Sunday, May 6, 2012

Anatomy of a Magic Pre-order

In the collectible card game market, we need to order everything we want up front. In the case of Magic, that's around a 30-day supply. How do you determine how much to buy as a retailer? First you look at how much you sold of the previous set in the first 30 days. Second, you gauge demand in comparison to past sets. Simple enough, right? Lets look at some of the factors.

Timing. Unfortunately, timing conspires against you. That Magic order needs to be put in weeks before the release and well before the pre-release, so customers don't really know how much they want. So you have to trust your gut to some extent, which is really a bad way of doing business.

Demand Forecasting: In the case of the most recent release with Avacyn Restored, I ordered based on the Dark Ascension release. We pre-sold about 100 boxes of Dark Ascension, often in case quantities. However, that number was a big surprise, so supply was severely limited as I scrounged everywhere for enough to cover our order. It worked out very well, but it was hit or miss for a while as I initially had more pre-orders than quantity on order.

Supply Allocation: This time I was prepared, with five suppliers on the line to get us our stock for release. However, there were no promises they would all deliver. In fact, since Wizards of the Coast has such a tiny allocation on release, they force you to deal with distributors, who look at your past performance with them, including everything you've ordered and not just Magic, and then determine how much they'll give you based on a percentage of what WOTC gives them. So although there were five suppliers, it was unclear how many boxes they would provide. Did I pay enough of them tribute in the last quarter? Some yes and some no.

Pre-orders: So with such questionable supply available, what did we do? We backed off on pre-selling, especially those case quantities. So our pre-orders on release were about a third of what they were for the previous set. Then we got a shock as suppliers called to tell us our allocation was close to 100%, meaning I would get everything I asked for. Huh.

Over-Supply: So now my 30 day supply was at 60 days. What does this mean? It means on a $10,000 Magic order, there's going to be a $5,000 bill due when there's no money. There are ways to stretch cash flow to prevent catastrophe in these situations, but ideally you avoid them entirely. It's also true that stores that have cash on hand and better credit terms are way better off than their competitors.

Increase Demand: So with an over-supply and a huge bill down the road, the only solution was to increase demand. I did that by lowering the price from $125/box to $100/box. The funny thing was, the set was pretty hot and supply was fairly tight for most retailers, so for the first time, our $100/box price was pretty close to the Internet discounters. In the first two days, we sold twice our pre-order numbers and were clearly out of trouble. Over the next few days, we'll probably bring the price back up as our supply stabilizes into that 30 day territory.

Why all the drama? It's Wizards of the Coast limiting supply regardless of demand. Part of this can be good for retailers, provided you have product to sell. Limiting supply does create a level playing field. It's something we already see with Yugioh, where the tight allocations mean we sell product at a reasonable price point compared to Internet flippers. It also means we run out sometimes, and we always run out sometime shortly after the next set arrives. We just don't have the budget to order years of product to sit around.

There is an up side to this. When you only have "X" product to sell, most retailers, including Internet ones, realize they don't need to cut prices so hard to make a buck. If you know you will sell everything in "X" period of time, there's no need to discount unless you're in trouble. This was something I learned buying cars. If a car dealership has a small allocation of cars each year, such as in the case of BMW, they don't need to discount. They will sell every car to someone at close to full price, and sometimes above their MSRP. The secret to buying a BMW turned out to be finding a car outside of allocation (European delivery).

Small allocations or fixed allocation is the mark of a premium product. The key, unfortunately, is steady demand, and collectible card games just don't have that. They're too hit or miss, too uneven to go this route. Will you sell every booster box of Magic? Is the risk non-existent?  There are crap sets that are still floating around out there at distributors from a decade ago. So with these small allocations, it means the retailer will either be unhappy with an oversupply, or unhappy because they sold out. Hitting the right number then is guesswork and not good business. However, the publishers are happy because they've eliminated the risk on their end.

Gaming the allocation system with Euro Delivery in 2001.

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