Friday, October 4, 2013

Game Store on a Budget (The Boom)

Lets assume we're building an average game store in Averageville, USA. We've got a decent population base, perhaps a college or military base, and we're hoping for modest, lets say... average ... gross sales of around $200,000 a year. My average salary will be about $30,000 plus profits, which with $200K/year will be $12,000. A $42,000 salary is actually the national average. Good for you!

How do you get to your average salary? That requires that $200K gross sales, which requires inventory. We're going to assume again that you're average, and average inventory turns in the game trade, when things are normal, is three. We'll also assume average cost of goods of around 55%. The opposite of this number, your gross margin, is 100% minus 55%, or 45%. These numbers get confusing, just remember they're mirror images of each other.

So this isn't so terribly hard. We now have a simple math problem. $200,000 divided by three turns is $66,666. 55% of that number is $36,666. That's your inventory number. You'll probably spend an equal amount or more getting started, but it's possible to get going for a lot less. That inventory number is key though. It's your economic engine. You won't hit your numbers without it, unless you boost your turns, which is what's happening right now.

So how does this look? We'll assume your first year you won't open your doors with $36,666 in inventory, as you really don't know what customers want. You'll add inventory over that first year as you narrow it down, and because of that, your turn rates will be low.

Year Inventory @ Retail Turns Gross Sales
1 66,666.66 2 $133,333.32
2 66,666.66 2.5 $166,666.65
3 66,666.66 3 $199,999.98

So before you can make your average salary, you'll need to have some money put away to cover the losses you'll incur during the first couple of years, what we call startup losses. How much? Good question, since sales projections are just that, projections. I would be lying if I threw a number out.

So why are stores popping up like crazy right now? It's the turns! Magic is huge at the moment, and turns on CCGs are nothing like your regular game sales. CCG's which account for 50% or more of a lot of store's income right now, turn in the 8-16 range. Now lets look at our calculations, assuming 50% of our sales are CCGs:

Year Reg Inventory Turns Gross Sales CCG Inventory Turns Gross Sales Total Sales
1 33,333.00 2 $66,666.00 33,333.00 4 $133,332.00 $199,998.00
2 33,333.00 2.5 $83,332.50 33,333.00 6 $199,998.00 $283,330.50
3 33,333.00 3 $99,999.00 33,333.00 8 $266,664.00 $366,663.00

Look at that! Your average $200,000/year store is now at $366,663/year. Your average salary is now well over $55,000/year. I would like to say that's what motivates new game store owners, the math, but it's really more abstract, as in "Magic! Shiny!"

So is there a down side? Well, if you built your store to be a $200,000 store, no. You've just gotten a kick start for your small business. However, if you built a $366,663 store, with $366,663 expenses, expecting the CCG boom to continue, assuming it's your baseline, you will, without a doubt, have serious trouble down the road. Lots of stores are going to fail.

So what do you do if the majority of sales are Magic and you're worried about a fall? First would be not to overextend yourself beyond what can be easily scaled back when sales begin to flag. That primarily means your harder expenses, like rent, but also wages. By all means hire the people you need, but know there will come a very uncomfortable day. Also delay buying that fancy car and if it was possible, I would say delay buying a house (I don't think game store owners can get houses anymore).

I can't say don't take advantage of what's happening, because that's what business is about. I can say build muscles in other areas or work out atrophied muscles if you had a store before the boom. Build communities in other game departments, diversify inventory and work to sell it, even if it seems kind of futile with all that Magic money around. The reason is it takes a lot of time to build muscle after it's atrophied, and your store will be dead if it's only muscle is the Magic muscle. If you have no idea what to do, just bank the cash. Cash solves a lot of problems, although no amount of cash can save a failed business model.

Personally, we've paid off all our debt, upgraded our infrastructure, and, I'll admit, I've had a year of fun. The future will be about expansion in one form or another, with the assumption that things will return to normal soon.

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