Wednesday, May 7, 2014

Wonders Beyond Reason (Expansion Project)

I wrote in a previous post about how moving to a bigger location usually means a worse location. Yet, building up, what we plan to do, is not really a valid option either. That's because of the high costs of construction compared to the shoestring nature of a hobby game store.

Hobby game stores tend to be low barrier to entry affairs, with many stores starting with thousands or even hundreds of dollars, often with owners going unpaid for years to launch it (a bad idea). One local store I heard about recently started with just $500. That's an extreme case, but it's not the first time I've heard that. Starting with $50,000 is fairly common, $100,000 at most, which is around where we began.

Why so little? There's no money there in most cases. A reasonable amount to invest should, I say should, correspond with a reasonable return on investment (ROI), of say, five years. When I started I had no idea what an ROI was. I wanted a "buy a job," essentially a lifestyle choice. Now I won't buy a candy bar without an ROI. Most store owners, like me, started with no concept of ROI.

What does an ROI look like? On a $100,000 business investment with a 5% net profit margin (on the low end), including $60,000 of inventory at cost, it would look something like this:


Year Net Profit Annual Sales Turns
Year 1 0 not enough2-3
Year 2 $16,250.00 $325,000 3
Year 3 $21,250.00 $425,000 4
Year 4 $27,500.00 $550,000 5
Year 5 $35,000.00 $700,000 6
Total $100,000.00

These numbers are expert store numbers. A theoretical example of how a veteran store owner could hit the ground running, quickly dial in a store's sales, and come out with their projected ROI after five years with a turn rate that is painfully high, twice as high as recommended. It almost never happens. It requires an urban market to get gross sales this high, probably three times the game store average. It's as rare as the guy who succeeds with $500. I know two people who represent both extremes, BTW, and they're both notable outliers.  It's why you don't see entrepreneurs starting game stores. They're labors of love.

When we contemplate construction for expansion, we see numbers that don't correspond with a labor of love. We see real numbers, the numbers paid by everyone else. For example, architectural services for our project is in the tens of thousands of dollars. That's only perhaps a third of the cost, before you begin construction. Add in thousands of dollars for permit fees and tables and chairs, and your expansion project costs as much as starting another store. And we have an ROI understanding of that, no? So why are we building a second floor and not starting a new store?

This is my store, our store. I learned when we moved to a bigger location rather than a second store that I really don't want to manage multiple stores. I have nightmares about this, a sudden realization that I have this second or third store that I've neglected. Or perhaps one that's failing and another that's being dragged down by the failing one. Multiple stores takes everything fun about running a game store and makes it about managing managers who do the fun stuff. 

When I calculated the ROI for the expansion, it didn't work. The return to make it worthwhile was not going to cover the investment, not all the way at least. This is a moving target, by the way, as we had to spend a bunch of money to even know what that construction cost would be, and we still aren't exactly sure, just somewhat sure. I spent $10,000 to understand whether we should even consider it. We got a loan for the mythical ROI number, the amount we would be willing to reasonably spend as an investment, if we could build it as such. But we can't. That's where the Kickstarter kicks in.

The Kickstarter builds from our ROI number by providing funding beyond our level of reason. The Kickstarter says we've gone as far as a business should reasonably go with this project and we need you, the community to push us the rest of the way. We need you to push us beyond the realm of business sanity and into the realm of amazing game center.  It should be quite the wonder, because no business would ever do this. It's not a hand out and there are services and products that go with most of our tiers. In fact, there are some pretty big expenses related to the Kickstarter, mostly in development work for unique game products. But wait a bit longer before we go into that.

The beauty of the Kickstarter is it kicks the ROI in the face. It does the impossible of allowing wonders beyond reason.




12 comments:

  1. Your kickstarter would appeal to a lot more people had you handled the Yugioh issues better. Your Kickstarter is missing a chunk of the community.

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  2. The Yugioh problem was dealt with as best it could. Bdg tried time and time again to keep them in, but with constant theft, rude behavior, not listening to the basic rules of the store and even assaults on other customers, they had to go. This behavior wasn't just annoying, it could, and very possibly did, threaten the business. Yugioh doome themselves

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  3. Our YGO "community" traditionally wanted nothing to do with anything we did beyond their event. Sometimes that was a blessing but it was usually a curse.


    I sometimes regret that we didn't throw our best resources at keeping that community stable, notably our best managers. However, it was unfair to our staff to subject them to the abuse. You might think the customer is always right, but you would be wrong. Staff comes first.

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  4. How long did you consider expanding horizontally rather than vertically? Still seems to me that it would just be a better way to go. As a long time in-store gamer the new incredibly close ceilings on both levels would be a huge deal comfort wise. I know you couldn't add 50+ seats by expanding into the retail part of the store, but wouldn't adding 24 or 32 be simple. Then again I'm biased, I know what I'm in a store to buy, I don't need to see it on the shelf before I grab it and head to the play area.

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  5. blackdiamond925May 7, 2014 at 1:26 PM

    There is nine above our 12 foot tall ceilings. I don't think it's going to be claustrophobic, especially with our open design on the wall (architectural wire mesh).


    Going horizontally means paying rent on the extra horizontal space -- as long as the store is in business, perpetually. That's why we would have to move to a worse location. We couldn't afford rent in a decent location if we needed to add a thousand or more square feet.


    When we build horizontally, we have to pay for the construction, but there is no rent on the horizontal space. There is a loan payment, but that loan payment is less than the rent on similar space, AND it eventually ends. That not paying rent on the second floor varies by location, but it's our current set up.

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  7. Sorry if I missed this, but did the Kickstarter begin yet? I want to kick in a few bucks (I enjoy the blog) but I couldn't find it on the Kickstarter site.

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  8. Very soon. We're just about done with our final draft, followed by a few days of preview, and a launch within the next week, two at most.

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  9. "When we build horizontally, we have to pay for the construction, but there is no rent on the horizontal space" Did you mean vertically here?

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  10. blackdiamond925May 8, 2014 at 9:35 PM

    Words hard. Yes, no rent on the vertical space.

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  11. Wait, you are only getting a 5% return on your investment year over year?

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  12. Net profit for most retail stores is in the 5-10%. ROI is a different animal. This is an example of how you could get a 5-year ROI with a 5% net profit.

    ReplyDelete