Parasitic Business Models (Tradecraft)

There's a lot of talk about the devaluation of the game trade. Yesterday I was quoted in an article on ICV2 about how Privateer Press wishes to remove those using a parasitic business model to devalue their games. Pretty harsh words, but I agree.

The premise is when a game system becomes too devalued, it gets dropped by brick and mortar, which is the driver of new players of these games. When B&M drops the game, the line loses viability. You have to accept B&M is the driver for this to make any sense to you, and many don't (hint: they're wrong, according to those in the trade).

Here's a Q&A I recently did via email with Forrest from Two Bats Gaming. This applies to Asmodee specifically, but also works for a discussion of Privateer Press or anyone else trying to protect their IP.

Christian Petersen (CEO) and Anton Torres (Marketing Manager of FFG) recently discussed the desire to ward off a potential bubble in board gaming. Do you believe there is a potential bubble, and if so, do you feel that Asmodee's policies will help combat it?

It's interesting they describe the situation as a bubble, but I can see it from that perspective. The problem with board games is a problem with how the game trade operates in general. As retailers, we are rewarded when we order a LOT of product. We get better margins if we do this and by doing so, we're guaranteed the in-store sale while being able to dump product online if we over buy. All up side, no down side, right? When only a few retailers do this, it's not a problem, but when a bunch of retailers do this, usually new retailers, but not always, we have a devaluation problem.

Amazon's algorithms are set not to be outdone by these private sellers (AKA brick and mortar game stores). As retailers dump product, there is a digital race to the bottom, resulting in a lot of product selling for 30-40% off on Amazon, almost all the time. Nobody makes money in this situation, although the retailers who are doing this aren't really losing money either, so it's a win for them and a win for the consumer. The retailer gets rid of overstock. The consumer gets a deal. This works for a while and then the system crashes.

The market becomes saturated with product with retailers attempting to undercut each other. The Amazon pricing algorithm won't be undercut, so it reduces its price. Most brick and mortar stores can't compete against 30-40% off pricing, especially on higher priced items. Sales stall. Discussions are had. Product is moved to ghetto shelves and events are cancelled. That's where X-wing was with us for a while.

That's not even touching on the self inflicted harm many publishers do to themselves, which is a topic for another post.

When these deep discounts become the baseline price in the market, the entire system begins to break down. Those stores who bought too much, selling a bunch locally and dumping the rest online, can no longer sell locally anymore because the price has become too devalued to make the full MSRP sale. Even more stuff ends up being dumped at an even lower price. Eventually, all stores stop buying these products. Because they can't sell it in store, they stop promoting the game or running organized play. Nobody has a chance to make any money on it in-store, including retailers like myself who don't sell online.

You can't talk about online retailers as if they're a separate breed of retailer. Online retailers are mostly brick and mortar retailers who sell online, and they're basically crashing the market for everyone. Restricting who can sell online is stopping this bad behavior, forcing retailers to order appropriately, and allowing brick and mortar stores to once again drive the hobby game industry by introducing games to new consumers. Yes, you might not believe this, but it's acknowledged at all tiers of this industry that brick and mortar stores play a key role in bringing in new customers. So fixing this problem allows stores like mine to continue to run events, sell product, promote the hobby and generally work with Asmodee to achieve our joint goals.

Does this hurt the consumer? Those who buy online will continue to buy online and they'll continue to get a nice discount. But they should understand that this 30-40% off MSRP is not a sustainable model. This is the sign of an industry that is dying. You should instinctively smell blood in the water when you see this. Something is wrong.

A number of shop owners I've spoken to are against Asmodee's decision to force retailers to decide between being a online or a brick & mortar retailer. They state that it is removing their ability to sell slow-moving Asmodee/FFG/DOW product online if it's not leaving the shelves in their shop. Given that you are a supporter of Asmodee's policy changes (as inferred from your blog posts), how would you respond to those owners who are now having a distribution channel shut down? (I understand you're not speaking for Asmodee, just interested in the idea between shop owners).

