Chicken Little Post (Tradecraft)

As World of Warcraft spun down and lost its balance on its axis, a million people a month were spun off into space. These people were gamer geeks. They may not have started as gamer geeks (although many did), but they were certainly gamer geeks now. A million gamer geeks a month were spun off into the void. They sought entertainment.

They didn't want movies and first person shooters, because although they might have have been muggles before, WoW changed them forever. They discovered (or sometimes re-discovered) Magic: The Gathering, and as WoW spun down, Magic took off, doubling in revenue in just a few years time and continuing to grow. This is a narrative I weave with no justification in objective fact. It's observational and greatly simplified.

Magic continues to grow, and I would suggest, to a frothy level. Retailers talk incessantly about card values and online sales methods. Margins on singles sold online have shrunk down to the level of a commoditized product. Magic judges are insisting they get paid, like employees. Small stores are subsisting entirely on their singles market, shoe boxes of sleeved cards worth tens of thousands of dollars.

Are we at the stage of "irrational exuberance?" When will the Gaming Goat's tax dodge description of "It's just cardboard, it has no monetary value" come around? Is Magic big enough that a collapse will mean a spin down rather than a sharp crash? Will there be a "return to the mean" or total destruction? Are we looking at the housing market or Beanie Babies? When will the blow off start? Is there a thing that will attract that jettisoned WoW player once again? Some say it will come in the form of virtual reality.

The chart below was designed by economist Dr. Jean-Paul Rodrigue to describe investment bubbles. All the talk I hear from store owners seems an awful lot like "New Paradigm" discussions. 

Beginner's Mind (Tradecraft)

There's a Zen saying:

In the beginner's mind there are many possibilities, in the expert's mind there are few.

The beginner's mind is full of possibilities, eagerness, and free from preconceptions. Meanwhile, the expert has hard earned ideas on what works and what doesn't and has been beaten down by the process of elimination. 

When it comes to giving advice, I try to keep this in mind. There are things I know are bad ideas, and then there are things that seem too far fetched or time consuming to be worthwhile. I'm probably right about the bad ideas, but that second category is how you build a business.  It's Beginner's Mind territory. It's also where the expert spends an inordinate amount of time attempting to return to, reading books, engaging with their experts, and pushing their own boundaries.

Also, every business is a unique expression of time and place, interpreted by the owner. There is no way I could possibly understand that owner's position without standing in their shoes. My expert mind is limited by my own experience interpreting my own time and space.

When I'm coaching staff, I try to give them room to express their entrepreneurial spirit, which means giving them room to fail. There's another good saying from that same Zen book: If you want to control your cow, give it a wide pasture. Wide boundaries have proven to be an excellent management process, provided you clearly communicate the fence lines. 

When my last manager left us after spending years creating processes and procedures, I was a bit concerned. My comment at the time: "I'm not sure where Parker ends, and Black Diamond Games begins." Part of giving people enough room is letting them put their personal stamp on everything they do, that wide pasture, unimpeded by the limitation of the expert's mind. 

This is just stuff to keep in mind when giving and especially, when receiving advice from those who have gone before. As the beginner, you have the realm of possibilities at your disposal, while the expert lacks the enthusiasm to fully engage in your vision. Use the veteran's wealth of experience for shooting down bad ideas, but embrace your own beginner's enthusiasm when it comes to expressing yourself in your business.

Different Animals, Different Zoos

We live in a world where a restaurant that specializes in southern Chinese cuisine will be given a one star review for not serving northern cuisine. When it comes to game stores, we have similar problems, with stores not only criticized for not having a particular type of game, but criticized for having too much of one.

If your presence appears to cater too much to the Magic crowd, there are players who will loudly complain about the death of the traditional hobby game store. Likewise, CCG player will complain about limits to their event sizes due to dedicated miniatures tables. Do we not know what side of the bread is buttered? This group you call "gamer" is not uniform by any means, and although they'll show some fierce loyalty when their store is in trouble, they'll also turn on a store if they're not feeling the love.

I believe game stores are perfect reflections of their community. They perfectly reflect the interests of the local customers. They reflect the business practices that are part of the local retail culture. They reflect how much a prospective small business owner is willing to invest in that local culture, if they're willing to build something grand or just throw up some Costco tables.

If an area has a poor store selection, well that's a reflection on the entire local culture, all the way down to the individual customer. It's a beautiful thing, perfection, and I believe, deep down, customers get the stores they deserve. If they don't get what they want, they have themselves to blame.

