this stuff, but the store would be better because of it. It's also a pre-requisite for opening additional stores, which could happen one day.

Marketing is a big issue right now, with the acknowledgment that 2010 was characterized partially by a failure in marketing. We've gone back to some tried and true methods like cable TV ads along with some surprisingly effective new methods, like Google advertising. My love affair with Facebook is over.

Finally, I'll be going to my first trade show in three years, the Gama Trade Show in Las Vegas next month. I love learning about what other retailers are doing and seeing new games. I'll also be giving a presentation on our method for selling Pathfinder. That's probably not surprising.

Competitor Closing

Our local competitor closed this week. I've written before about this, but I have to admit in retrospect that I handled it badly. I took it personally. Mostly it was personal because it was made that way by one of the original owners, who was very open about their desire to leech our customers and bury us. He was reading my blog, so in the spirit of openness, he told me their strategy. He suggested a plan in which they would carry all the hobby games like Magic and D&D, leaving us to carry the other stuff you know, the chess sets and toys. As if. There were other issues too, but it honestly got under my skin and I ended up acting poorly. It wasn't throwing bricks through their window poorly, but the animosity should have ended with me and it didn't. He ended up getting bought out by his partners shortly thereafter, but the animosity persisted and windows of opportunity opened and closed for me to make it better. The die was cast and it continued even after the store was sold to someone else (this all happened in about 18 months).

As some will tell you, success is the best revenge, but really, store owners generally think they've got the needs of their customers in mind. When I first opened a store, I was small and in the sphere of a local giant who I thought had lost their spark. Who's to say my new competitor didn't feel the same way about me? Some competitors don't even know I exist or don't see me as competition. Some competitors could be friends now or in the future. In other words, getting all worked up about competition is only self-defeating. It's in my mind and it gets me nowhere with my business. I was just causing myself pain and suffering and stressing out my staff. Success may be the best revenge, but I think an "abiding impartiality" will keep you happy and sane. In other words, let it go.

I expect more competition in the future. In fact, there is a feeling of strategic loss with this competing store gone. It turned out to be generally so inoffensive that it likely scared off bigger, more dangerous sharks that might have considered opening up shop nearby. It also funneled overly competitive card gamers away from us, who tend to drive away both the fun and the sales. I still believe that my best strategy is to look forward and constantly assess the needs of customers instead of looking backwards in the rear view mirror at competitors. Next time, however, I'll try to practice some of that abiding impartiality and not get so worked up over this stuff.

Also, I hope if you're reading this and have a store in mind, you consider one of the many under-served communities rather than wasting time and immense capital on an unnecessary venture. As I've said many times, you build a retail business on your own steam. There is very little "stealing" of customers, just as there is very little pick up when a competitor fails. If it were a winner take all business, there would be many more bricks thrown through windows. A lost business is a loss for the community and very little gain for its competitors.

New Bedrock (RPGs)

Last year around this time I reported that our RPG sales were down 20% in 2009. This year I can happily report that they were up 15% in 2010. It's partially the roller coaster of sales patterns, but the big trend in 2010, in case you weren't paying attention, was Pathfinder. Here's the chart from last year showing that D&D was dragging down our numbers. It also shows what I now consider to be a rather unhealthy dependence on the venerable brand.

 

 D&D is blue, the bedrock of our RPG department. Red is everything else.

The chart below shows the last 6 months of the chart above and continues on for another year. You can see how we began promoting Pathfinder (in red) about half-way through, providing a second bedrock for our RPG sales. In fact, Pathfinder outsold D&D in five months of 2010. As I've mentioned before, we're not looking for a winner here. We want all our RPGs to do well, but relying on D&D to keep RPGs alive in the store seems not only dangerous, but lazy. If you're a store owner following the cancellation of the D&D miniature line and the paired back 2011 D&D release schedule, you might be in the market for some RPG insurance.

So what are we doing in 2011? I have to admit that the "Is Indie Dead?" discussion got me looking around at what other stores are doing with their non-D&D role-playing games. I'm not interested in "indie" so much as the category of "other," good, mainstream stuff that's not Dungeons & Dragons. Most top tier stores have special RPG events focusing on these types of RPGs. 

We decided to follow their lead and we implemented a non-D&D RPG night once a month. This has opened our customers and staff up to some fantastic role-playing games. Some, like Eclipse Phase, were already on our shelves but were relatively unknown. Others were already popular, like Deathwatch, but are getting some extra excitement generated around them. Excitement is contagious and we've had strong sales of these games that are pretty easy to correlate back to the events.

Snowpocalypse

It's a week of uncertainty coming off an amazing weekend. Our Magic Mirrodin Besieged pre-release on Saturday had 40 people, a significant increase from previous events. Our Yugioh Duel Terminals, with the new Duel Terminal 4 cards and major software update, outsold sales from the Magic pre-release. It was mind blowing and we sold out of our month supply of cards. It foretold a blockbuster weekend this week when we held the Storm of Rangarok Yugioh Sneak Peak (their pre-release). Alas, the winter storm, the Snowpocalypse, is putting a chill on this build up of steam. Our Magic order for the release tomorrow (along with new D&D) and our Yugioh Storm of Ragnarok boosters (ironically named), are both delayed. Our Duel Terminal 4 restock order hasn't even been processed yet, as Konami is focused on getting Sneak Peak kits out the door.

Both orders are stuck in Hutchins, Texas, a small town outside of Dallas where the Southern Fedex distribution center resides. I felt I should learn more about this old railroad town, since it seems to be such a big part of my business. The key thing to know about Hutchins it is it's currently covered in ice. Knowing where our boxes are sitting offers a small amount of consolation to all this. With any luck, our orders will go out today and be delivered tomorrow, but it's highly unlikely. Both Konami and Wizards of the Coast have essentially let us know they've done their work and now it's up to Fedex to close the deal. Both orders have sat at the distribution center for days at this point.

Our customers have been really good about all this as I post Facebook updates and email our event coordinators. What we know about customer service is people want to know what's happening, whether it's being stuck on an airport tarmac or waiting for your Yugioh cards. By updating them, you avoid panic, work some damage control and get ideas on how to fix the situation. For example, we've been able to second source enough Magic to run our events this weekend (plus we have a ton of pre-release boosters left over). Yugioh players are already thinking about having their Sneak Peak next weekend instead of this weekend. Most have no idea what's going on in the rest of the US and are skeptical of the bad weather issues, especially as our local weather is the best in weeks. However, they're letting us know that despite Snowpocalypse, it's not the end of the world. The upside to communication is a helpful conversation, something I forget sometimes.

Fedex ground hub in Hutchins, Texas