Construction Costs (The Final)

I promised to answer questions related to our mezzanine expansion project as part of the Kickstarter process. If you have questions, please ask them in the comments and I'll respond in my next post.

Construction is complete. We're putting pictures on the wall and painting the Wall of Heroes, honoring our Kickstarter backers. We still need a sound system and we would like another TV monitor, but those can wait a while longer. We're poor right now anyway, so music and TV can wait.

Today I want to write about the costs involved in this project, since it's a more objective, nuts and bolts topic. I hadn't figured all the costs until I wrote this post, but I was pretty close in my mind. There are the concrete costs, which I'll get to in a moment. These are the items entered into the accounting software. There are also a lot of soft costs, which are more difficult to quantify, but which had a big effect on this project and put tremendous stress on the business.

When we first asked for a loan, we requested and received a $50,000 construction loan from Opportunity Fund. This was in addition to the $28,493 we raised from the Kickstarter (of which we really only got about $21,000 after expenses). We also had a decent amount of cash on hand that went entirely to paying the architects. This project took so long, we paid off most of this loan before construction began. It was a crazy loan, that included paying off my personal car so it could be used as collateral, so I was happy to see it go. We received a lot of additional loans from "angels" who answered our Kickstarter request for funding. Those loans are what we're paying off now (and for the next four and a half years).

I planned to do this project with a family discount, but by the time we got from planning to execution, my brother, who was going to do the construction, had changed fields. He's now a successful real estate agent. He can sell me a building, but he isn't making them any longer. Our property management company stepped in at the last minute and agreed to do the project, even financing a portion of it, building it into our rent over the next five years (another form of loan payment).

They gave us a decent bid, but even that was a moving target, increasing by $20,000 between our request for a proposal and actual execution of the contract a year later. Eventually we signed our new lease, with construction, several days before our current lease expired. The delay in the project was about finding a builder, first my brother, then a series of other much higher bids, and finally property management. I believe we signed our lease on a Monday and it was scheduled to expire on Wednesday. That's how close we came to being in serious trouble.

So how much did it cost?  Here's the break down from start to finish, 2014 through 2016:

EXPENSE	TOTAL
Construction	$81,334
Architect & Engineering	$39,431
Painting (Professional)	$6,448
IT & Infrastructure	$3,051
Storage	$1,770
Painting, Staff	$500
Alarm System (replaced)	$481
Locksmith	$159
Total	$133,174

This is around twice our initial estimate. There are also soft costs as well. The project was supposed to take 4-6 weeks, but took 6 months instead due to some serious miscalculations on the part of the (now former) project manager. The losses on the income from not having our space available is probably another $15,000, but overall, it wasn't as devastating as I had imagined. My 60% reduction in sales prediction wasn't remotely close.

Because the project took so long, really to a legally actionable degree, we received some rent concessions to make up for this.  We got a free month of rent in our contract for them being late, along with three more months negotiated to take on some of the construction ourselves (the painting). That totaled over $32,000 in free rent, which makes the cost overruns a bit more palatable. Half of that is future rent, so we're still hurting.

So where are we now? We're going to survive! We're in a deep financial hole that we're digging our way out over the next couple of months with our "free" rent. Each month we get a little bit stronger, and with the holidays coming up, we should be back to normal by 2017. If you're a customer, we could sure use a little extra help this holiday season, maybe an extra game purchase instead of socks. I always hated getting socks.

If you have questions, please ask them below. If this sounds like "seat of the pants" high risk chaos, welcome to small business!

We had an old Yugioh poster in a frame and a bunch of
architectural plans lying around. What to do...

Commoditization of Board Games (Tradecraft)

A friend in the industry recently commented that board games had become commoditized. What exactly does that mean? I will use the Investopedia definition:

Commoditize refers to a process in which goods or services become relatively indistinguishable from competing offerings over time. Generally speaking, commoditized products within specific categories are so similar to one another that the only distinguishing feature is pricing.

