Thursday, November 18, 2021

The Scalper

It finally happened to me, in a three star review I was called a scalper for selling Pokemon for more than the MSRP. Let's take a look at this:

1. How dare you. Is the term scalper not offensive? Have sports teams not changed their names for less offensive references? Maybe come up with a different term that doesn't involve a Native American stereotype. I'm not offended, but it's curious.

2. Scalper is a specific term with a legal meaning. Alright, so it's in the lexicon. Scalping is legally defined, in some jurisdictions (not mine), as buying tickets at a low price and selling them for a higher price. There are laws specifically regulating this ticket selling practice, down to how many feet from a sports venue you can sell tickets. Note that I do not sell tickets.

There is is the incorrect assumption that buying product low and selling high, over the suggested price, which they refer to as "scalping," is somehow illegal. I kid you not. There are times when someone calling you a scalper thinks they are accusing you of a crime. Just to be clear, buying low and selling high is known as commerce. There is no law or practice that limits the price we can sell goods or services, except for very specific circumstances. There is nobody to report us to, no repercussions from manufacturers, and honestly no long term hate from most customers who understand what's happening.

3. The collectible mindset. Collectible infers that the cards go up in value. You are familiar with buying low and selling high, because you expect to buy low from me and sell high to others, or at least hold those high value cards over time and peer at them through plastic. It becomes infuriating for collectors when retailers sell high. We are eating into your margin, your future value. I tell people to just wait for prices to come down, but they have strong FOMO, Fear of Missing Out. Since in their mind, values only go up.

Anyway, I buy role playing books, and if my books suddenly spiked 50% in value, I would wait for them to come down in price. I will buy the book later, or I'll buy a used copy, or a PDF. That's my suggestion, just wait. But Pokemon players look at me like I must be insane. That's because they don't believe that product can ever go down in value, only up, and it's going up all the time! The collectors mind set is this product is an in "investment," while I buy a book until I don't need it, and then dump it. I am not a collector, I am a player. We need fewer collectors and more players.

4. This whole house of cards. It should be mentioned that for a lot of stores, higher than market prices on Pokemon, which normally has the worst margin in the game trade, are keeping their stores open, driving expansion, and leading to profit margins never experienced before. When I look at my accounting, it just seems wrong. The margins are all off. If it makes you feel any better, the ecosystem survived and prospered over the last year thanks to Pokemon. More game stores are popping up every day. I know, you don't feel any better.

5. How much should we sell Pokemon for? It's simple supply and demand, with some market guidance. This year, it wasn't unusual to see our Pokemon supply last one week, while still selling well above the MSRP.  There were no re-supplies coming for a lot of this product. What I would like to see is product last several months until the next set. The fact it sold out in one week means I sold it for too little, based on my stated desire for a longer shelf time. Again, it's my decision to adjust the sales velocity using price as the mechanism.

I try to keep Pokemon at a reasonable market price, using TCGPlayer as my guide. At the same time, there's nothing keeping me from deciding I want this product to last three months, or a year, or forever, because I think it's pretty, and coming up with an astronomical price to make it last. I've had a suit of armor for sale for 17 years because I think it's cool. If I sold it, I would just buy another one, so the price is high.

6. Think of the children! We have held some product back for our events, which are mostly attended by kids, but my best advice for kids right now is play electronically until this market cools down. My son has switched from Pokemon to collecting stuffies and Hot Wheels. Prices will eventually drop. Which is happening right about ... now. 

7. Prices are dropping. The music stopped and retailers are sitting on a lot of Fusion Strike. Boxes sit at $117 (with an MSRP of $145, as a reminder, the price of all booster boxes when not being devalued or demand spiked). Chilling Reign, which we have a ton of, is at $98. Other retailers are trying to offload cases and pallets of overstock. Is this the end of the boom? Probably, maybe, I don't know. We're still selling a ton of product at a lower price, so demand remains while supply has improved.

Monday, November 15, 2021

Buy Once, Cry Once

I'm a "Buy Once, Cry Once" kind of guy. That means I like quality stuff and have learned to "invest" to smooth my way through life and hopefully have an extended lifespan where I don’t have to buy stuff a second time. It usually means less stuff of higher quality, because I’m not rich. One of the areas in which I've invested has been quality store fixtures.

When I started my business, I was told to expect several years out of my store fixtures. What I found was I could have a premium looking store, with better quality fixtures, for about 50% more money. I went ahead and bought the premium fixtures, mostly because I had more money than sense, thanks to a home equity boom, and have (mostly) continued to buy them throughout the years as I’ve expanded. Can I recommend that? 

It's almost impossible to square a reasonable ROI out of any store build out, let alone one where you start adding premium features. I would tell a new store owner to pick ONE premium feature, if they showed me their business plan (I don’t want to see your business plan). You can have good fixtures or the chocolate fountain, but not both! The SBA will tell you half of businesses fail within five years, which I think is where you should position your ROI. Buying premium fixtures is a vote for success, a belief those extra thousands of dollars will take you into year six. A six year ROI shows high confidence, low financial aptitude.  

Have those fixtures been worth the money? As I’ve expanded, I’ve messed around with cheap fixtures. What I found is they wore out as predicted, at around three years. Worse, as they wore out, some became dangerous, with shelves that would collapse. I had a kids section that towards the end, was probably not safe for children. I cried twice when it came to those fixtures, because they all had to be replaced with quality ones. 

Those garbage fixtures weighed on my mind, and they needed replacing when I had the least amount of money. This occurred during my Dark Night of Profitability, several years where I wished I would just fail already, if I wasn’t going to succeed. Bankruptcy seemed like a sweet release. Eventually I had some holiday money and all those garbage fixtures went over to the local thrift store. Watch your kids carefully over there.

In year 17, I’ve replaced only one of my high end fixtures completely, after driving screws into it from every conceivable angle to keep it alive. It was my Frankenstein monster fixture. Let me tell you how we destroy good fixtures: The problem with my fixtures, high end gondolas from Newood, is we love hanging things on the endcaps. These are the slatwall ends of each fixture, where we hang small items on hooks. 

If you aren’t paying attention, you’ll walk by, snag your clothes on a hook, and rip that hook out of the wood, damaging the gondola. This won’t happen every time, obviously, but over the years, like a monkey at a typewriter, someone will eventually rip out a number of hooks in high traffic areas. New staff can't possibly imagine this happen, but the veterans know, if it can happen, it will happen. The major maintenance expense of the fancy gondolas is replacing these endcaps, and we’ve done perhaps ten in 17 years. But the gondolas look new and they’re safe.

Which brings us back to ROI. As I watch new stores struggle with untested store fixtures, I’m brought back to the troubles I’ve brought myself with deviating from quality. Yet, I had a very long ROI, and maybe they’ll spend year six on vacation on a beach, while I was working, beaming proudly in my fancy fixtured store. Whose the winner at retail? Money is rarely the measure. 

We all define success differently. I’m planning to work from a beach in 2023. I’ll be 55 years old and I could be called back from that beach at any moment. I could be on the beach now, but letting go is a struggle. Others couldn’t imagine being anyplace but their sales floor, or doing community outreach, or any other customer facing service position. Most store owners would quit first, because the job is the people. I’m sure some of those people would consider my dream a sell out, and for stores just getting by, there are probably a number of asterisks next to my name. *“Yeah, but he…” If I were to give a seminar on how to run a store remotely, which nobody would attend (maybe I should give it remotely?), it would start with all the things to make your store self reliant. We would start with not having to worry about a child being crushed under your cheap fixtures. 

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.