Wednesday, October 20, 2021

Crumbling Pyramids

There's a retail inventory concept of the product pyramid. The pyramid is a collection of products, in which a small number of top sellers at the top support a large number of slow sellers at the bottom. The typical approach to inventory management would be to drop all the slow selling product at the bottom. If you do this, you collapse the pyramid, reducing sales of the top sellers. You have impacted your perception of a collection.

Customers want to see tremendous choice, every color of the rainbow on offer, for example, but in reality they only choose primary colors to purchase. I've started ordering better selling dice sets deeper, and there are perhaps a dozen really good sets out of a hundred. Remove the supporting colors and customers are unhappy with the selection, even though their eventual purchase is represented.

An unstated principle of the product pyramid is we need to suffer through the dreck product on the pyramid bottom, because that's the only way to sell dice or puzzles. Cut out the bottom and the top suffers. For example, carrying the full line of Chessex dice makes sense from a product pyramid perspective, or the full line of Ravensburger puzzles. When these two "gold standard" product lines make up the majority of sales in their categories, you play this pyramid game.

This changes, however, when the market becomes flooded with competitors. A decade ago, I could point to three significant companies who made dice. Now there are innumerable companies and I'm solicited weekly by new ones bringing in dice from China. There have been over 100 Kickstarter projects just making dice. My own store went from a primarily Chessex store, with a smattering of Koplow and Crystal Caste, to carrying and supporting dice from eight different companies. Our puzzles went from two companies to six. In the case of dice, the product pyramid is crumbling. In the case of puzzles, not so much, and I'll explain why.

With my much larger dice selection from seven companies, I don't need to support the slow selling bottom of the product pyramid from companies like Chessex. It's true I may not have every color of the rainbow, as it's impossible to monitor my color spectrum when I'm only looking at inventory performance. However, this does give me the opportunity to have a very wide selection without sacrificing performance. The key is this: Customers honestly see no significant difference between a Chessex die made in Germany and one of the other seven brands, made in China.

This is not true for puzzles however. Puzzlers are very much aware of the quality between puzzle manufacturers. There are certainly Wal-Mart shoppers who burn through puzzles and are more price conscious than quality conscious, but that's not our crowd. Our crowd knows the puzzle quality rankings and understands the differences between brands. As much as I would like to replace Ravensburger with our Eurographics or MasterPieces, customers just aren't having it, at least not in the volume of Ravensburger sales. It's too bad that company can't remotely keep up with demand. 

So for the pyramid to crumble, you need to not only have strong competition from competing brands, you need comparable quality in the eyes of the consumer. There are dice brands that attempt to claim superior performance, with sharp edged corners and superior construction, but nobody is buying that nonsense. For the most part, random number generating polyhedrons are more or less equal across brands and manufacturers. I just wish that were the case with jigsaw puzzles.

Monday, September 13, 2021

How to Add 50% More Inventory

Steve Martin has a bit about how to be a millionaire and never pay taxes. It starts: "First, get a million dollars." That's where we begin this post, in mid 2020, with ridiculous amounts of government loan money, the question was how to intelligently increase inventory. The first question is why should we?

Why increase inventory? In the face of a crisis, inventory is safe. Provided the world doesn't come to a crashing end, you can be certain even bad inventory will make you some money. If people have jobs, they will buy games. That's the rule of thumb. 

At liquidation, you can often get your money back, at the very least. Here's an example: Invest $1000 in inventory. If it does very well, say six turns, your $1000 becomes $6000. If it does poorly, you'll probably double your money, and if it was a mistake, it's unlikely you'll sell it for less than $1000. The booming stock market of 2020 would have given you the equivalent of four turns a year. Inventory is safer and you are the Subject Matter Expert when it comes to inventory.

I've had this discussion with investors and they're like, "Great! Let's put a bajillion dollars into inventory!" And I'll say, "Not so fast, it's not that easy to just add a lot of inventory quickly." Adding inventory is normally something you do gradually. But this was anything but normal. We were fighting for our survival. If we had to add inventory quickly, how would we do it?  