So board games become like the app of the month where you buy it as cheaply as possibly, burn through it as quickly as possible, and toss it aside so you don't run out of space. In the SF Bay Area, 1,500 square foot million dollar homes are not unusual, so even my better off customers complain about their board game collection sizes (we have a thing for that). There are numerous threads online about how many unplayed board games is too many or what can I do about my exploding collection.

The problem with this disposable board game market is the traditional costs of developing a board game assumes the game will be around for years to come. You're swinging for an "evergreen" item, one which will sell in perpetuity, or at least a very long time. You might go through half a dozen games before you get your evergreen. Now do that for a couple more decades and you have a thriving company. Traditionally, you're trying to create a company with a stable of games that provide enough income for future development and luxury items like maybe food for eating and shoes for wearing. 

I used the word traditional above, because there's another model that works far better in a commoditized market, and that's crowdsourcing. There are some board game publishers that are happy to develop a game for a set community of backers, who may produce a small percentage beyond this for retail, but who are completely happy to never reprint that game again and move on to the next one. I don't want to go so far as saying Kickstarter is the cause of commoditization, but it's certainly the best model if you want to go with the commoditization flow. 

If you want to frantically design games until the day you die rather than build a company that sells a variety of "evergreen" games, by all mean, one and done it on Kickstarter. I'm sure there are game designers who see this position as impure and selling out, much as there are game store owners who think profit is theft from customers.

Coming in as a brick and mortar retailer, the commoditized model is not one in which I want to engage. It's a market that I'm likely to walk away from to focus on less volatile areas. I don't have to sell board games. A commoditized market is about price and volume, two things brick and mortar can't provide well. It's also a little demoralizing when I'm picking up the tail end of some Kickstarter board game that I know we'll never see again. My desire to know anything about it, to even read the back of the box, is close to non existent. Commoditized games are indistinct from one another from a business perspective. But what if that game isn't a Kickstarter? The market is still commoditized, so how do you break through the price is king feature of commoditization as a publisher?

The first thing you must do is try to de-commoditize your game with some sort of pricing scheme to attempt to maintain some semblance of value for your partners. This method provides risk reduction for retailers. I won't go into detail here as there are many schemes, but Asmodee is the best example, restricting how retailers price their products online. If you read board game forums, which I highly don't recommend, you'll hear talk of the Asmodee "monopoly" or other End Times discussions. This is from hobbyists who are fine with commoditization and dirt cheap prices. They're happy to watch the world burn. However, retailers, who build board game communities (that later tend to migrate online because of commoditization), are fleeing from this market segment.

The second thing you can do is find a way to take advantage of a market segment for maximum benefit. The best example of this is convincing brick and mortar stores that your game is unique and they need to partner with you in marketing efforts. Ignore the man behind the curtain whose selling through every conceivable sales channel, you, hobby game retailer, are the one we want to partner with (because the others don't have game space, yet). This includes organized play programs, early release programs, buy a case promos, demo copies, you name it. This assumes you've attempted price stabilization because nobody wants to demo your game if it's 40% off online.

The problem with working with retailers in a commoditized market is only those who have a strong board game operation have the desire to partner with a board game manufacturer. Commoditized products don't need hand holding. The average game store wouldn't know what to do with a demo copy.  However, a strong board game operation can take these resources and turbo charge their sales. It's been shown that a well done demo program can increase sales of a title by 400%. That's money for everyone.

What publishers need to understand is only a tiny percentage of brick and mortar game stores are capable of running such a program. It takes a focus on board games (only one store per market can be this) and enough staff to pull it off. One of my favorite stores is Rainy Day Games in Aloha, Oregon. If you walk into that excellent store, staff are actively selling or demoing. It's an active sales process that is in the minority in the hobby game trade. We all aspire to such a store, but most of us are years away, if we ever get to that stage at all. Just remember, you have to stop the bleeding with price stabilization before you start sending out demo games to distributors and retailers. Nobody demos peanut butter or toilet paper. No retailer wants to spend time with a commoditized product.

Diversification and Board Games (Tradecraft)

There can be only one.

That's my general statement regarding local markets and game stores carrying board games. It's my impression, through personal experience and watching other markets, that one store will get the majority of board game business, enough for strong performance metrics, while the other stores won't get enough. The other stores will dawdle along, wondering why everyone suggested they carry these meeple mishaps in the first place.

