Thursday, January 10, 2019

10 (11) Reasons Why I Might Skip A Product (Tradecraft)

I have purchased $10,000,000 in games. I know a thing about buying. Yet, I'm often in the dark. I mostly buy from gatekeepers, distributors who use their buyers to know what to buy. Some of those buyers used to work for me. On rare occasions, I'll play a game before buying it, and my instincts are usually pretty good, although not nearly as good as those who do this all the time.

Increasingly, relying on distribution is a failed strategy. More of what I buy needs to be through firsthand knowledge, or at least firsthand risk taking. Backing Kickstarters is a thing I regularly do now and I've gotten better at it, mostly because I can spot an inexperienced mess of a product pretty well now. It doesn't mean I don't get burned, I really do (Dark Souls stretch goals), but I'm making enough money up front to offset the losses.

Telling you what to buy would be one heck of a holy grail blog post. I can't do that. I'm good enough to stay in business after buying my ten million, but I can't tell you what to buy. If I could, I would crush your store with my national franchise. We're still specialty retail with individualized hand selling to an idiosyncratic base of customers that is different just ten miles away.

So why wouldn't I buy something? Here are some reasons:

  • Margin. Of course margin. I often don't know the margin until after I pre order something, in which case, if the margin is too low, I kick myself and set a product not to re-order.  50% is a great margin. 47-49% is reasonable. 45% and I better see above average performance. 40%? I better see stratospheric turns like with a CCG. There is technically no floor to margin. I'll take 10% if I know I have a guaranteed sale. Car dealerships make their living like that. Then again, give me a medium to low margin on a run of the mill product and I'll kick it to the curb (Tiny Epic).
  • Packaging. Is your game in a brown paper bag? Unless it's Poop: The Game (really, that sells like that), I'm likely not to re-order it. Same goes for tubes. Nobody likes a tube, unless it's full of counters or dice. Tubes and boobs. Meaning I also don't want explicit graphics on a game. I'm looking at you play mats. We recently had a long thread in a retailer forum about the logistics of dice bag packaging and how few companies have figured this out. This stuff is critical. Kickstarter products often fail here, although much less lately.
  • Installed Base. If you're trying to sell me a collectible card game, just no. If I need a community to support a game, I need that community to ask me to carry it, not a publisher. How do you get that community? Don't care, your problem. Most stores will tell you they can only support perhaps three games in a community at most, and they probably already have those three. I've simply passed on several CCGs lately as companies seem to have some arcane inner motivation to break into this realm, and I'm not going to be their guinea pig.
  • Devalued Online. I'll often look to see if a product is already being sold when I'm solicited by a distributor. If it is, it's not a disqualifier, but if I see it's going for 30-40% of the MSRP, that game is dead before arrival. There are ways to protect your brand value and often that product is under assault before I'm even asked to order it. If Dungeons & Dragons were a new game today, I would shun it (same with Magic).
  • It's Everywhere. There are some games I don't have that I've seen at Target that look kinda neat, but Target has it. I think they're doing fine satisfying the demand. This is not to say I won't try such things. There are perhaps 18 Hasbro games I keep in stock when I can (I can't right now). They sell just well enough to make sense for me, despite being everywhere.
  • I'm Poor. I could easily increase my inventory by 10-20% or even double it. That's right, I have room to double my inventory. But I'm poor. For me to say yes to one game, I have to stop carrying another one. Sometimes that lines up wonderfully. Whenever a store has a clearance sale, that's the sign of a mis-alignment (all stores have clearance sales).
  • My Customer Base. I have demographic envy, a desire to have my competitor's customer bases. My customers buy what they buy, and it's not always the interesting stuff I want them to buy. I would love to have more exotic stock for them to purchase, but I'm in the suburbs. Sometimes I buy something and tell myself I'll buy it myself if nobody picks it up. Then, six months later, I don't pick it up, because I've grown to hate the site of it.
  • Line Extension. Line extensions marketing theory has been debunked, but it basically says when you add more products in your line, the line eventually becomes too confusing for customers and they stop buying. I can see this with Munchkin, Red Dragon Inn, versions of D&D, LCGs and many miniature games. There is debate about line extension theory, and it's likely nuanced, but it has increasingly become more true. Endless supplements will eventually collapse a line, and I increasingly avoid them and often desire to dump the whole thing. I'm always on the look out for that tipping point.
  • Bad Company. How terrible a company would you need to run for me not to carry your game? Well, money talks. I'm not happy with a lot of companies, but they make me a lot of money. Usually my irritation with a company is directly related to my inability to make money with them. The more irritated I am though, the higher that company needs to perform. So you can be a giant dick and if I'm paying my mortgage with your game, we're good. But when your product slows, retailers look for excuses to let you go, often with a vengeance. There is a brittleness with companies with ill will, and we make excuses for you if you're good people. There are companies with people I just really like and their stuff is marginal and often gets a pass.
  • I'm Ignorant (or I can't get them). There are 10 new board games released a DAY. My gatekeepers might present me with what, three? I might pick one to sell. I may not know of a games existence. A game might not be available to me at wholesale prices. I really want to sell Matthew Colville's Strongholds and Followers, but he has no love for the middle man. I'll have to be content with my personal copy. I regularly bug one of the distributor buyers to look into a game and I'm often told they're not interested in distribution. Fair enough. There are a lot of games I have no access to either because I don't know or just can't get them. I suppose that's two reasons right there.
Anyway, ten reasons why I might pass on a product. Why might I buy something? You're one of my 30 top companies of proven performance in the marketplace. You personally impress me with your cleverness or innovation. You provide me early copies before the rest of the marketplace. Customers ask for it (number one reason). It's not just good, but cheap, which bypasses online price competition. See, I'm not all negative today.