Blame is a harsh word, but I use it as a mirror so customers can look at themselves before judging the life's work of a small business owner and the owners faith in their customer base. If your local stores are all discount dumpster fires, well, that's the area you live in. Just as with poor schools, a bad job market, and food deserts, you may want to make a change. Change comes in many forms, be it with your feet or your wallet. Find the store trying to change the culture and give them your trade. Likewise, If your local stores are cathedrals of gamer culture, well, you've chosen wisely. and hopefully you do what you can to preserve that.

Every game store is a different animal, in a different zoo. We don't need grand comparisons of great stores. They are reflections of their communities, their cultures, their local markets, and of course, the owner, who built it, and could have absolutely, always, in every case, made better use of their time and resources when it comes to economic outcomes. That's true of everyone in the game trade. Monastics for a small cause. And if you want to prove me wrong, if that store you want to support doesn't exist, send me an email and we'll talk about how you can be the change.

The $100 Board Game

Among the many misconceptions about game stores is the amount of money they make on a sale. I wrote a post like this years ago, but lets try it again.

The first thing to know is we own our inventory. Once it arrives, it is ours and we don't have the luxury to return the item if it doesn't sell. It's our responsibility to run with the ball, now that we've bought it.  We also have no relationship with the publishers to speak of. There are no rebates, coupons, or special relationships that allow us to somehow pass our costs back up to someone else. We're entirely on our own.

On a $100 board game, the example I'm using, we will be collecting sales tax, which for us is about $9. That $9 sits in our account for 3-5 weeks until we remit it to the state. Any advantage we have in holding that cash (in our non interest bearing checking account)  is countered by the pound you in the butt consequences of somehow screwing up a payment to these people. Before it was electronic, I made a number of errors that were often discovered a year or more later, resulting in penalties and interest of extreme proportions. 

The first thing we do when we sell a $100 board game is order another one, or if it stunk, something better. That means we spend $55 on replacement inventory. This is known as our cost of goods. Cost of goods will often include shrink, but I've pulled it out for you.

Shrink is approximately $3.10 of money that was given out in error, received improperly, stolen from the till or inventory that was the victim of the five finger discount. About $1.55 will be stolen by someone on staff and $1.55 by customers. That's on average as we rarely know which is which, or who is doing what. This happens every single day and is the cause of most retailers losing faith in humanity.

$12.21 will go to pay our staff, which of course, circulates throughout the local economy to pay rents, food and other expenses. Most store owners have a salary they take from this amount, or at least they should. In California, this number will be rising about 10% a year for the next five years, as the new minimum wage law kicks in.

$3.93 will go directly to paying taxes, either payroll or income for the business. This does not include property taxes and the many, many, regional taxes hidden in our rent payment that people continually vote for and forget about here in California. That's probably another $1.50 included in rent. This also doesn't include income taxes for the manager and owner. That's probably $2 or so taken from payroll and profit (below).

$9.67 goes to rent, including the previously mentioned taxes, and maintenance of the building exterior (called Common Area Maintenance or CAM).

$1.99 goes to advertising. If you're reading this on Facebook, I probably paid for you to see it.

$1.74 goes to utilities, a big chunk of which involves keeping our game space at a reasonable temperature. It includes things like our alarm system, Internet and phones, garbage and the biggest, electricity. Water is in our CAM charges included in rent.

$1.53 of the average $100 transaction goes straight to the credit card processors. It's a fee much higher than the rest of the developed world. They're nearly 10 times the fees paid in Europe.

$.90 goes to travel to trade shows and conventions, so we can be better informed sales people and learn how to operate our businesses better.

$.61 goes to insurance, which includes business liability insurance, skyrocketing workers comp insurance, and a "key man" life insurance policy that ensures the business has continuity if I get hit by a bus.

$.34 goes to outside services, like our accountant, IT consultants, and the attorney. Some stores spend a lot more on accounting, but we do book keeping in house.

$.31 goes to over 100 office related expenses, from stamps to pay bills to pens that constantly run out of ink. 

$.31 goes to servicing debt, which in our case was used for our expansion.

$.23 went toward "Big Blue," our van we take to conventions. We have a vehicle insurance policy on the van, but this category also includes repairs, parking and gas. Because its primary function is a bill board, this could be considered an advertising expense (unless you're the IRS, in which case we're certainly not claiming it as an advertising expense).

$.14 goes to licenses and permits, including the ridiculous county fee for "inspecting" our barcode scanner. Such a scam. I used to write "For Sensual Massage" in the memo field of the check I sent them, until I had to uncomfortably explain what that was about to my accountant (I still do it, but delete that field in QuickBooks right after).

$.13 goes to subscriptions and dues, like our POS software annual fee, our GAMA membership, and services like Carbonite for backups.