I dawdled for several years before my biggest competitor retired and I took up the mantle. While I waited, I learned to play a couple hundred board games and figured out how to manage a board game inventory that was pretty much ignored by my customer base. I often wondered if there was light at the end of the tunnel, what exactly it would take to hit it with board games. Sound familiar? Many stores are in this boat.

There are other factors besides Not being The One. There are an increasing number of sales channels gobbling up a hot board game market, including Kickstarter, Amazon, Target and the flailing of brick and mortar stores on life support like Barnes & Noble and GameStop. You would think that with board game sales taking off nationally, there would be room for stores to jump into the mix, right? The pie should be growing. Nope.

We're seeing a problem where there are simply too many sales channels, combined with too many stores that can't differentiate themselves with their top board game inventory strategy, and most importantly, a glut of too many games being published. This glut means distributors are short ordering, resulting in brick and mortar customers being driven online to find their elusive games and most stores unable to place a heavy pre order to avoid the outage.

When Barnes & Noble carries the top 100 board games, how many board games do you think you need to diversify yourself from them? How many to diversify yourself from your local game store competitor? 500? 1000? Can it even be done if there can be only one?

Unlike Magic, which keeps many stores afloat, you need to own your local market or cede the space. Unfortunately, with Magic in the doldrums, that can mean closing your doors when you can't make board games work for you.

But that's just an observation. I could be wrong.

How We Run Events (Tradecraft)

This is an article about how we run events. Our way doesn't work for everyone. We're in a suburb of the San Francisco Bay Area. We have a large population base, but not a large group of gamers, per capita, as say a more urban city like Berkeley or Oakland.

That means there are fewer game stores out here, serving fewer gamers, who have generally limited tastes, with at least half of them buying their games online. Store demography envy is a thing, and I often suffer from it, wishing we had more customers with more divergent interests. We would sell indie RPGs and artisanal miniature games all day long, if we could.

Pay to play is what we call our event structure, but in reality very few actually pay. Instead, every event, at a minimum, has a $5 cover price that goes directly to your store credit account. So you pay $5 and you get $5 of store credit. This ensures that customers are ... well ... customers. I see no value in non-customers taking up space and using my air conditioning. Warm bodies just screw up my ambient temperature, they don't help generate the extra $2000 a month I now need to cover our construction loan payments for the space they are using.

Games played must be games we sell in the store. Games we sell in the store have to meet sales performance metrics or they're dropped. When a game is dropped, such as when it becomes devalued and customers buy it primarily on line (like Warmachine), events will likely not last long. We don't run events so customers can play with the models they buy online. Our competitors do though. You might try there, while they're still in business.

Events must meet consistently to be effective. This means weekly. If you can run a D&D event every other week, we're not interested. If you want to occasionally run an event on a weekend, again, no go. Only games played weekly have a shot at surviving and only when they're run once a week.

Running board games twice a week means both events sabotage each other, especially during periods when attendance drops off, like the upcoming holidays. Even Magic, which will now be run every night of the week, will feature different formats, essentially different games.

Why do it this way? It keeps me from murdering my customers. Really, you wouldn't believe what we put up with before. There's nothing more abused, nothing that creates more resentment, that brings in more entitled people than free. Free means take a dump on my carpet. It's a sign flashing abuse me. We don't do free. This will turn away some customers, but that is alright. This is a premium position for a game store and honest to the gods, we try to run it like one. Our Return on Investment because of our build out was six years. We swing for the fences.

Open Play. We allow free open play only when the calendar is clear. So there's open play during the week days. There's open play on weekends where we have no events scheduled (since every week night has something scheduled). Open play is a failure on our part to come up with a compelling event, so it's not a thing we hope to have much of. Open play is not an option at any time an event is scheduled, regardless of space available.

In exchange for this managed model and nominal (non) fee, we have clean bathrooms, working air conditioning, strongly enforced polices that keep our space safe and secure, attentive staff and best of all, events that entertain and delight. The cost is ridiculously low for hours of entertainment. Thankfully our community supports us in this endeavor and our space was at capacity for years before our recent expansion.

