Monday, February 19, 2018

Report to Stakeholders 2017

This is our third public report to stakeholders of Black Diamond Games, Ltd. It provides insight into how we do business at our one store. Being in a suburb of a metro area surrounded by hundreds of thousands of people, in the prosperous San Francisco Bay Area, our way is just one way. Unlike many smaller markets, it's possible for us to see strong growth for decades, without resorting to opening multiple stores. It's a relatively prosperous area with customers far less price conscious compared to other areas of the country.

Overview
A stakeholder includes employees, event coordinators, shareholders, distributors, publishers, private lenders and our customers. Private lenders funded our Game Center expansion in 2016.

We are a single, brick and mortar store with the vast majority of our sales made to local customers. 2017 saw us enter the Magic online singles market through the new TCGPlayer Pro. Although we're late to the online singles party, Magic online singles now accounts for 1% of our sales over the last 12 months. That's not very much, but it served the important purpose of allowing us to better serve our in-store customer by having a larger selection and a method to sell off locally unpopular cards. Our best selling game in the store is Magic and the best selling "item" in the store is Magic singles. That's probably true of many stores. 



2017 Summary


Sales in 2017 were up 14%, as we capitalized on our expanded space. While the large Magic events this space was designed for never materialized, we instead saw a doubling of our nightly events, with a wider variety of events and the same events held on multiple nights. We were hoping for a 5% sales increase through this expansion, so 14% is pretty phenomenal. That's good, because as usually happens, our expenses were higher than forecast.

Sales were well over a million dollars for the first time and lagging profit margins throughout the year finally hit a respectable overall level in December. Despite our high level of profitability, we also had high levels of construction loan payments that left us little operational wiggle room. Paying supplier bills on time in 2017 was a challenge, but I'm told our tardy payments are still way better than most stores (which is kind of sad).

That's a minor complaint though. As I told one investor today, our cash crunch means I pay expenses and high loan payments AND still go on vacation, BUT we have little money for future projects. It's  frustrating but it's also an enviable position for most store owners. We will make our loan payments and bide our time until we have capital for the Next Big Thing.

With our 30% bigger space, we also saw bigger expenses: Insurance doubled, interest payments doubled, and labor increased around 15% as we added staff to handle the influx of customers. Wages also suffer from the steep increase in minimum wage, which will continue to rise every year indefinitely. Outpacing wage increases is going to be a challenge for all California small businesses for the foreseeable future. Our high tech lighting and HVAC meant we only saw a 5% increase in utilities.

Winners and Losers
2017 was a rebound year for sales. As much as I discounted 2016's sales numbers due to construction, 2017 sales likewise saw huge increases for the same reason. 2017 was a year where diversification played an important role. Half our sales are CCGs and board games and both those categories were flat or down.

We saw enormous sales in other departments, with notable ones being RPGs and miniature games up 50%, and our fast growing geek apparel department growing over 300%. It grew 168% last year and it's becoming a larger part of what we do. We're in year 15 of this business when you would be expecting low single digit growth, so these are pretty extraordinary numbers.

This year saw a lot of retrenching of existing games. Warhammer 40K dominated miniature games with solid 8th edition releases. Dungeons & Dragons and other RPGs have shown great strength and interest, and our sales are accompanied by four nights a week of role playing in our Game Center. Most of the CCG decline was Pokemon missing a beat and missteps by Wizards of the Coast with Magic. Magic was down slightly for WOTC in 2017. Our expansion into online Magic singles didn't help in this area either, as sales of singles were down 3%, despite greatly increasing our singles catalog.

Board games remain a chaotic category. Kickstarter continues to see increases, and although it's only about 10% of the US market, it saw a 30% increase in funding for hobby games in 2017. That said, it would be wrong to think game stores are shut out of this market, as many of our top sellers in 2017 came from backing Kickstarter games as a retailer, notably: Gloomhaven, Massive Darkness, Dark Souls and The Grimm Forest.

From this article.