$.07 of this transaction goes towards the interior upkeep of the building, which has been thankfully low lately. When we first moved in, I swear we fixed absolutely everything that could break. We've replaced doors, toilets, sinks. you name it.

$7.77 is net profit. You can see here that there is not a whole lot of wiggle room for things like discounts. I could give away a 7% discount and break even, or I could feed my family instead. Most game stores are in the 5-10% range. To be honest, we had $11 of net profit last year, a record for us, but that $5-10 is more normal. If there's a take away from this, remember the 7's. That's what the average retailer has to work with when it comes to price flexibility. $2.33 of this will be taken to pay income taxes.

Financing (Tradecraft)

Our construction project will cost us over $100,000 when it's completed, hopefully in a month. That includes all the architectural and engineering work, permits, construction, and even the tables and chairs.

I wanted to mention the variety of creative financing "instruments" we used and are still using to fund this project. We've also spent a bunch of our own money along the way, but we've paid even more dearly in opportunity costs. It's painfully clear there were directions we could have taken, growth that we gave up, to make this project happen.

I have modest goals with our expansion. If it increases our revenue by three percent, our costs are covered. Just three percent. I'm hoping for ten percent. When we went from no game space to game space, our sales soared sixty percent.

That's the economic reasoning if you were wondering why anyone would spend a hundred grand to improve someone else's property. I don't own the building, I'm just using it for another seven years, with an option for five more.

The reality is we need to serve our community better. We need to delight them and entertain them and fulfill them in a ways only other gamers understand. That is our mission. This will accomplish that.

Financing started with Kickstarter. When it failed to attract enough customer backers, I made personal appeals to everyone I knew in the game trade. It worked, but barely. I have much gratitude towards a core group of publishers and other game store owners. Paizo and Atlas Games stand out as our heroes.

From Kickstarter, we moved on to a community funding non profit, my property management company and a variety of private lenders. It did not include a bank, home equity, or credit cards, the traditional small business funding sources. Those wells have been poisoned from the Great Recession. It also didn't include all those fly by night business lending sources, which often charge between 15% and 40% interest on their money, usually sucking it out of your daily credit card receipts.

Negotiations involved some creative finance, such as liens on my cars, security agreements on inventory and fixtures, "senior" debt, lower interest in exchange for product discounts, a loan built into the rent payment, acquiring inventory on time, and a holiday balloon payment amortization table to coincide with our income stream (I'm proud of that one).

A couple of our loans are already paid off, including the one with the car liens. In fact, I've always paid off business loans early. Every one. Cash flow is king, and loans drag it down. Also, this is a lot of money for an individual, but it's a relatively small amount for a profitable business our size.

The truly amazing thing is we turned down a couple hundred thousand dollars of lender money, due to not coming to terms or the amount being too small. I just can't manage a dozen, five thousand dollar loans. I will lose track and it will keep me up at night. We also turned down several business owners and I'll explain why.

 If you own a business, and you have extra cash, you will always make more money investing in yourself. I learned this with one of our first angel investors, and then quickly walked a couple other people through it, as the reality dawned on them. Even bad inventory decisions are more profitable than me or the market. I can't match you, when it comes to profitability on your money, and I'm certainly not as secure. Invest in yourself first, then other people if you're feeling generous. Everyone else who works for the man? We're a pretty good bet compared to your options.

I also learned it's way easier dealing with experienced lenders. They know the language, a reasonable rate of return, and the difference between a loan and and an equity stake. Also, the smaller the loan, often the bigger the headache, the more questions, and the more security the lender desires. Weird that way.

All of this is banking off my personal reputation. None of this would be possible out of the gate as a new business owner. I am more astonished than anyone this was possible. We live in a crowd sourced and crowd funded world nowadays, but it doesn't mean my primitive monkey brain intuitively grasps this. In my confusion, I default to gratitude. Thank you so much for making this possible.

Almost Human

Someone recently told me they liked my old gaming articles in this blog, because it made me seem human. Well, that's been something I've been working on for years! As this blog got more attention, I started focusing on business posts, and instead created other blogs to express my outside interests. A couple I'm even happy to share, in the pursuit of being more human:

Fate of Tara. This is my Pathfinder/D&D campaign blog that explores the theme of sandbox games. I put a huge amount of work into this multi year campaign, wrote seven books of GM material, and had the maps and much of the artwork professionally designed. I'm especially proud of Get Your Ass In The Dungeon, a study of the donkey.

Interlagos. Probably of little interest to most, this was an ownership blog for a new car, a Volkswagen GTI. When I'm not reading about games and the game trade, I'm often reading about cars (currently 4x4s), and I love the ownership blogs written by automotive journalists. Maybe a bit obsessive, but hey, it's got 4 times the hits of Fate of Tara.

