Thursday, February 4, 2021

Stages of Stocking

 I've watched the game trade nearly double in sales velocity since I started in 2004. It wasn't uncommon to consider a three turn a year game store a success, and now that number seems to hover around six. That means if I had $100,000 in inventory at retail, I was seeing $300K in sales in 2004, and $600K in sales in 2020. Success means efficiency in this example, which equals getting as much money as possible from a minimal investment. You might define success as sitting on a treasure trove of games with one turn a year. No kid, get away from that, THAT'S not for sale!

For me, the difference between a three turn a year store and a six turn a year store is the difference between peanut butter sandwiches and home ownership. This is highly subjective, of course, as we have no solid data, but you'll probably agree the trade has breached mainstream culture in a way that didn't exist 15-20 years ago. You can have a middle class lifestyle with a reasonable, six figure, investment. I wrote a book on that. We are beginning to see more top tier stores, with solid policies and procedures, sell to others, rather than just liquidate. 

When it comes to inventory, this success didn't come with a larger investment.  We saw the same level of inventory out perform throughout the years, with minimal additions, at least until 2020. Rather than expand inventory, capital was thrown at large projects or extracted from the business to regular exercise my return on investment, expected by most business owners. Inventory didn't seem to matter all that much as reinvestment. 

The pandemic killed sales, thanks to the cancellation of public gatherings. In the SF Bay Area, where my store is located, we were technically closed entirely for two months. It's clear now that events were responsible for 15-20% of our sales volume, although at low margins and super high management costs. When we received government loans,  the goal became finding a way to efficiently offset that loss with new inventory people actually wanted. Inventory for inventories sake was not going to do the job. This stuff had to perform and now. 

When I moved stores to a three times larger space, I massively increased inventory and learned some hard lessons. My attempt at diversification away from the trade was a huge failure that took two years to unwind. It was the wrong read on the market, with the wrong inventory at the wrong time. So adding new inventory was going to be a bit more conservative, using what I had learned. There was no time to waste, and I knew we were looking at 18 months at least to return to normal, if there was a normal to return to. 

I wasn't the only one doing this, so it got me thinking about where I and others were on a spectrum of purchasing. I've got this theory of inventory tiers based on store makeup. It's really defined by how successful a store can be within the confines of the three tier game trade. I've got four store models that look at this, with each building on the one before it:

  1. High Efficiency: Inventory is highly efficient, but that efficiency also loses opportunities. More inventory would go to reduce the friction of that high performance with depth of stock. You might take your six turn inventory performance down to four, reducing stock outages with some sales increases. It's a low risk, low reward inventory increase, but it's necessary to progress. This store likely has a direct account or two, like Games Workshop or Asmodee. Perhaps 20% of their product is outside the trade.
  2. Newly Diversified: Having satisfied depth of stock, this store needs to diversify within the game trade to appeal to a larger customer base. This often coincides with capital improvements to attract a broader range of customers. You can't just throw general public appealing inventory into your Gamers Den. This is going to be a medium risk, medium reward increase, as you're likely tapping your existing base and asking them to spend more. It's not as lucrative as a new customer base, but also not as risky. Perhaps 40% of their product is outside the trade, mostly with direct accounts to obtain product available within the trade. 
  3. Beyond Diversified: This store has mastered depth of stock, has diversified as far as they can within the trade, and now needs to seek out new product lines through direct partners. This is a high risk, high reward strategy, as they're appealing to a new customer base, if they can find them. They are probably a Wizards of the Coast Premium store, based on the capital expenditures needed to appeal to the general public. If they're not ready in appearance and service for the new customers, this could be a disaster. This store may also begin to chafe at the allocations and available inventory provided by distribution, even with deeper buys. Perhaps 60% of their product is outside the trade.
  4. Fully Diversified: This store has tapped out all known sources and constantly needs new product from a variety of sources well beyond the game trade. They likely have dozens of active direct accounts, work with toy companies and distributors, and go to publishers first to guarantee supply of product. They back many Kickstarters. This model is medium risk, medium reward as they've already created the customer base expecting to be regularly delighted. They are now capitalizing on tier three risk taking. They are really a more sophisticated tier three store than a new model. Perhaps 80% of their product is outside the trade.
What I personally discovered with an unlimited inventory budget is there wasn't a lot of obvious diversification options left on the table. There wasn't much low hanging fruit. That's because I was probing all along for new opportunities. Although I did some diversification in my buys in 2020, which increased my inventory 55% at one point, most of my buys were in depth of stock. I'm probably a 2.5 in this model.