There seems to be an attempt by the larger board game players to flood the channel in defense of their position. A good example is Asmodee sending us a huge influx of new and reprint games on a weekly basis. Games Workshop and Wizards of the Coast also seem to be stepping up releases in a crowded marketplace. I'm told some customers are not only burning out on the release cycle, but are seeking the lowest prices to keep up with the fast release cycle, not a positive development for brick and mortar retailers.

The huge influx of board game releases averaged around ten new board games a day. The end result is great games unable to gain traction in a crowded marketplace and overwhelmed retailers dumping great games, often before they even hit the shelves.

There are simply too many good games and not enough customers to buy them. It's not uncommon to stare at our new release table with six unsold games, half a dozen copies deep, with stellar reviews. It's no longer enough to just have great product all the time, we need new ways to engage customers and show off the best of the best. We are of course in a board game bubble, but it's a resilient bubble with enough flexibility, enough channels to find customers and continue for quite some time.

2018 Plans
I'm expecting 2018 to stabilize, which might not sound exciting, but it's what we need right now. My Magic experts believe the next release of Magic could break the downward spiral. Brand value protection is becoming the norm with board games and if we could develop a demo program in 2018, I think we could see some great results.

Miniatures in 2018 will be about Star Wars Legion by Fantasy Flight Games. We're going deep into this game, with enough copies to score an early demo game with my assistant manager dedicated to getting it on the table to teach and show off. Whether Fantasy Flight can handle stocking a game as broad as legion while managing organized play remains to be seen (I only have to look at X-Wing to have my answer). I went deep with Legion because Fantasy Flight gave us the opportunity to work to make this game great in our store while also protecting brand value online. Games Workshop does the same, which often leads to great successes with that brand.


Role playing in 2018 will see more early releases by Wizards of the Coast, with Mordenkainen's Tome of Foes likely to be similar in popularity to Volo's Guide. We're attempting to run a Dungeons & Dragon summer camp in June. The camp has been well received by the online community, although it hasn't resulted in sign ups. We'll continue to market that.

At our current sales and profitability level, even modest growth would appear to be a win. However, with all of our costs rising well above inflation, especially labor, we need better than 4% growth every year. This is true for every small retailer in this state, whether they know it yet or not.

My 2017 plans included transitioning to full time employees and the like, but that will have to wait. Our debt levels mean we'll need to run lean for a couple more years at least. We really didn't have a solid idea of what our finances looked like until we had our tax forms in hand for 2017. On the plus side, regardless of your political views, 2018 should be a better year tax-wise, and that will result in more opportunity for the business.

Saturday, February 17, 2018

The Creaky Game Trade (Tradecraft)

Before I bought the Black Diamond Games van, I bought a Toyota Land Cruiser. This was going to be the store's adventure vehicle, with a cool wrap and our name in big letters to attract street traffic to make up for our anemic sign. The Land Cruiser's claim to fame was Christian Kane once ran it out of gas on the way to a music audition (the gauge was broken). The old Cruiser looked amazing on the outside, a weathered, ancient vehicle that had surely seen quite a few exciting trips.

When I started the test drive, well, that was another story. The beast took a while to get started, then it trundled down the street like an ancient tractor. If you looked behind you, you could see the road passing by through the cargo floor. As I picked up speed, the thing began to cough and sputter and eventually it simply stopped working, leaving me stranded in an LA intersection, the owner next to me swearing it was a minor setback. It turned out the battery was attached with a bungee cord that came undone, but he never could get it started again and I shook his hand and walked away, leaving my Ebay deposit with him. I considered myself lucky. The game trade is like that Toyota Land Cruiser.


The common saying for game trade retailers is two steps forward, one step back. There are no easy profits, no sure things, and more than likely, when something gets hot, the publisher or distributor or some idiot retailer will open the pot and let off the steam before it becomes a big deal. Large retailers know the game trade eats its young, so they work hard to capitalize on good games quickly, bringing in large quantities, demoing games extensively, mastering organized play, so when the publisher-distributor-retailer inevitably screws up the product, they will have already capitalized on its popularity. Two steps forward, one step back. The game trade can't get up to speed without feeling like an ancient tractor about to blow a gasket. It's like a piece of crap Toyota Land Cruiser that continues to exist entirely because of nostalgia and now that there's big money involved, that vehicle is no longer acceptable.