How do I respond to brick and mortar stores complaining they can't dump slow moving Asmodee product? Retail better. You're doing it wrong. You're hurting the industry. Learn how to run a store properly. Order using forecasting. Stop chasing discount tiers. Use in-store sales to dump what you can't sell. That's how professional stores have operated for over a hundred years. I have no sympathy for these folks, who I consider clowns. There are some prominent retailer clowns who are angry about this. They need to stop being clowns. Step up.

Anton Torres also stated that (paraphrasing) he'd rather see consumers buy one or two games at a higher cost than purchasing a glut of games at a lower price point. Do you agree with his sentiment?

As for buying one or two at a higher cost versus lower, I don't have much of an opinion on this. I think the natural tendency is to maximize your budget to get as much value as possible. I think there's a middle ground where everyone can get what they want. It's not how it has been though. Understand that this is industry death as you see it now.

A large contingency of gamers state they do not have the availability of (or choose not to visit) local game stores. They say their preferred method of deciding what games to buy relies on online reviewers/media. Simply put, from my research I can conclude that a sizable group of gamers are not interacting with FLGS's, and yet the hobby continues to grow. Given that Asmodee's policies will restrict and/or raise the price of a large amount of games (specifically Asmodee/FFG/Days of Wonders products), do you believe that Asmodee's policies are in the best interest of expanding the hobby, with regards to the concept that many new gamers are not entering the hobby through the traditional game store events/promotions/etc?

There is no "raising the price," by attempting to stop gross devaluation of their product. The truth of this issue is those who buy their games online are a minority. They are not capable of sustaining the hobby or acting as gateways for a significant number of new players. Everyone in the industry believes this to be true. I know online only buyers don't like to hear that they're outliers in the community, but sorry, they are. I wish I could give you numbers on this, but what most online only consumers don't understand is they are often buying from brick and mortar stores when they buy online. The true online only stores are an insignificant slice of the pie in the game trade. However, when you add in the brick and mortar stores selling online, the data gets muddled.

Finally, I just want to make it clear that this is not about the end consumer getting things. This is about sustaining an industry that has gotten itself into a nasty mess based on perverse incentives to over consume. The end consumer needs to understand there is a baseline price point that needs to be maintained or the train comes off the rails. The system crashes and nobody gets what they want. The stores stop selling the product. The publisher stops making it and nobody gets cool games.

Gotta Turn Somethin' (Tradecraft)

When we talk about an experience business there's this common (usually online) misperception that an experience game store will be an open venue of sorts, dependent on concessions. This is the gamer cafe model.

The idea is gamers come to the gamer cafe, have their concessions and uses the tables for the evening. Games in this theoretical model are purchased online,  because duh, while the brick and mortar business provides the venue and food. If there are games for sale, it's like the pro shop in a bowling alley. It's there. Some things are bought, but it's all about the lanes.

Unfortunately, this doesn't jive with reality. If we're going to eliminate the brick and mortar game product sales, something else has to give. If we can't turn inventory, we have to turn tables. You gotta turn somethin'. You're not going to turn tables with a bunch of gamers camping out playing Tikal for 90 minutes while drinking Americanos. There's no money there. You certainly don't have gamers stacked 3-4 deep to play, either, although we can hope the hobby continues to grow.

Most cafes need turns on tables per night like game stores need turns on games in a year, probably around 3-4. That means 3-4 customers per table come in, purchase concessions, eat them, and then get the hell out. And those tickets need to be a lot more than two bucks a person for a cup of coffee, preferably around $15-20. If you've got a fancy restaurant, you may turn your dinner service just once a night, but your ticket is going to be much higher than that $15-20 average. 