It was interesting to watch my store transform into what I had seen in many stores before, a larger, more mature store with the depth of stock that represented the appropriate sales velocity. You wouldn't have guessed our sales levels by just looking at us before, but a store owner would know now. That sounds like an admission of guilt.

I did diversify, mostly into puzzles (a whole wall of them), product from the book trade, and toys. We now carry every first and second tier Games Workshop product. But the bulk of my buys were broadening my game trade stock and deepening depth. Depth of stock was simplified by dividing stock by annual turns. That was a blunt hammer, so that large bump in 2020 was fine tuned by the end of 2020. We also spend a few thousand dollars on new store fixtures, as the deluge had us using folding tables for several months, just for a place to put everything. I once said I could double the inventory in my 2,000 square foot showroom, but the true number, it turned out was a 50% increase.

These tiers don't necessarily correlate with sales numbers. You can have a multi million dollar tier one store and a very low performing tier four store. In fact, it would be highly desirable to have a lower number with higher sales, as the infrastructure is lower. If I could have a multi million dollar store with four product line, that would be amazing, but brittle. 

The reason the tiers don't correlate with sales is because there is no acknowledged formula that says, I'll do six turns at tier one, then shift gears to two. It's highly subjective. There used to be a ton of tier four stores with one turn a year, the museum store. Most of those are gone or have reformed. Those of us in the trade know the difference, by the way. Customers love the tier four store, even when it's unprofitable. Store owners can tell if it's a powerhouse or a $#!*house. When it comes to gossip, this is a hot topic.

Anyway, those are my thoughts on inventory after a very interesting year of having all the money in the world and no easy answers on how to spend it.

Wednesday, January 20, 2021

Applying for an IT Job

 Here's how I would apply for an IT job at this stage in my life. I do not want a job again, but here's my general impression of how I would go about it. My guess is the approach isn't effective, but who knows:

Dear Hiring Manager,

My decade of experience in IT and 25 years of managing employees, clearly qualifies me for the position, but I wanted to touch on something you may not have considered. Running a small business for the last 16 years has provided a perspective on IT that I'm sure few of your IT employees possess. You see, I dislike technology.

I am not enamored with technology, nor do I wish to burden your company with a bunch of soon to be useless gadgets and computers. In small business, you quickly learn that IT is a cost center, an expense that you wish was unnecessary, and to the extent you can make it unnecessary, you do that. Clever technology is not so clever when you're troubleshooting a computer on your office floor on a Saturday night, rather than being with your family. What I'm saying is technology needs to be applied intelligently, and most often in IT, it is not. IT experts are often on to their next gig, long before the return on investment fails to materialize.

As your new IT professional with a small business background, you hire a skeptical expert. You hire a technologist who doesn't slap a business case onto a shiny piece of new tech, but starts with the business case. I want to learn about your business and how technology will advance it, improve it, make it better in every way. I am also fully satisfied to let the "trains run on time," and keep your operation in tip top condition without change. I have nothing to prove and I'm not obsessed with the next tech gig or building the resume.

In short, I wish to partner with your organization, make it my own, understand what makes it tick, and when necessary, and only then, bring it the latest technology to propel it forward. For sixteen years, I applied just the right amount to my business, resulting in a modest 10% a year growth rate, while technology took a back seat to people. A good IT opportunity should have a solid business case, with a thoughtful cost-benefit analysis and prompt return on investment. I can't promise to make your IT a profit center (although I've seen that done), but I can make it a less painful center of cost, while focusing on what matters to your company, the people.