Also, if you're into Planescape, I used to be the "webmaster" and author of Tale of the Bariaur. The site is long gone, but last I heard, people were converting my two unauthorized Bariaur fan books to newer editions of D&D. Those were the Bariaur Book of Belief and the Complete Book of Bariaur. The most current links to these books point back to Wizards of the Coast. Hah!

There are a couple others, but they're only of interest if you're into disaster preparedness, so I'll let you look for those yourself.

Retail Headwinds and the Future Survivors (Tradecraft)

With Sports Authority announcing they're simply closing all 450 stores, it led to some interesting discussions both amongst fellow retailers and business oriented friends. Here are a few retail headwinds we have in store and a theory on who will survive and who will not.

Minimum Wage. This has been discussed to death, but being in California, I'm trying to predict what a $15 minimum wage will look like for retail. My basic metrics are this: A third of retail expenses (after cost of goods) is labor. The average store has an annual sales increase of 3% a year. If you raise wages 10% a year, and it's a third of expenses, it means you tread water and don't make additional money. So if you're average, you're looking at 5 years making no money. If you're below average, you will cook like a frog in a slowly heating pot. Bottom line: Be above average.

Will the rising tide of higher wages raise all boats? Nobody knows. If they tell you otherwise, they're lying or confused.

New Overtime Rules for Salaried Employees. If you're on salary and making less than $50,000 or so, the new overtime rules will allow you to earn overtime pay, something you didn't do before. I personally find overworking salaried employees abusive. Paying someone $24,000 a year and expecting them to work 50-60 hours is not only abusive, it effectively puts them below the current minimum wage. Most managers of retail stores on salary will be effected by this ruling. That $24K manager would now be paid nearly $700 more each month, which I think is fair, but that money has to come from someplace and struggling retail stores may not have it.

The End of Volunteers. As mentioned in one of my recent blog posts, and then here and here, the volunteer category is an endangered species in game stores. Events will likely be shifted to employees and independent contractors and those events not economically viable are likely not to happen at all. 

Without events, certain in-store product categories will likely be weakened further and will eventually not be sold primarily in stores. I'm referring primarily to Role Playing Games (already rumored to be over 50% sold online) and Miniatures. These are already marginal categories in most (clearly not all, and I would miss them) stores.

Mass Marketization of the Game Trade. Barnes & Noble is now running weekly game nights at all 640 stores. Top hobby games can be found in Target, Barnes & Noble, GameStop, Wal Mart, and of course all the online usual suspects. Good Games, a franchise of game stores in Australia, announced they'll be opening stores in the US market. We haven't seen a game store chain since Wizards of the Coast closed their 80 retail stores in 2004.

This is both an opportunity and a threat to hobby stores. Those big enough to compete with compelling events and well stocked, in demand product will be able to prosper under the pressure. Those that don't offer a compelling retail experience will be hopelessly outclassed and made irrelevant. Competition is good that way.

Increased Showrooming and Amazon Same Day Delivery. Combined with the rise of a younger demographic more inclined to shop online, online retail and its innovations are increasingly a threat to brick and mortar sales. If you've been around for a decade or more, you've survived in spite of online trends, but they're still mentioned as a reason for store closings, such as with Sports Authority. The pressures will only increase as demographics shift.

So who will survive in the future?

My theory is generally the big game stores will survive. They're compliant with current labor laws and other legal requirements, including the many insurance requirements that small stores often skip. They have growth way above average, insulating them from the frog in the pot scenario.  They have enough scale and diversification to shift when there's weakness in a segment. They often have "war chests" of cash on hand and product to weather a storm or two. A large store is a personal definition that varies, but my guess is it means stores that do a million or so dollars a year in revenue. That's probably the top 10% of hobby game stores in the country.

The small game stores will also continue to survive. The small stores are scrappy. They often have innovative ideas to make rent. Many are not remotely legally compliant with labor laws and codes. Compliance is aspirational for many small stores. They will continue to find ways to eek out a small living any way they can. But they will mostly stay small or fail. The pathway to a medium sized store will be increasingly difficult.

The medium sized stores? Having been one, the goal was always to gain enough scale to tick all the boxes on compliance and get all the work done in order to go from good to great. There was a transition year or two when we simply couldn't break out. I think the bar will be too high going forward for the medium sized stores. My advice if you're medium (we'll call you $400-$800K a year in annual sales) is get bigger as quickly as possible. Get into full compliance, get diversified, and master policies and procedures while you still have breathing room.

Who will survive is all speculation, game trade table talk really. If you've got an opinion on this, I wold love to hear it in the comments.