Here's how I added 50% more inventory, how I measured performance, and the end result. The caveat is sales are stratospheric right now, so that inventory was fed to a ravenous customer base with a tremendous bankroll in pent up savings. Without that ravenous base, I could have just locked in a bunch of money with a much slower return on investment (still better than the S&P 500).

Go Deep on Market Leaders. Each department has a market leader. You've got your 40K, D&D, Magic, Asmodee. You really can't go wrong with these product lines. These are safe. The first thing I did was made sure I had the full line of each of these leaders (Asmodee less so, since they have a lot of garbage, but you get the picture). I did this as best I could, as shortages became a huge problem pretty quickly. At the moment, I have four restock orders pending at Games Workshop and I recently received a pallet of D&D in anticipation of price hikes and shortages for the holidays. I admit I mostly missed the boat on Pokemon, because it was on clearance in mid 2020 and on fire by the end of that year. I wasn't paying close enough attention.

Add New Lines Carefully. I've made the mistake before when expanding with new, untested lines that were more diversification than expansion. I added 20% more inventory in 2007, mostly toys, and it was a disaster that took a couple years to unwind. In a crisis, diversifying or expanding too far felt wrong. The new lines I added were adjacent to existing product lines, like new Pro Acryl paint, products from Foam Brain and geeky items from Darrington Press. There is the concept of "Flight to Quality" where consumers gravitate towards the familiar and safe. I played flight controller during this crisis and made sure I wasn't suggesting a cruise or a train ride when what they wanted was a comfortable flight. 

Safety Stock. This is a term used to describe stock acquired to avoid anticipated outages, and boy do we have those. Retailers have been building safety stock early enough to essentially be a holiday stock up at the same time. I was getting warnings as early as May that now was the time to stock for the holidays. With a big enough bankroll, I spent time identifying opportunities and bought deep on those items. This didn't happen a lot, but if I had an inkling of problems and quantifiable past demand, I went deep.

Depth of Stock. This is where I took a big chance and spent most of my money. When an item would sell, I would look at its total sales over the past year and divide by my average turn rate (six). That gave me a safe number to stock on the shelves. This was done on a daily basis, rather than all at once, but the stock began to grow quickly. This was a bit seat of the pants, because I didn't actually know if the expansion would grow beyond my bankroll. I tracked inventory values carefully with open to buy and wondered if the strategy would expand beyond my budget and what I would do when it did. It leveled off at a 50% increase.

How Did I Measure This? Within the first six months, inventory performance had not surprisingly decreased by 50%. This was a little disappointing. The advantage of this inventory without strong demand was I at least wasn't missing the opportunity to sell product. When demand finally picked up, our turn rate went from a lackluster four or so to our previous performance of six. And of course, that meant more money, more opportunity, the ability to pay back all those loans, and ... more inventory expansion. We've added another 10% for 2021 and if sales continue, we'll keep growing.

Don't Forget Fixtures. We quickly ran out of room with this big stock up. I knew I potentially had physical room for twice my inventory, but I was unclear on what fixtures we needed for expansion. With COVID protocols, it also meant items were more spread out. We ended up with a very cluttered store, often with items on folding tables. The first step was some cheaper fixtures, my first foray into Ikea shelving for the store. Then as we stabilized, we put in orders for more permanent fixtures. After moving the retail space to install new carpet, we damaged enough fixtures to put in yet another order for shelving. It should look great in another month, but the store has looked pretty full throughout all this. I'm happy to drop $5K on D&D books, but I'm far more reluctant to spend $5K on store fixtures, which is what we did.

Mistakes? A lot of stuff bought early in the pandemic had no traction and was dumped around the time things got back to normal. This was not my deep stock however, but new items in reasonable quantities. Likewise, I haven't had to dump any of my "depth of stock" items. Those have remained strong. I go through our "dusty"inventory weekly and put items in our new online store, and thankfully it hasn't been entire product lines, or deep stock mistakes. 