I would be happy to discuss this position and your needs in more detail. 


Ex IT Guy

Getting The EIDL Loan

With some perspective and some mushy memories, I'm better able to describe to the narrative of the EIDL loan process I went through in April of 2020. Having survived the 2008 housing crisis and not getting my house in order until 2010, I made this a massive priority to educate myself on this loan and be first in line. Some people camp out at Best Buy on Black Friday, I have Google alerts for SBA portals and hit refresh a lot. 

I wanted in first, because being the government, they would: a) run out of money, and b) there would probably be a first mover advantage in scrutiny, meaning they may be too overwhelmed to make good judgements or might implement new rules later, after they ran into problems. As it turns out, I have stellar credit and they really wanted to give me money, which was a bit of a problem.

When I was approved for the loan, they offered me an enormous amount, over a quarter million dollars. I was applicant number 10,000 or something. I was early, I understand finance and paperwork, and they had a lot of money. Eventually they would run out of money and limit loans to a smaller, more reasonable amount. Once I was approved, they offered me a villa in Mexico amount of money. I asked them if I could just take a smaller amount. They told me not to worry. I don't know where this will go, and I can just take what I need, like a line of credit. That made me happy. I can manage a line of credit. But that much money? Are bank accounts even insured for that much? 

They are not.

Then they just dumped the whole amount in my bank account. No line of credit. That's when I learned there are SBA contractors just kinda winging it. So wow! All the money I could ever ask for, business wise, for my completely shut down business that may never open again. I was thinking Guanajuato or maybe the outskirts of Oaxaca. With so little faith in the government and the pandemic raging (really just getting started), I had one foot in Mexico while trying to restart the business. 

And then they came back and asked for something I read about but didn't fully understand. They needed a property lien on everything the business owned, but they needed me to file that with the state. That took a day of figuring out, but it let me read about the "hooks" involved in this loan, and to better understand the requirements.

By the simple loan language, I can't pay myself dividends. Really? Ever? It's a 30 year loan. Are businesses with an EIDL loan over their head forbidden to ever realize profit? Oh, well you just can't pay them with the EIDL money. So if my business makes $5K this week and I use it to pay investors while I borrow $5K from the EIDL fund for allowed expenses, everything is fine? Exactly. Just show a paper trail. Then there was the car. I needed a car to do deliveries. Doing the research the EIDL loan was fuzzy about capital expenses. Ask a lawyer and they interpreted that as allowed. You can buy a car. Ask an accountant and it was certainly not allowed. The accountant had a different understanding of capital expenses, probably one more in line with the government, since it's their job. I bought a car anyway and made $57,000 in deliveries.

My final understanding was this: If you pay back the loan, nobody cares. Nobody is going to look at your delivery vehicle and send you to prison (an option), if you pay back your loan. Don't pay back your loan and there will be scrutiny and open books and questions about everything. So the answer is win, don't lose. And if you think the SBA is clear in their writing or understanding of how the law is supposed to work, talk to Congress about that. They've been yelling at the SBA for nearly a year now. And with todays shenanigans for EIDL disaster grants, I'm sure they're just getting started.

Thursday, December 31, 2020

Forgetting the Fizz

Every time I meditate, I forget how wonderful it is to center the mind. There are parts of consciousness, reached during meditation, that are beyond thinking and memory. You can't remember the feeling because there is no feeling, no thing to imprint.  You experience this non thinking, but its nature won't allow you to remember, so you forget how wonderful "it" is. If you could remember your non thought, it wouldn't be the thing, since the nature of the thing is non thingness. Still with me?

Working with customers is similar in that it brings an ineffable satisfaction. It's certainly not a deep meditative state of no-thing ness, but it's a satisfaction that's soon forgotten. When I'm away from this for periods of time, I forget about that fizz, that deep satisfaction. I feel like a bit of a fraud. Was it ever there at all? Maybe I willed it into being. You see this attempt to will it into being with new sales people who over do it. They talk too much, too loudly, don't listen, don't engage. Maybe that was me!