Tuesday, January 8, 2019

New Year of Value Seeking (Tradecraft)

Wizards of the Coast has deeply screwed game stores with their margin reduction. New distributor prices, distributors being the only way to get their product now, reflects this in the new year. Many Magic centric stores will fail from this move. Of course, we've deeply screwed ourselves by relying on this one company to play such a prominent role in our businesses. Heck, I built my game center with the idea we needed a much larger space for Magic events. The L2 judge was still unhappy with my 121 proposed seats, as it wasn't big enough for large events (that no longer exist). Since construction completed, Magic events have yet to exceed 75 seats and I need an L2 judge like I need a war games coordinator. I fill my space with many other events, so I have no regrets, but if I wasn't diversified I would be in serious trouble.

I've spent the last 14 years not quite oblivious to margin at distributors, but pretty close. There had to be some significant margin differences before this was on my radar, and even WOTC direct sales discounts were often not worth the hassle. Now that I'm more established and I'm not seeing double digit sales growth every year (13% on average but far slower nowadays), the difference in margin between 2018 and 2019 is enough to sink my business outright. That's right, not hurt it a little like minimum wage increases of 9% this year, but rather a huge margin hit on a third of my sales.

That's not something a responsible business owner sits back and just watches happen, nor is it something easy to fix. Our rent and labor both went up 4% last year and that money came from reducing our marketing budget. This margin difference blows those increases out of the water and requires a behavior change. Most game stores (Magic shops) won't even know what happened, they'll just be unable to pay the bills and not be sure why.

There are a couple ways to fix this problem, the first being getting the best price up front.  For Magic I started looking at second tier distributors for better value. The best prices came from Magazine Exchange. My primary, ACD, had second best prices. There was a 5% difference between the lowest distributor and my highest. If you're one of those people who only have one or two accounts, it's really because you're lazy. Get off your butt and fill out a damn form.

Getting the best price is important, but with Magic it's far more important to look at how you sell it. Perform a GMROI, analysis, Gross Margin Return on Investment. Does Magic look soft? Are your events low priced as a loss leader? Are your box sales bottom of the market? Are you discounting at the pack level? Are you buying a bunch of crap singles for event formats nobody plays? Is store credit and single sales hiding your view of your true margin? Tighten up your game.

Singles are really hard to perform an inventory analysis on, but you should at least be getting solid turns equal to your store average. Selling singles poorly is far worse than not selling them at all. We're in this boat, I think. Raise your prices by at least your new margin difference (6%?). The back end problem of margin reduction can be solved with a front end price increase. Let customers complain, you're in business to make money, not to go down with the Magic ship. If Magic sales slow, let them and shore up your business elsewhere.

Next, pivot to safe harbors. This 500 pound gorilla got this big by steady feeding. Diversify away from CCGs and Dungeons & Dragons. Still sell them of course, we're not stupid, but look for alternatives. The new Pathfinder is out this year, and it may be the cleanest shirt on the floor. I don't believe it will ever have that number one position, but it should easily sit at number two. Board games is a thorny area, but there's room for best sellers. We've had good success with the core line from Asmodee (another 500 pounder in the making).

WOTC will measure your existence with butts in seats. If those butts aren't always making you money, stop chasing those meaningless statistics and use your event space for games from companies that won't cause harm. Drop slow attendance Magic events and make sure the D&D crowd isn't taking up a disproportionate amount of event space. D&D kept me afloat last year, so I'm happy with my ... what .. THREE nights a week of events? Jeebus.

Finally, if your lease is up or you're just starting out, understand there's a right size of event space and it's no longer as big as it once was. There are no giant PPTQs and pre-releases can be managed with more events, rather than bigger ones. Shrink your space, give up butts in seats, for an overall more profitable store. This country has 7-10 times the retail square footage as other industrialized countries and that unnecessary extra space applies to game stores too. If you were expecting giant Magic events with Magic being your core product line, I suggest you don't rely on that gorilla to lift you up.