Times are changing and people are freaking out. Asmodee has dominated the final frontier of the game trade, the board game market. It's natural in any mature market for a leader to dominate roughly half the sales in its category. Then as the market gets even more mature, you see fragmentation, but we don't see that yet, we only see a quick domination of the hobby board game market by Asmodee through acquisitions.

It was such low hanging fruit, it's mostly a surprise it didn't happen sooner. Hasbro could have done it if they felt like it. Asmodee does not wish to ride in the piece of crap Toyota Land Cruiser, where you can see the road fly by through the holes in the floor. They want a new vehicle, bereft of clatter and empty promises of goodwill. They need something that can handle high performance. And that's what they get with exclusive distribution.

Exclusive distribution combined with brand value protection is a terrible deal if you're a crappy retailer. If you can't manage your finances, keep tabs on your inventory or the only tool in your toolbox is a product discount, you now have serious problems. If you rely on the holes in the floor of the vehicle that is the game trade to jettison weight to keep your vehicle moving, you are going to have a harder time moving forward. It's not just Asmodee though, Wizards of the Coast is being run more like a corporation than a typical game company, as is Games Workshop. These companies could care less if your wheels fall off because of their increased product release velocity. You are being forced into a vehicle where you must make smarter decisions on the front end because you're now restricted on the back end. Do you have the guts to take your crappy Land Cruiser on the highway?

Wednesday, February 14, 2018

Working for Yourself (Tradecraft)

My assistant manager asked me what brought me happiness and my response was never work for anyone else. It was kind of a smart ass answer, but I thought about it all day and what it meant to me. If you're young, and many game store owners are young, without a lot of experience in the workforce, you may not have much experience working for other people long term.

When you work for other people in a professional setting, as opposed to a limited service job, there's an expectation of progression. They ask dumb questions like "Where do you see yourself in five years?" It's a dumb question because most people see themselves somewhere else. They want to see if you have commitment, even though it's not yet deserved. 

You might start as a junior bottle washer with the expectation that over time, you might become senior bottle washer, head of the bottle washer department, or maybe even director of sanitary glassware. A boy can dream, right? A solid progression encourages you to invest yourself in that business and gives you a gold ring to strive for. It also gives them permission to manage your performance on your way up the glassware sanitation ladder, a process that irritates the hell out of an independent spirit. "You might have cleaned glassware with a brush at your last job, but here at Brushless Bottle Washing Incorporated, you shall use the steam invigorator or nothing at all. Our way or the highway at BBWI, junior bottle washer."

So that independent spirit swears off clean glassware and starts their own business. This is where it gets a bit complicated. Working without a boss requires a level of self motivation and goal setting few people possess. It's not that they're lazy, it's just they've never been educated on how to be an independent person. It's not taught in school, and in fact, if you're good at school, there's a chance you've been culturally assimilated into being a good employee.

Most people not suited for independent work will have their business crater in short order. It will never be about their not being managed or the stress of not knowing what to do, there will be other reasons, like a hostile market, or bad timing, or wanting to spend more time with their family. This is a known problem and not surprising. These people constantly blame others because they lack the flexibility to weave and dodge as they progress through the marketplace. They're standing still like a target.

What surprised me in small business is there's nobody there to fire you, when often that would be best. There's nobody there to lay you off when the company has ran out of money. There is nobody there to send you home because you just told another customer to get stuffed. There's nobody there to tell you you've washed enough bottles, so how about you take the director position. There is such thing in small business as having worked long enough, yet there's no place to go. If you believe in the concept of Return on Investment, it's likely you're just now reaping the reward of your business just as you're the most burnt out you've ever been. Yet you soldier on because it would be economically foolish to go back to washing someone else's bottles, right?

Those who have been married a long time will know that the only thing required to keep a marriage together is two people who don't want it to end. You can fight, you can withstand abuse, you can be terrible partners who enable bad behavior, but unless someone throws in the towel, you're still married. You'll talk to friends getting a divorce and think, wow, we've gone through way worse than that and we're still together. As many times as I've referred to my small business as a mistress, it more resembles a long term marriage with a lot of ups and downs, times when it should have ended and no clear exit strategy. 