That's how I increased my inventory by 50%, resulting in a 54% sales increase over 2020 and an 11% increase over a more normal 2019. We're having our best year yet and it's modest compared to my peers who had depth to begin with, strong online sales channels, or were better at divining demand. We know our success is partly due to increased inventory and partly due to outsized demand. We'll never know how much is which. Profits are stratospheric. Now we begin worrying about paying taxes.

Wednesday, August 11, 2021

Last Five Percent Projects

As part of our store improvement, we have a list of projects on an agenda and meet weekly to tackle them. We haven't physically met in over a year, but the process has taken a life of its own. This is a process outlined by veteran retailer, Dave Wallace. As we tackle each item, they're removed from the agenda and new ones are added. Sometimes an item is stubborn and we have difficulty coming up with a solution. I have several personal projects like that right now, and the only solution is to put the project aside until there's a solution present. Fixating on a problem or berating a manager for not having a solution is pointless. I call these the last five percent projects.

If you have an ethic of setting up projects and knocking them down, those last five percent problems will not just go away. Those pesky items will stick around in your head. They are the big fish that got away. Over time, you'll think more about these problems and maybe revisit them later with a solution. For example, technology might not be ready for what you want to do, but in a few years, perhaps it will be. We're there now with in-store kiosks, which have many more options than from when they were on the agenda five years ago.

What you can't do with last five percent projects is insist they be completed. It takes a strong manager or owner to admit they're not ready to tackle one of these problems. Sometimes we get outsiders insisting they be completed, and again there's going to be pushback. If someone wants a last five percent solution, they better show up with the implementation. There's no "handwavium" of just figure it out.

I suppose the most important thing about last five percent projects is they aren't allowed to impede progress in other areas. As Dave Wallace teaches, remove these items from your meeting agenda and stop fixating on them. There is always more to do, more projects in need of completion. I've got about $30,000 of projects on a white board in the store office, and we finally tackled one this month. We had enough money in the bank where we went from crisis survival mode to problem solving mode in about six weeks.  It was nice doing something for the store that wasn't absolutely critical to its survival. We got new carpet and ordered six new fixtures. This is the glamor of retail.

Wednesday, June 9, 2021

I'm Successful, Now What?

 I've been thinking about a trade show presentation based on the Harvard Business Review article on how successful small businesses eventually reach an impasse. They have a variety of roads ahead, including selling, closing, expanding, and my favorite, the Maui Beach House. The MBH is when the owner finds a hobby to use up all that small business energy. Leave the store alone, design your beach house on Maui. This is a type of safe disengagement, at least safer than over leveraging yourself and ending up hungry in the street with your children.

Let's look at disengagement for a moment, to help understand the various stages:

1. Solo Store. You are the master of your domain. You set strategy and tactics. You might never hire staff and you might be happy doing this or it might burn you out. You may not be able to become profitable enough to get past this. Nearly every store starts as a solo store. 

2. Managed Store. You manage your store and hand out roles, so at the very least you don't burn out. You set strategy, and eventually need to give up tactics. You can't tell people what to do and how to do it, at least not if you want them to stay. Most stores mature into a managed store, rather than starting as one. If you're at a higher tier, this is your first fallback. This is where you hone your policy and procedure. This is store ownership for the vast majority of profitable store owners, and some will find anything else to be aberrant. 

3. Remote Managed. "I'm doing the job, just not here." You set the strategy, have no hands on tactical role, and you rely on a manager or two to do your bidding. You may still work long hours, just not in the business. You are in Maui with your laptop, while the kids are surfing. You can easily step back in and manage your store again, as you're intimately familiar with day to day operations. The Remote Managed store does not require as bulletproof policies and procedures as the remote owned store (below), as you're still hands on, just not present. However, it has to be strong enough to work without you physically being there. You can't sell or retire until you shore this up. I've been remotely managing my store for the last year.