If a location appears to be breaking this rule, it's most likely because they're running a very good coffee shop by day, and a gamer cafe by night (like GameHaus Cafe in Burbank). Running a gamer cafe in the evening is kind of ingenious, since it's when most coffee shops are closed. I know locally of a coffee shop planning to open a coffee shop/bar combinations, since the coffee shop is empty at night. You pay rent 24 hours a day, so why not? This model really isn't a gamer cafe, it's a gamer themed cafe, and if you ask the baristas at GameHaus, they'll tell you flat out, this is a cafe, I know nothing about this board game nonsense (paraphrased).

You're now in the coffee shop business (gamer themed) which means you're going to have to run a very good coffee shop to make this work. Just like if you add a coffee kiosk to your game store, you are very much still running a retail game store with some coffee, and you'll have all the issues with retail. There are full fledged hybrid models out there, with Mox Boarding House and Cafe Mox being the most interesting, as they run both models quite robustly. 

However, in these models, you're essentially running two businesses side by side. You've got a great bar/restaurant in a great retail establishment. Although it's a clear win when we look at Third Place Theory, you have to wonder if each piece of this puzzle would be more profitable if you separated them. That's often the case with hybrids. Clearly you need top expertise in both business segments to be successful and if you lack in either, the impression of the entire business suffers. A bad waiter can ruin your game store and a poor game store manager can trash your bar. Could they be even more successful separate? 

Also don't underestimate what it costs to hybridize a game store. A coffee shop build out is easily $40,000-$60,000, while a restaurant could run you $150,000-$250,000 and up. That looks suspiciously like the cost to open another store, and if you've made it to this point in your business, opening and running game stores is your skill set, not making Americanos and serving customers four times your usual speed. 

Anyway, bottom line is there is no magic bullet. There is no pro shop model that works. You're either turning game product or tables, or ideally both. But not neither. 

The Experience Economy (Tradecraft)

“Millennials like not seeing people. I’ve been inside restaurants where we’ve installed ordering kiosks… and I’ve actually seen young people waiting in line to use the kiosk where there’s a person standing behind the counter, waiting on nobody.” -Carl’s Jr. CEO Andy Puzder

American workers are insanely productive, with US productivity growing 74% since the 1970's, while wages grew only 9%. Productivity gains clearly didn't benefit workers during that time, which is why minimum wages are being enacted to close some of that gap. While workers at minimum wage are around 4% of the workforce, when we start talking $15 minimum wages, that number includes over half the hourly workers in this country. That's going to have a huge effect on the economy.

It's clear business owners will do what they can to avoid taking big hits, but for smaller businesses, there's little they can do. At the same time, those who push for big wage increases could care less about the business road kill they leave behind. Liberals get that steely, survival of the fittest, look in their eyes, usually reserved for hardened business owners. "Some will die, and that's alright. It is the way of things. Circle of life."

Businesses like Carl's Jr. will adjust with kiosks and robots. Businesses like mine? We won't be able to afford such expensive changes. Plus, how can we possibly compete against Amazon same day delivery and big retailers with labor saving robots and kiosks? It's quite possible we even see a future without work, a move to a Star Trek like existence with a guaranteed minimum income and people doing good for the world rather than dropping another batch of fries. I believe work has intrinsic value, but I'm sure that fry cook has dreams that don't involve empty carbs.

We will survive, those of us in retail who understand the new experience economy. This is a term from the late 90's authors Pine and Gilmore use to describe the new economy following the service economy. Anyone can buy stuff online for less money and more convenience. Ask yourself why they buy from you? Why has specialty retail, game stores in particular, survived? They're not dying, their numbers are actually growing in a field that has seen clear growth over the past decade. It's because we unconsciously transitioned from a simple goods business and now run rudimentary experience businesses. Here are the stages we see from Pine and Gilmore in an experience economy:

A commodity business charges for undifferentiated products.

A goods business charges for distinctive, tangible things.

A service business charges for the activities you perform.

An experience business charges for the feeling customers get by engaging it.

A transformation business charges for the benefit customers (or "guests") receive by spending time there.