When these thoughts arise, you'll probably think the fizz is gone. However, you just can't remember it. It's an elusive feeling. For those of us who delegate fizz, you might think you gave it away. I used to have the fizz, but now someone else has it. John or Tammy have my fizz now. That feels especially true when you disengage and then watch your proteges take up the mantle. Yep, there goes my fizz.  You still have it, you just need to go do the thing, like a reluctant meditator. Fizz abides. You'll slip right back into that ineffable, fizzy feeling. 

You probably won't remember it afterwards though. 

Thursday, August 20, 2020

Lift Off

I am betting on the U recovery, a downgrade from a V, hopes dashed by a uniquely American belief in personal freedom. A U is a V with a trough filled with the corpses of our callously discarded elders. A "U" assumes we will see sales back to normal quickly once a vaccine is in play, which is somewhat optimistic when many industries expect up to three years to recover. They expect something that looks more like a Nike swoosh. I do not want swoosh. If I thought we were swooshing, I might exit. No swoosh.

This willful rush towards oblivion cost my business $90,000. I didn't fully realize this until I applied for a grant this week. It will set me back five years financially, assuming things were back to normal, which they are not. We survived because I borrowed money from my home equity, called on investors for more cash, took a PPP loan/grant that is still questionable as to repayment, and only then dipped into a large EIDL loan to pay off creditors. Any victory lap you perceive me taking is in the context of this tremendous cost for others personal freedoms. 

My strategy forward is fairly simple. Since I'm loaded up with government loan money, I'm rapidly expanding inventory. Some of it will be good choices, some bad, but in the end, and before I make a single loan payment, I'll have it dialed in. I am going to attempt to broaden and deepen my offerings in hopes of drawing in more customers now, boost sales to something approaching normal as time goes by, and be prepared for my approaching U recovery. 

When that recovery comes, be it a U or even the dreaded swoosh, we will be stronger than before. Which is good, because I've got some hefty new loan payments. That's nothing new though, and in fact, they are lower than my recently paid off construction loans, for the game space I can't use, in the retail location rent out of proportion with what's happening.

Saturday, May 23, 2020

We Are All Multi Channel Retailers Now

If you had asked me at the beginning of March, if having an online store was necessary, I would have told you no. The vast majority of retailers make single digits of their revenue from online sales. It's something I've watched closely, because it seems like a logical thing to do, but it actually isn't. Online sales are an exhaust port for dead stock, a blessing, and a curse for everyone else. Most online retailers use Amazon to sell online, and before that Ebay. Many more only sell Magic singles online through TCGPlayer. Only a handful make any reasonable percentage of their sales online through their own branded store, and of course, they're in a "I told you so" mode.

Was I wrong? Small business is not about planning for 100 year floods, it's about being nimble with the opportunities and threats presented and quickly pivoting in times of crisis. It takes about 100 hours to add 1,000 descriptions to an online store. Stores generally have somewhere in the 2,500 to 5,000 item range, with the big boys upwards of 15,000.  If your big store can spend 1,500 hours, we'll call it $18,000 in California wages, just so customers can view items from home and you get a few percent in direct sales, you are probably uniquely successful in this trade. It makes no sense in normal times.

Now things are different, and for long enough to just as well be permanent. Customers are scared and are not returning to businesses as they re-open. They would still like delivery to their homes. I bought a delivery vehicle for this purpose, as I'm that certain this will continue. Having an online store is an essential part of delivery and curbside pick up. How long will this continue? The answer is longer than you can survive without an online store.

The next year to eighteen months will be a challenge for retailers. You may not need an online store after that. You may be able to dodge this 100 year flood a second time. However, you probably can't survive this period without an online presence. You are also going to have to figure out outreach online. Facebook might have worked in the past for most customers, but you'll need to figure out where the rest of them have gone in the online world. If I thought my Pokemon kids were unresponsive on Facebook before the pandemic, they are absolutely missing in action during it. My marketing to them had been Wednesday night Pokemon.