Finally, thank you to the community that supported us during our expansion, especially those who contributed to our Kickstarter in 2014. I also want to thank those who continued to shop with us during expansion. You are why we're still in business. The miniature gamers were especially good to us, our Sunday Morning Skirmish crowd and our 40K crowd. Miniature games was the only category that went up during construction. Thanks so much!

Game Center is Built

It took two and a half years to get it built, but our new Game Center is complete. If you were reading this blog back then, you would have seen some optimistic plans, such as how construction would be completed within a few months of the Kickstarter or how it was the cost of a new BMW (more like two). We still need to paint our "Wall of Heroes" in the Game Center, but we're essentially done.

When our original construction plan fell through, it turned out I had little to no control over the fate of the project, at least until the biggest financial deal of my life came around, also known as my lease re-negotiation. With a builder and a deal established, we then canvassed out Kickstarter backers and asked it anyone was willing to loan us money to complete the project, which at that point was around double our initial estimate.

We got enough money to get construction started, and funded the rest of the loan as the second payment was due. The third payment is due any day now and lower sales during construction means we've had to do financial gymnastics to come up with it. The project ended up costing way more than even this doubled initial estimate, but we negotiated the cost of the project up front, with the builders taking a huge loss.

I don't want to dampen the excitement about this project. Our hopes are that we can hold bigger events, generate more sales, if for no other reason than to cover the construction loan payments. I'm sure it will more than that though, a long term profitable project. However, right now we're all just tired. I processed our biggest payroll ever this week, as I paid staff overtime pay to get in there and do the final painting. I ruined a pair of pants in the process, which I'm kinda proud of. We are weary but hopeful.

The big issue, looking back, is opportunity cost. Opportunity cost is about what you could have done in that time you spent doing the other thing. The opportunity cost of a game store for a professional who could be doing other things is often staggering. It's about a million dollars for me. The opportunity cost for this project is all the things we could have been focused on as a game store, or spent money on over the past several years. That might be a second store, doubling our inventory or even a retirement fund. It's huge and without the realized benefits of the project, which will come later, the opportunity costs seem overly steep right now.

In other words, I need some perspective to judge what we've accomplished, perspective coming from time or from someone outside looking in. As much as I'm not an attention seeker, it would be good to have follow up trade interviews or even a real news story about this project from someone looking in. This Game Center project cements us as the counties premier game store, a hub for the gaming community. If you know any press folks, please send them in my direction. I promise to bring the enthusiasm.

Finally,  we've got a coupon we're giving out for an excuse to visit again. We're in an odd cash flow crunch, where we have free rent for the rest of the year, but we've got about $20,000 in construction related expenses that we have to pay this month. We're beating the drum and trying to get customers to come take a look, and spend a little money of course.

Perhaps what we need is a question and answers post? If you've got questions, please ask them in the comments.

The unusual end date? The day before the credit card payment is due

Amends

I received an anonymous letter today, along with $200 in twenty dollar bills. From a nondescript, hand written envelope, it looked like prison mail. We sometimes get letters from prisoners desperate for any sort of games. This letter was different though, a confession of a past transgression, theft from a product line we no longer carry, along with a pile of twenties to make up for it.

We're square, whoever you are.

I've read that making amends in recovery programs is about opening up what was previously closed off. This opening up provides the freedom to re-enter society, a sense of justice for yourself and others. While a lot of recovery is about yourself, this is also about your positive role in the lives of others. 

In retail, shoplifting is euphemistically called shrink. I think shrink refers to the shrinking smile of retailers who start off idealistic, but slowly lose faith in humanity. It's easy to become jaded over the years and it seems only other retailers can commiserate with us. The grinding shrink, the 1-3% constant drain, can leave you exhausted. One friend told me to get out before I lost my soul. This is what he was referring to.

On my refrigerator

So this making amends for shrink does widen my smile a bit. It does restore my faith in humanity a little. I do forgive the actions of this person. I hope they find the freedom and happiness they deserve, that we all deserve.