Source

If you think of a game store as a place to buy stuff, you're thinking of it as a goods business, a place to buy distinctive things. It's passive consumption of goods. We certainly need that, but it's the model most at risk from online sales and robots. It's not particularly hard to have a store with things that people buy. Well, actually it's pretty hard, but it's nothing compared to the coordination required of a service business, which improves our competitive position and increases relevance to our customers. A service business moves from passive consumption to active participation.

A service business is where most game stores reside right now. We sell tangible things, but we regularly hold events where we charge for our activities and customers participate. It's not a completely transformative model and for us, only about 20% of our customers participate in this way. It's only part way towards a service business transition. By the way, if your business is suffering, and you're not monetizing your game space, you're brain is stuck in the goods business and needs to kick it up a notch to the service business model.

The higher levels, the experience and transformation business, is perfecting of the service business, becoming increasingly relevant to customer needs, which improves our competitive position. The subtitle of The Experience Economy book is "Work is theater and every business a stage." Taking your game store to this level is going to be key to survival in the age of our robot overlords. You need active audience participation in this model.

You need to delight and entertain, and not just the 20% who engage your game space, but the full 100% of customers. We no longer employ clerks, we employ skilled theater workers. These workers not only understand the product you sell, but the experience your business is trying to provide your customers. It's more than connecting product A with customer B.

This additional experience has somewhat been there. It's not something we're pretending to add to our businesses in this late stage. It's the intangible reasons customers shop with us now. It's your personality, your knowledge, your position as alpha in the hobby or field. This is no time to employ The 4-Hour Work Week, we need you here directing the stage. It's the opposite of kiosks and robots, it's finding ways to be increasingly relevant to your customers by creating that differentiated experience in the marketplace. Perhaps it's improving our events or adding concessions. It might include a variety of demo games that educate and delight while increasing sales substantially. We need to make that intangible, very much tangible.

We'll need to increasingly monetize our space and our services so we can afford to improve and move in this direction. When customers won't engage your mode, they're simply not your customers. A growing market means you can turn them away. Those competitors who give away their performances for free or less than their market value need to be seen as the enemy, at least until wage increases crush them under foot. If there's an upside to an increasing minimum wage, it's that those who can't or won't adapt to the experience economy will fail, providing us a small opening to take our businesses to this next level.

With hobby games becoming more mainstream, increased competition from big box and online and wage pressures hitting the smallest stores the hardest, not every store will be around to run a transformation business. A transformation business will include too many moving parts at too high a cost for the survival of the average Magic shop with some Magic boxes and sea of Costco folding tables (a service business model). As wages rise and businesses automate, service businesses will quietly fold or adapt to the transformation business model. As there's no guide to such a transformation, it won't come easy.

At least that's what I'm thinking about this week.

Higher Turn Rates (Tradecraft)

I'm doing inventory management seminars this week at the GAMA Trade Show and one of my discussions is about turn rates. There is no hard data on turns rates, just generally accepted views of how inventory should perform in the trade, often compared to mass market turns.

That number has been taught to be in the 3-4 range when I started 12 years ago. I heard it from many veteran retailers and I based my business on this. Mass market was twice that number, needing, we were told, around 8 turns a year. If you're unfamiliar with this number, it's your retail sales divided by your inventory value at retail price. You can perform turn rate analysis on items, departments or entire stores.

As I've seen my turns grow over this 3-4 accepted range, I grew concerned. There's not much you can do about high turn concern except throw more money at inventory to hopefully stop losing sales from stock outages, because that's what we were taught was happening when you hit turn numbers like six or eight. In theory, it means your stock is too lean and when customers arrived to buy it, you're out. Even just-in-time inventory management isn't enough to avoid outages at the highest turn levels.

This year at GAMA, the thinking has clearly changed, with veterans teaching 4-6 turns or even higher as a good baseline. Larger stores can see turns in the 7-8 range. So what does this mean? The most obvious thing is game stores, with the same amount of capital as ten years ago, can easily achieve twice the revenue. That's a big deal.