4. Remote Owned. "What do you see? You don't see me." You set the strategy, you have no hands on, and you delegate all or most tasks to a manager. You are on the beach in Maui. This is as close to retired as you can get, without selling the business. I've done this for three months at a time. It requires a very good manager, and when that manager leaves, and they eventually do, you'll be rushing back to set up your Rube Goldberg machine once again. You might get lucky with succession, or you might start from scratch if you can't find the right person. The advantage of this model is when it works, you have a valuable business that anyone can run. When it doesn't work, it could be catastrophic if you weren't paying attention. 

Anyway, those are my thoughts so far. I'm sure there's a stage I'm missing. Let me know if you spot it.

Friday, May 28, 2021

5 Reasons My Store Didn't Back the Kickstarter

  1. I didn't know it existed. There are 600 live Kickstarter game projects at this moment. I'm currently backing 29 Kickstarter projects that could be anywhere from a day old to over a year old. 29 is about 5% of what's live right now, but since my 5% represents a year of Kickstarters, it's more like half a percent. I tend to follow the lead of my peers who back more Kickstarter games than I do, so we can at least cry together when they take our money or the game is late. I'm also not an "alpha" board gamer, and that's often where most of my KS money goes.
  2. The publisher didn't offer. We can't just back games like a consumer, we need an appropriate margin. Some publishers have no idea how to structure a game for retailers. Some do the math and realize their project has no way to support that retailer margin. Building in a retailer margin so the game is "marketable" outside of direct sales, requires planning in advance and not all games are going to sell in the volume to make that happen.
  3. The terms weren't good. Perhaps the publisher did offer the game to retailers, but the terms were poor. Perhaps the margin was too low or the buy in was too high. If my turn rate on board games is six per year, and you require I buy 12 copies, I will need to be certain that game is a hit. Since I only back a small percentage of what's out there at any given moment, I can often swing for the fences on the hits, or at least try. With supply chain problems, all games right now are one-shot print runs, so buying a years supply is becoming more common place.
  4.  It was wrong for the store. I get a lot of push from my customers to carry Kickstarter games, but often that customer is an outlier. They may love train games with crayons, but they're the only one. Sometimes I'm the only one, like when I back Italian, spaghetti fantasy RPG books, and then bang the drum to create interest (there was no interest). I back a lot of experimental RPGs because I think they're cool. The game might also be wrong for the local culture, like yet another offensive game in a black box.
  5. I can't afford it. Kickstarter games are a marketing expense. 29 projects might sound like a lot, but this week I received 16 new board game titles and none of them came from Kickstarter. That's one week. Kickstarter games assume: a) I may never get my money back again, so it's a gamble, b) My ROI is irrelevant, because it often makes no sense at all when you run the numbers, and c) I can afford to essentially use staff "pizza money" to fund the games in a financially irrelevant fashion. I call it a marketing expense because it drives people to the store and allows us to stand out against competitors. 
If you're a publisher and want to learn some well accepted guidelines on how to structure a project to work with brick and mortar retailers, join the Game Retailers Who Back Kickstarter Facebook page and read the pinned post.

Thursday, May 20, 2021

Delegation and the Maui Beach House

Since my store closed in March of last year, I've taken on all the office work and data entry. The employees have come back to work, but I've retained my work load. It's a tremendous amount of hours, but they have enough on their plates with COVID era retail. It is work that was originally mine, but was then delegated to anyone on staff at any given moment, often with a newly arrived order in front of them. 

Delegating this work freed up a huge amount of my time, at the expense of accuracy. The work was critical to inventory management and the health of the business, and it was done very, very poorly. Nobody "owned" that job so nobody really cared or understood it. That's entirely my fault, of course. It's really a management level responsibility at the least, despite being a lot of clicky clacky.