So if you ask me in two years, will an online store be necessary, I would tell you probably not. I don't believe shopping habits have been permanently changed. I believe humans are social creatures and they thrive with social interactions, and providing that will be even more important when you can safely do so. I also don't know of any other retail business model that works without that social interaction, barring some online monopoly fueled by Wall Street capital. Yes, Amazon simply wins in a pandemic. There is no competing model.

If you ask me now if an online store is necessary now, I would say absolutely and you are very late to this party. Most retailers I know have been building their online store since late March. Those who spent the time to do it right and integrate their POS systems with an online store took longer to launch, but saw perhaps double the sales of those who put up something quick next to their point of sale systems. POS adjacent. I'm doing both, propping up our integrated online store as quickly as possible, while adding items to our stand alone online store for emergency revenue, until which time we swap in the integrated one (hopefully next week).

In normal times I would recommend going to conventions, community outreach and other channels for sales, but I'll instead recommend you look within. Search for fruit at the top of the tree. We are accustomed to doing cost-benefit analysis, and only reaching for low hanging fruit. In this time of fruit deficit, no fruit is too high. When there are no customers to serve, your time has no value. Find ways to generate revenue that you may have discounted in the past because the benefit was only marginal.

Gift wrapping is a good symbol of this. If your store doesn't do it, because "you're not good at it" or you just simply didn't see the point, get yourself a gift wrapping station today and watch a YouTube video or something. Find out what customers want and stock it, even if it's outside of distribution. This isn't a new retail channel, but it's an opportunity to tap new revenue, and when this is all over, your store will be that much better for it.

Monday, April 27, 2020

Game Store Problems and Solution in the Age of Social Isolation

After my dismal assessment of the hobby game store, I wanted to delve into the root causes and some possible solutions during this COVID-19 pandemic. There are three problems right now when stores re-open, lack of events and outsized real-estate, the effect lack of events has on staffing, and unpredictable demand of product in breadth and depth. Let's look at each of these and see if there are some solutions.

Events result in a significant portion of store sales. They drive sales of product, either directly with CCGs or indirectly, with games that drive tertiary demand. You play Magic, you buy product to play in the store, while if you play 40K, you buy product later, after you've have your rear end handed to you. When there is no in-store gaming, which is a cornerstone of the modern hobby game store, there is significant reduced sales. Often it's a big event that pays the rent. Events are so integrated into the model, we really don't know to what extent this will effect sales, but my guess is 20-40%. When I moved from a no event store to a store with events in 2008, my sales rose 48% the first year.

We are overstored. Losing events for a year means hobby game stores have too much square footage, too high a rent. 1,000-2,000 square feet of unusable space could cost as much as $6,000 a month. Commercial leases are usually multi-year affairs, although some stores will have month-to-month leases. Those who can downsize would be wise to do it, if they can do it cheaply. Last time I looked at moving, it was going to be a $50,000 expense, so the idea of moving to a small space and then moving back to a big space in a year, is unrealistic. I've suggest mothballing the business, if you can possibly put it away and get a job for a while.

The other option is lease modifications. Right now, most landlords are not having this. If they don't want to forgive rent, they certainly don't want to change your lease. This catastrophe has happened too quickly for them to absorb or comprehend the damage. When we begin to re-open, and it's clear a lot of stores remain closed or simply can't pay rent, cracks in their armor will form. During the 2008 recession, I was able to re-negotiate my lease. I only expect this to happen if we are economically impacted for the rest of the year, such as the predicted comeback of the virus in the Fall. There is no evidence lease modifications will work now, but keep an eye on your neighbors.

Will online events work? When you're out of crisis mode, if you can wrap your head around Magic Arena or D&D online, these are great for keeping communities alive. Our Magic judge has been great in running Magic Arena for our community, and we've had success with volunteers stepping up and running D&D games for kids. The ideal store would have a business oriented partner handling the overwhelming tasks of survival and re-start and a more events oriented partner doing outreach and online event coordination. If you can do both of these yourself, you are far better prepared for this than I.  There is no direct revenue of any significance involved in this, but it keeps your customers engaged, entertained, and hopefully planning to return to your store later.