Personally, I worked the counter for nine years, never getting a lunch, rarely taking a day off, before I finally said I need out of this relationship. Like anyone desperate in a relationship, fleeing was my first thought, but my manager stepped in and essentially fired me. I was promoted to director of sanitary glassware and was sent to the office to be more businessy. It certainly saved the business and it never occurred to me that was an option. Even after nine years, I needed someone, anyone to step in and tell me what to do. I had the key to my chains in my pocket, but nobody ever told me how to use it.

I want to say my issues with self management ended there, but it's a daily struggle to figure out what I should be doing, what goals to set, and there's always the question of whether I've had enough. I take a lot of time off nowadays and I understand the problems faced by retirees. The goal of a business is to be capable of running without the owner. However, the owner needs a place to go, a purpose after the business. Finding that purpose when you've spent years struggling to survive isn't easy and it would be far easier to start a new business, to put my head down and struggling not to fail, rather than learning to surf or mastering Italian lawn bowling. There are hopefully new opportunities on the horizon. One thing for sure though, I would never work for someone else.

Just a reminder to order my book, if you like what I write. Thanks!

Tuesday, February 13, 2018

Friendly Local Game Store



Almost a year ago to the day, I announced my intention to write a book. It was naive in its early concept, but we eventually got it done. Today it went live for pre-order. You can order it now for delivery in March (or pick up at the GAMA Trade Show). Electronic only versions, Amazon editions and game trade options will arrive later in May, but if you want a physical copy, it's hard to beat the pre-order deal with free digital content.

When I wrote that post a year ago, I expected the book to be a collection of blog posts interspersed with personal narrative. It turned out to be a whole lot more. Blog posts make terrible book chapters, it turned out. I didn't know exactly how terrible they were until I saw them in a Word document, puny and insubstantial. A blog post is supposed to be pithy and to the point, with a lot of assumed knowledge and at best a nugget of a concept. When I tried to turn those posts into chapters, it wasn't just about expanding a post, it was a full re-write. 

Chapters need themes with supporting concepts hanging off them. They can't assume the reader is "in the know." I can't put "Tradecraft" at the beginning of a chapter and pretend everyone knows what I'm talking about. Having an editor who wasn't a retailer also meant I couldn't get away with anything. All my concepts needed to be explained and the math crunched. That turned out to be a very good thing. The book shines because of my editor and is polished to a brilliant sheen due to my industry outsider, proof readers, who took issue with my business slang and occasional mean spirited discourse.

The obvious question if you read this blog is should I buy the book? I would say the book is inspired by the blog, but it's not a collection of old stuff or even re-worked stuff. It's about 80% new content and the other 20% has been worked over to be much better than the original content. So yes, please buy the book. You won't feel cheated after being a loyal blog reader.

The book has two concepts in one. The first concept is how to build a profitable game store. There are many ways to build a game store and even several that work. Writing this book was an exercise in best practises. It's one thing for me to say what I would do in a blog, but it's quite another to distill a concept down to what I truly believe will work for my readers, folks who may have hundreds of thousands of dollars on the line. 

The premise for this build is getting the owner to a middle class income in five years. That income is roughly $55K a year, a number that might seem overly ambitious to an existing store owner, but is the median household income in this country. So some people will think I'm insane to shoot for such a high income, while professionals will laugh that I'm essentially aiming for the middle. Who invests six figures and five years of their life to aim for ... the middle??? That sums up the game trade pretty well. Working our darnedest to achieve the middle. 

The second concept of the book is a personal narrative. I wrote a book that I wanted to read, which is not a book about building a game store. As an established retailer, retailing books bore me. I read them anyway, but oh man are they tedious. So the second part of this book, interspersed with the how-to,  is my story. It's a narrative of all my mistakes and victories that roughly corresponds with the how-to chapters. Every store owner has singular reasons why they succeeded along with unique failures. It was glorious to write a chapter on how I think you should run your business and then tell stories of how I completely screwed up that area when I tried to do it. If you find my how-to stuff preachy, feel free to skip it for the much more fun narrative. 

