Monday, December 24, 2007

The Squeeze

The squeeze by distributors continued this week. GTS Distribution announced that their current prices will reflect a cash discount starting January 31st. Those who use credit cards, like me, will have to pay an extra 2% or we will have to figure out another method. Unfortunately, all the options add costs on my end. This comes as distributors are attempting to figure out how to deal with rising shipping costs, due to fuel prices. Distributors receive the smallest margin in the three tier system, so they're the most sensitive to changes.

Here's how it's normally broken down: The manufacturer produces a board game, for example, with a retail price of $50. The retail store gets half that, or $25 (the margins are shrinking though), the distributor gets 10% or $5, and the manufacturer gets 40%, or $20.

In the toy world, that $50 game would be around $55, an amount the retailer would tack on to cover the shipping, a charge the retailer almost always pays. The game world comes from a tradition of free freight on orders of a certain amount. Ask someone outside the game world for their freight policies and they'll look at you funny. This free freight is where the problem lies. As the cost of shipping increases, the free freight model breaks down. What was once free freight with a $350 purchase might now be free freight with a $1000 purchase or free freight plus a service charge.

So far, all but one of my distributors (Alliance), along with Wizards of the Coast, have increased shipping costs to the retailer to get the goods to the store. Nobody faults them for trying to recover their costs, they have a business to run too. The issue, as I see it, is that retailers can't be expected to bear all those costs without passing them on to the consumer. It's inflation 101.

Unfortunately, the industry is a bit peculiar in its methods and isn't set up to do it any other way, so retailers will be forced to make decisions or perish. Most who perish probably won't know why. It's usually a combination of rising costs that does in a business. Growth for most retailers is small, probably a few percent a year. Adding a couple percent would kill off distributor, with their thin margins, but it's a slower life drain for retailers, something that could close their doors if the economy were to falter and their regular growth stopped.

Retailers have a peculiar response to individual product line increases. Some simply draw a line in the sand and decide not to carry games with a margin below their baseline, possibly 45%. Others, like myself, stock those games but don't put effort into promoting them. I would much rather you play Warmachine (50% margin) than Warhammer (45% margin), and absolutely prefer you play either of those over AT-43 or the new Confrontation (40% margin). If I can create events, specials, or overall excitement for the better margin item, I will. I could decide I don't want you to have the choice and not carry the lower margin products, but I don't control what my customer buy, I only have an influence on whether they buy it from me.

Product line price increases are easy to decide upon compared to this new problem. What do you do when all of your goods are going up in cost? From working with my toys, shipping is about 10% of the total cost of an item, a cost that has been subsidized by the distributors, who are also drawing a line in the sand and saying any more expenses will be born by someone else. I don't see any way out of this other than to raise prices beyond the MSRP, an idea wildly unpopular among store owners.

1 comment:

  1. "raise prices beyond the MSRP, an idea wildly unpopular among store owners"

    You forgot a word:


    As in "idiot store owners"

    best -