I think these overall higher turns comes from a couple sources. The most obvious is Magic. Magic is a mainstay of almost all game stores at this point, and Magic and other CCGs boost turns dramatically. Our CCG turns are around 11, and with CCGs estimated to be double what they were ten years ago, that high performance department sees itself reflected in higher overall turns.

I also think higher overall industry turns has resulted from an increased mainstream acceptance of hobby games in general. Board games, especially, have seen a huge influx of new customers who weren't previously hobby gamers. When you can boost sales 400% by demoing board games to people off the street, conventional turn numbers start to fall apart.

The implications of higher overall turns is what we're beginning to experience in the industry. We've got a huge increase in hobby game stores. We see our top games reflected in mass market, at least until they lose their bloom and are dropped. We see national chains beginning to emerge, either home grown or imported. All the implications of a mainstreamization of hobby gaming are reflected in this higher turn rate indicator. Some are good, but it will likely mean consolidation and increased competition and not everyone will survive.

Trust Your Gut (Tradecraft)

With the GAMA Trade Show next week, I wanted to encourage new retailers to trust their gut when it comes to new product. Publishers create slick presentations and great demo experiences at the show, which can short circuit your usual buying process.

Your gut is an amalgamation of your experiences. It's your subconscious understanding of your business, your customer base, your stock. This is not to say a game in particular is inherently flawed, it's just not for you, and your gut will let you know. Having ignored my gut, because of lack of experience, I can tell you that it doesn't take a long time to develop a strong gut instinct. Even after a couple years, I knew in my gut what worked and what didn't. It just took much longer to trust it.

Edit: Trusting your gut doesn't just mean knowing something is a wrong choice. It also includes right decisions. Unfortunately, we forget about those because there's no pain associated with it.

This brings up another mini topic, that of store identity. Everyone wants to grow. We're taught to grow or die, like the swimming shark. Swim or suffocate. However, after a while, your store will mature and you'll establish an identity. That identity is rarely what you want it to be, it's what you've become based on your circumstances. You might not realize you even have an identity, because you're striving to be something else. It's much like becoming an adult.

Embracing your identity means playing to your strengths. It also means saying "no" a lot. In fact, it means saying no most of the time: to opportunities, to customers wanting new product lines, and to lines that excite you but don't fit your identity. Deciding what not to carry will not only define your business but can save it.

This is a fine line, for sure. Small business is supposed to be nimble, innovative, and quick to evolve. That's all good, but within your identity. This has taken me a very long time to understand and even longer to embrace, but lately it has been key to our growth. I often have demographic envy, in which I wish I had the customers of other, more urban stores, rather than my suburban clientele. It's a case of the grass is always greener or perhaps Pinocchio. If I could only sell specialty miniatures, indie role playing games and chit and counter war games, I would be a real boy!

"Prove yourself brave, truthful, and unselfish, and someday, you will be a real boy."

Your ONE Game (Tradecraft)

I'm working on my inventory management presentation for the GAMA Trade Show next week.  In one section of my presentation, I'll be talking about exempt categories of inventory, categories that are immune from the strict scrutiny necessary for inventory management. These include areas like safety stock and holiday (anticipatory) inventory. I also added a new category that I call Your One Game.

The concept comes from emergency survival gear. When you're building a 72 hour pack, a bag you make to survive an earthquake or other catastrophe, it's often recommended that you bring one item of personal comfort. This could be an inspirational text or a stuffed animal or even a little extra food. My car bag has an MRE (Meal Ready to Eat), even though I can't justify the weight. However, knowing I always have a hot meal, after who knows what, gives me comfort.

This one item is your exempt item, free from scrutiny of usefulness or weight. Putting a bag like this together is subjective, and it's easy to put in too much stuff. So your one item is an emotional crutch to allow you to be ruthless with the other items in your bag, which can number a couple hundred and if you're not careful, weigh more than you can safely carry. But you only get one.