The narrative also goes over what was happening in my life during the 14 years of owning a store. There were major illnesses that almost ended my marriage, a new child was born, and I almost lost my house, but turned that defeat into my greatest victory. My attitude had to change over this period, as there was too much on the line. I think you'll get to know me in this book, which is a little scary. 

Thanks again for reading this blog. If you look back far enough, you'll see I had no great plans for this thing. You can find my 40K army lists and photos of my Dungeons & Dragons games. You'll find grand pronouncements of how to do something then descriptions of terrible failure that contradict what I said. I've enjoyed writing it and plan to continue. I hope you enjoy the book as much as I enjoyed writing it. Please let me know what you think of it.

Saturday, February 10, 2018

Rational Consumer

One of my main hobbies is what's called overlanding. It's a kind of off road, road trip through the most remote areas of wilderness with camping along the way. It's really just a fancy word for car camping used in places like Australia and Africa. My motivation for overlanding is so I can spend more quality time with my son in amazing places. I say that's my motivation, but what I really do is spend my weekends with friends, building my Jeep for these trips. Other overlanders I know spend their weekends at work to pay for their overlanding gear.

Few of us act in a way consistent with our stated motivations, spending time with loved ones or getting out into nature (In truth, I don't even like camping). In fact, some people spend all their time in this hobby building their vehicle, and never actually go anywhere. You can bargain shop for semi complete vehicles as people realize their stated motivations were never going to match their actions. We all have stated motivations for what we do and we all lie to ourselves to varying degrees, when in fact the answer to what to do this weekend if we were consistent, is to just go on a drive with those you love with what you have.

As a store owner, I see this conflicted motivation every day. I have to assume not only do my customers have mixed stated reasons for what they buy, but they have underlying motivations they don't really understand themselves, or like me, stated motivations that don't line up with their actions. Games Workshop published a pie chart a few years ago where they compiled what their customers really do with their models. A good percentage obviously play the games, but shockingly large percentages either just collect or just buy models to paint. Roughly half their customer base never plays at all, yet if you asked me how many customers fit into that category, I might tell you it's a percent or two. What I'm told and what actually happens is very different.

Yesterday I had a customer come in who wanted to get back into gaming after having a heart attack. This was a person who was crystal clear on his motivation. This game brought him joy. The expense of the hobby had held him back for years, was a source of conflict in his relationships, and was a reason for leaving, but now he knew it was where he would find his bliss. Getting him back into this hobby was a solemn affair, at least for me. It was as if his life depended on it, which perhaps it did. I didn't really feel up to the job but I listened and paid attention. Rarely do I have my role so clearly spelled out: I sell happiness. Sure, it's just boxes of plastic, but the potential for joy, of collecting, of painting, of playing a game with friends and connecting with others, all starts right here with me and my store.

Hardcore online shoppers think game store owners like me guilt people into shopping with them. I've been marketing my store for fourteen years and I can tell you guilt is not a selling point. It does not tap into anyone's motivation for why they play their games or shop with me. Guilt doesn't work. Yet, there are a large percentage of my customers (at one point I figured it was 20%), who support us because of the intangibles we provide. I know this because I started asking. That support may appear to come from guilt, but it's primarily a belief in supporting a local community (play space being a requirement to get this support). I think for an online buyer, these two concepts, guilt and community support, are likely indistinguishable. They see my Unique Value Proposition as psychological warfare.

After fourteen years selling things to people, I honestly don't know why people buy, and anyone who claims to know is a fool or a genius. There's a great book on this called Why We Buy by Paco Underhill. The book claims to explore the "science" of shopping, but it's really just an observational study on the insanity of the American consumer. We know which direction they turn when the enter a store, and how they need a transition between the outside and inside, and how when they brush against another person it creates a flight response. It's a book derived from countless hours of watching CCTV cameras. Designing a store like mine is really about maintaining circulation patterns and not putting impediments in place of the human animal in its primitive gathering rituals. I can't really claim to know why people actually shop. Paco doesn't know either. The online shopper who thinks they understand what I do and why my customers foolishly shop with me, knows least of all.