The second problem is the reduction in staff hours. My store was open 85 hours a week, with at least two to three people on staff most of those hours. My payroll costs have grown 50% in the last five years due to increased event space. This is because of the growing demand for events. The business was pretty relaxed from 10-5, when I worked, but it was hopping after hours until 10 or 11pm. We will likely change our hours from 11-7, like I had when it was just me working the store, with no events. I only need about half my staff to run with these hours.

Knowledgeable staff are critical to a hobby game store. It takes six weeks to train a staff member, but six months to have them truly competent (six years to mastery). Losing any of them is a huge economic loss in itself. How do we retain them during this crisis? The PPP loan is a stop gap solution, one I've received. It will cover my payroll for the next two months, starting this week. I'm giving starting bonus hours to help compete against overly generous unemployment benefits. 

PPP is set up very badly, in that it starts while businesses are still sheltered in place. Businesses are competing against the government who gave employees huge bonus money, more than they would have made working. I never thought I would use the term "burn rate" again, but here we are. I need to get my payroll burn rate up, regardless of the value of that labor. If I can maintain high payroll costs, my PPP loan is forgiven.

We're using PPP hours to populate our new point-of-sale system with item descriptions and photos to sync to a new online store. Hopefully some of that money will be used for generating direct revenue in June. What will happen in July, when PPP runs out and demand is a mystery.

Increase labor demand. Reducing head count is inevitable without some other method of increasing demand for labor. Increasing non conventional sales may take care of some of this. Curbside delivery, contactless home delivery,  and online shipping can be part of the solution. Right now we're seeing artificially high online sales of around 20-30%, all for home delivery. Most game stores who did online sales in the Before Times will tell you it was only in single percentage digits. Online sales for most stores was supplemental, and it was neither necessary nor relevant to most stores.

When people can shop again, I anticipate a larger than previous percentage of online shopping using various delivery methods. It would be wise to have your store set up so customers can shop at home for pickup or delivery. This demand should last a year to eighteen months, but it may just entrench a trend that was already growing.

I'm considering leasing a vehicle for the business for deliveries. That's how confident I am this will continue for a while. These type of sales are time consuming and lower margin than in-store sales, but if they maintain your most important asset, your staff, they're worth slogging through for a while. If I can afford it, I plan to give up most of my store hours as an owner to provide a much needed shift to an employee.

Product demand relates to what degree of sales decline we're likely to see, if any, and what sales patterns will change, if any. During The Great Recession, a lot of vanity product dried up and disappeared. A lot of cool things you see on Kickstarter today would have been carried directly by innovative game stores ten years ago. I was proud of that extra effort. Our ability to be the curator of cool has shifted online, at least for the alpha customers.

Right now I'm sitting on a pile of low interest, long term, six figure, EIDL loan money, that could transform my business. I could double my inventory. Quadruple it, if I were a mad man. I could turn my game space into shelves. I could transform my store into a gamers dream, and I could do it now and have it ready when we re-open. I would be a dark lord of games, all shall love me and despair!

That assumes I know what's going to happen. It assumes I expect normal, and not dark times ahead where I lose money every month for a year. It most importantly assumes I know what customers will want when I re-open. Do I double my 40K offerings? Do I go deeper on board games? Do I finally buy six figures in Magic singles? I simply don't know what they'll want, and to what degree, and neither do you. I must wait and see. I may diminish and go into the south (I'm learning Spanish).

I'm expecting a bit of a W recession, where we've been hit hard, we'll see a strong initial recovery, and then we'll get hit again in the Fall. Governments will be more reluctant to close down then, and they'll likely use technology to aim closures and re-open more aggressively. If I thought this were actually over, if I believed in the V instead of the W, I would make very different decisions. With a W, you keep your powder dry and look for opportunities to keep everyone working and the money flowing. If I believed in the V, I would make a grand gesture or plan to return to normal earlier. Pick the wrong letter and you move at the wrong time.