That's the psychology behind your one game in inventory management. You can have that one game in your store that you're personally attached to. My game, for many years, was Tikal. I like this game. There are several ways to win. I like the theme, since I've been to Tikal and enjoyed my trip. I also tend to win it often. Who doesn't like a game like this? Unfortunately, it sold poorly, often just once a year.

Besides Tikal, I had a bunch of other games I was attached to, mostly games I had stayed late at the store to learn to play. I sacrificed personal time for these games, away from my family, so I could learn them and sell them better. Eventually, almost every game stops selling and you need to let them go, but personal investment makes that hard.

So the ONE game concept means you keep your Tikal, but you let the rest go. Hang on to your comfort game and know it's safe while you do the hard work of detaching from the rest. Don't let those games crush you with their worthless weight. Keep your Tikal and be ruthless with everything else, for your own survival.

Photo from Never Bored of the Boards

Bought A Game Store

Well, I didn't buy the store, I bought its contents.

Not all of its contents, just its games.

Well, not all of its games, just the ones I hand picked. Plus the drink cooler.

If you're going to buy a store, buying the inventory is your best bet. You don't want the actual business, most of the time. Buying a business is like getting married, but very quickly and without knowing if they have good credit, and agreeing to take care of all of their problems and debts. It's like getting married to your down on their luck, second cousin, in outer Uzgameistan, with an implied shotgun pointed at you from your uncle-father-in-law.

Buying a game store. Don't do.

No, you just want the stuff. In the old days, you would pay maybe ten cents on the dollar for sight unseen game nonsense. If you can curate that experience, you might spend twenty cents. We do twenty cents on our ding & dent stuff all day long (if any game companies are listening). This is almost always cash up front, an offer they can't refuse.

Offer less than twenty cents and the previous owner is likely to do what most failed game store owners do nowadays, go home and sulk with their Ebay account and get thirty or so cents on the dollar over a long time. With the devalued game trade, you can get forty cents (close to wholesale) all day long on just about everything, so nobody is going to give you close to that in a sale.

This particular store was one I helped set up. So although I had never been there, I spent hours with the previous owner hand picking the inventory, including a walk through the dealer room at the GAMA Trade Show.

Of course, the owners went off script and bought a lot of garbage too, but I was able to ignore that stuff. In one day, we ended up increasing our store inventory by 12% without adding any new items to our system. With everything recommended by me and hand picking the mostly good stuff, I essentially bought safety stock.

Where the deal is weird is how we structured the money. The owner being a good friend, we didn't do that ten or twenty cents on the dollar thing. We did more like thirty five cents at the end of the day, with payments over time. The reasoning here, which I don't recommend, was I could leverage inventory turns to make more money than the loan payments. We're basically using inventory analysis, something you do on the back end, for sales projection. This is a dumb thing I don't recommend. It's like buying stocks based entirely on past performance.

For example, if you take $11,000 of inventory at cost, which is roughly $20,000 at MSRP, and turn it at 3 turns a year, that's $60,000 of gross sales, with a net of around $5,400. If you can get your loan payment down to $450, you've broken even (that's 24 payments). But if you figure a 15% net margin instead of a 9% margin, your net is even higher. Increase turns to 4 and you're way ahead. Drop them down below 3 and you're way behind (I need 3.18 in my deal. I currently average 7.6).

It brought up a bunch of difficult thought questions. If everything is safety stock, are you really selling these items or selling the previously purchased ones? And what about the overall increase in sales you get by having 12% more inventory? How do you calculate that? It doesn't happen right away, because of the nature of safety stock. That occurs on a curve as the safety stock sells and new items are ordered to replace it. This assumes you order more stock and not pocket the money (you will be ordering less and building a cash reserve).

This is why twenty cents on the dollar sounds swell. But I'm helping out a friend. That's the take away. And so many new beverages on the way!