I'm thankful for my customers. Thankfulness is a wise position to take when you understand you only have a vague understanding of the way the universe functions. There are times I wish everyone who wasn't a rational actor, everyone who didn't shop with me because of my Unique Value Proposition, would just go away. That's right, if you're not clear on what I'm offering you, please take one big step back. But the truth is I have no idea if there would be anyone left in front of me. I can't even tell a model collector from an actual gamer, so what makes me think I know why people shop with me? So I'll keep my mouth shut and remain thankful. Thank you everyone.

Wednesday, February 7, 2018

Eat What You Kill (tradecraft)

We screw up everything.

That's the premise for the changes in the game trade, specifically brand value protection. I'm referring to retailer bad actors who are the problem with product dumping and brand devaluation.

This week we have an offer on the table from Fantasy Flight Games. Simply put, buy ten of their $90 Star Wars Legion board game and you can have a free demo copy. You also get a listing on their website and some minor perks that honestly have Games Workshop's fingerprints all over them. This whole campaign is a page from the Games Workshop play book, which is terrible when the product sucks but can be amazing when it's excellent. This product looks pretty excellent, for the right store.

There is hemming and hawing about this deal, mostly in how ten copies is well beyond the capabilities of small stores to sell. This brings us back to brand value protection. In the old days, stores would have quietly bought the ten copies, sold the two they should have ordered, and exhaust ported the other eight at cost online, incentivized by that free demo game.

My store would have ordered ten, hoping to sell ten, but would instead see the bottom fall out of the market with hundreds of online copies sold at cost. I would cry in the corner about how Games Workshop played on my hopes and hoodwinked me once again, but the problem lay with us, the retailers.  However, now, the exhaust port is closed. You can't just dump those copies online.  The result is real discussion about fairness and what it means to participate in such a program. I think that's the unstated core of this argument. You now eat what you kill.

Let's do some math. My premise is a demo copy is only good to you if you plan to sell ten copies. If it's a free demo copy, then it's great for everybody, right? But lets pretend you had to pay for it, such as offering it as an add on purchase. A $90 demo board game would be roughly $50 cost that you're now declaring as a marketing expense (where profit goes to die). We need to make up that $50 cost with our sales. How do we do that?

Let's assume you're making 5% net profit on each $90 game, which assumes you're profitable, a rare thing in the game trade, that you can calculate your profitability (even more rare), and assumes you're at the low end a reasonable range of retail profitability (a conservative estimate). Your net profit at 5% is $4.50 per $90 Star Wars Legion sold. So how many copies of that $90 Star Wars Legion would you need to sell to make up for that $50 demo game cost? Eleven is the answer we're looking for. If you can't envision selling ten copies of a board game, you don't need a demo copy and you certainly shouldn't expect someone else to provide one for free. Again, now that the exhaust port is shut, we're being asked to think a little deeper about this stuff.

What's fair is everyone has the opportunity to participate. I have three pre orders right now for this game and I'll be ordering the offer at ten copies, assuming I don't have a huge influx between now and then. I have been given the opportunity to play. I know some store owners ordering 40 and getting even more benefit. That's not me. That's fine. They're taking the risk at 40 and I'm not.

I can decide if this is right for my store. My store is not a miniatures centric store and this is really Star Wars 40K, the miniatures game, not some casual X-Wing thing played by the average muggle. Every opportunity doesn't need to apply to every store, either the product itself or the offer on the table.

Fair is being offered the opportunity, unlike say not being allowed to run Magic pre-releases because there's a backroom deal. You have the opportunity, so it's fair. By the way, fair is overrated. Fair doesn't reward those who hustle to find new opportunities, who corner new markets through initiative. My store has several advantages others don't because I made opportunities where there weren't any, and I made them when I was small. Is that fair? Is it fair the lion eats the gazelle? Fair's got nothing to do with it. But since it was brought up in this particular instance, this deal is definitely fair.