The solution to giving that work back begins with tracking my hours. I can't assign hours if I don't know how many there are. What do I do on a weekly basis? I've been reluctant to start this tracking, because I know how this goes. I've done this before, when I gave it away initially. 

Before you give away your work, there's an important pre-requisite that's really obvious, like the key to the whole concept, but a pre-requisite I failed to grasp. You have to have something else to do. The goal is not to make yourself dispensable, that's just a step to bigger things. The best reason to delegate is so you can do "more important" work, otherwise known as work only you can do. If you don't have anything more important to do, don't even bother tracking your hours.

"More important" could mean high level owner tasks, but it could also mean taking a vacation, retiring, or having more time with your family. Maybe you want to play games more often. All good motivations. Really, anything you would rather do is a fine motivation. What you can't do is have nothing to do. You can't delegate and twiddle your thumbs, because I know you, business owner, you are not a thumb twiddler. Idle hands results in weird projects, at least for me.

I've quoted the Harvard Business School study of successful business owners before, and I regularly reference my "beach house on Maui." You get to a point in business where you sell, shut down, expand until you fail, or accept your slow growth level of business existence .. . and plan your beach house on Maui. The beach house on Maui represents outside interests you pursue instead of mucking up your business. Maybe it's coaching kids soccer or painting all those unpainted miniatures. 

This problem came to a head when I was handed a quarter million dollar, thirty year, government loan. Having all the money in the world, in the form of government money, and not having a plan to spend it to expand my business or start a new one, accentuated that I would be building beach houses on Maui. I called it a failure of imagination, but it was just a final acceptance of the fact my business is fine, it doesn't need to expand to any great levels (it did somewhat with this money), and I have no desire to start another business. It was an imagination exercise and I both failed and succeeded. It accelerated a thought process that might have taken another decade. I am done ... for now.

So I'm not going to track my hours yet because I have nothing better to do right now. As I research trucks and travel trailers in my spare time, and work on my online Spanish (yesterday was day 600), I imagine what I'll do with those extra hours. But for now, that work is mine. 

Thursday, May 6, 2021

The Phantom Business and the Placeholder Customer

I recently read an article from someone who declared the hobby game store finally dead. In sixteen years of flogging this dead business model, I've seen many such articles. This is the "standing on the COVID corpses of dead game stores" version. What struck me about this article was the misperception of how stores run their event space.

This customer went to local game stores, used their game space paying some nominal fee, and bought all his games online. He had no idea how this game store could possibly operate under such conditions. He's choosing to ignore the busy register, ringing up sales, or the many customers that come in throughout the week to make purchases, all of them cheaper and easier online.

Put simply, he is not their customer. The nominal fee, social gatherer game, is not how stores survive and prosper. Their value proposition does not align with him. So why is he there and why is he confused? It's because he is the product, not the consumer. His living corpse is being used as a placeholder for actual customers who wish to engage in that stores value proposition, which is community. His role is filler, a cardboard stand in. He's more Facebook user than Amazon consumer. Unfortunately, store owners have a difficult time sifting the wheat from the chaff, so these people sit amongst the real customers, sometimes confused.

Many customers are eagerly awaiting stores to re-open their play space. There is tremendous demand for this not just because it is our core value proposition, but because it's an impossibly good value. Asking a nominal fee or tiny buy-in for access to this core feature doesn't begin to cover costs. And to a mercenary customer only interested in the best price, who takes advantage of this near free feature, it causes legitimate confusion. How do they do this? Why are my peers supporting this? So the game store is once again declared non viable.

The solution to this is to actually charge what that space is worth. I figure its value is at least the cost of a movie ticket, probably approaching $15 an evening. But will stores ever charge that amount for an evening of entertainment? Doubtful, but they should charge something. Do it for your bottom line. Do it to clear up confusion in the market place. Do it because you've seen this business model works without events and how events drag down your store to a micro managed chaos that impedes your progress in life. Or don't do it. The model was viable before. It's viable now.