Wednesday, January 2, 2019

Report to Stakeholders 2018

This is my fourth report to stakeholders of Black Diamond Games, Ltd. We're a private company with a lot of transparency. I'm going to forgo the formality this year and write informally about our year in general. Every store owner has a specific narrative about what happened to them, with generalities about what is happening in the trade.

A lot of stores have recently announced they're going out of business. More than average? Who knows, we have no data. I also have store owner friends with 20-40% sales increases in 2018. Your mileage may vary and your narrative is mostly your own. I think the trade is booming, but it impacts everyone differently. The rising tide lifts some boats. I also think that tide seems to be crushing it online right now, while the water trickles into the brick and mortar harbors. There really is no way to contain general enthusiasm to build up a head of steam in the Internet age. It's all on the store owner to locally build up enthusiasm. Retail is like a tea kettle and when a head of steam builds up, the release is the Internet. If you hear that whistle, it's money being added to Jeff Bezo's bank account.

I think it is increasingly difficult to funnel the bonkers enthusiasm to the friendly local game store. Parallel systems now exist to do what we do. You can buy your D&D books on Amazon at below wholesale prices and the important service of learning how to play those games can be accomplished by watching high production D&D in play videos online for free. This is an example of our Unique Value Proposition, game space, becoming a mere Useful Value Proposition. It's also an example of poor brand value protection by Wizards of the Coast.

These videos are becoming the normative way to play, and players are holding their local DMs to these professional standards. That's not how it's done on Critical Role they say, so it must be wrong. A good number of YouTube D&D channels now have over a quarter million subscribers, the tip of the cultural iceberg. Personally I can't sit through a recorded D&D session without growing instantly bored, I just don't get it. However, I find Matthew Colville's D&D channel addictive and brilliant.

The question of what would happen to your store if millions of people suddenly played D&D? For us it meant an 18% increase in RPG and dice sales and a 200% increase in miniature sales (because WizKids is awesome). I don't want to sound ungrateful, but I was expecting more from the revolution. Whenever I talk about the tea kettle whistle and how we're mostly left out of this building head of steam, a store owner will tell me they sell a metric buttload of D&D books. Yes, that's not the point. Or ... maybe it is.

Something was off for us in 2018. In retrospect, 2017 was a year too good to replicate, although we pretty much did. In 2017, Warhammer 40K was booming, board games were on fire, Magic staggered around like the giant Pillsbury Dough Boy of Ghostbusters, scaring everyone as it lurched about (while making money), ready to destroy buildings (stores). Our 2017 sales, with construction of our Game Center complete, jumped 14%. 2018 was a shadow of 2017 as it struggled to replicate that success.

2018 saw Warhammer 40K cool a bit as the new edition matured and customers tired of the weekly release schedule (down 20%). The board game bubble deflated a bit and it took months to figure out I was over ordering like we were still booming, right about the time the big hits arrived, and I was too gun shy to go deep (down 7%). I was ready to throw my hands up with board games. It was an enigma in 2018.

Magic staggered around as usual, with a tight embrace of the mass market, finishing up with a volatile December release that took everyone by surprise (down 1%). As I write this I have one box of Ultimate Masters left, and the difference between having it and not having it would have been the difference between losing money in 2018 and making money. You could say that about a lot of things, but since I practically wished Ultimate Masters would die in a fire, I can now say thank you, I was wrong (the $10,000 bill is due in 6 days, and there may be a game trade reckoning). We made money, but only because we sipped at the D&D tsunami through a straw to gain a 18% gain in that department.

There was much flailing about in 2018 with this flatness, and much gnashing of teeth about increased expenses. Our payroll costs and rent rose 4%, both somewhat fixed with the rising minimum wage and our lease structure. This led to a tightening of the belt and cost cutting in other areas, marketing taking the biggest hit. Facebook Page promotion has stopped being a functional tool at this point, and we rely on Groups to do the heavy lifting. Marketing is another enigma, but mostly how to spend money effectively, since Groups are powerful and free.  It's more labor intensive but it costs zero dollars, other than directing customers to them. 

In the end, cost of goods decreased significantly and cutting expenses rose profits. Dare I say, it was a better, more profitable year than 2017 by nearly 7%. When we're in boom times we crow about gross, but when it's slow and difficult, we can always talk about net. Cut your costs of goods by 1.5% on half a million dollars of stuff, and you've got a new car.

My book, Friendly Local Game Store released in May of 2018. It's on its fourth (small) print run and sells on Amazon and with game distributors, when they have it. It just received its first bad (2 star) customer review on Amazon! All reviews drive interest and this one has some valid criticisms about the narrative (and some off base ones). Publishing the book hasn't changed anything in my life, but it did help pay for an epic road trip visiting game stores and talking to owners throughout Mexico and Guatemala. 

Thanks to everyone who supported us in 2018. We have many changes in store for 2019. 


In Ensenada, Mexico