Friday, March 21, 2014

At Risk Stores (Tradecraft)

If you've got a game store that's less than four years old, with Magic sales exceeding 30% of your revenue, you're quite frankly, at risk. The game trade goes through boom and bust cycles, with those slow, drawn out bust cycles comprising "baseline normal." Right now we're in a boom, which is characterized by what other businesses would consider normal patterns of business. 

Having come from other, more successful business models, I recognize what we're in right now. It's a wonderful thing to feel appreciated and have resources to make things happen. We sell things, people readily buy our stuff, we make money, we hire staff and add product, expand our space or add stores, and the cycle repeats until we retire young.

This success is not for us. It's not a normal game trade trait. The game trade is usually about guerrilla marketing, a lot of hand selling, demos of products, having to decide which of the ten broken things gets fixed this month and a lot of diversification. It's running on pure passion most of the time. Problem solving is usually about triage, rather than expansion. Margins are thin, and it's not uncommon to have both profitable and unprofitable months. 

If you are in the at-risk category I described, chances are you haven't had to go through this. Your skill set is not the same as those who have come before. These are hard earned skills, often derived from desperate times. You are likely making decisions based on the "new normal" rather than "baseline normal." I feel the new normal attempting to infiltrate my thought processes every day. Resist. We are geniuses and gods when we're making money and it lulls us into a false sense of security.

You can't help it really, what else do you know? I realized a while back that my understanding of the housing market, my complete adult life understanding, was based on an illusion, a bubble that started 25 years ago. What it required me to do was to think entirely differently about real estate, that it wasn't in a virtuous inflationary rise, but more of a long game, boom and bust cycle. It was less investment and more place to keep my stuff.

That's what we need to keep in mind in the game trade. Magic doubled in sales for us. Then it doubled again. Then it doubled again. It went from our best game, with around 7-10% of our sales, to twenty, to well over thirty percent. Scary. Exciting! Magic makes our role-playing department look like a rounding error, and we sell a respectable amount of that stuff. Our upcoming expansion, to be completely honest, will be built with Magic money, to hold bigger Magic events. Nobody else really needs the space, or at least nobody else can pay for it.

If you're considering a new store because you think hobby games are trending upwards, don't do it right now. Just stop and wait. The opportunity you think is there is already in the rear view mirror. Like any trend or investment, if it's plain there's money to be made and everyone is doing it, it's probably already played out. When it does begin to falter, you don't want to be in that 18 month initial period trying to survive while everyone seeks the exits. 

We are not on the way up, we are teetering at the top. At least that's my impression. If you think you've got a solid, diversified business plan and you're not trying to grab the tiger by the tail on the way up, here's the hard part: you should still stop and wait. The fallout could be messy and the longer we go, the messier it will become, because "new normal" has a tendency to reach its tendrils far and wide, into distribution and publishing. Looking around, there are publishers and manufacturers teetering on the verge of bankruptcy now, and times are good!

If you already have a store and you're in the at-risk pool, consider what would happen if Magic suddenly dropped to 7-10% of your sales. Is your business model still sustainable? Are your competitors diversified while you're not? Will there be something else to sell? Do you have savings to get you through these rough times or are you at the edge with expansion and projects (I know I am). Most importantly, do you have the very basic, in the trenches, business skills to survive during "baseline normal?" If not, start acquiring them. And as I've said before, if you don't know what to do, hold onto your money.

Here's where I would sell you something if I could put business experience in booster pack form.

Tuesday, March 18, 2014

Leveraging Inventory (Tradecraft)

This post is a riff on using Open to Buy to leverage your inventory. I'm working on it for my ACD Games Day presentation. It may or may not go into that presentation, but it's been rattling around in my mind for a few days. It might be a bit too esoteric for the presentation. It might even be dangerous for beginners. It's certainly powerful.

If you are interested in this topic, but unfamiliar with the area, here are some links to read first:
If you know this area, skip down to Leveraging Open to Buy.

Open to Buy Basics
When you use Open to Buy, you are taking your powerful inventory budget and separating it from the rest of your expenses. This is difficult if you're not profitable or you don't have the cash flow. If you only order stock when circumstances permit, you're not ready for Open to Buy. My suggestion, before embarking on OTB, is to build up a cash buffer so you have room for an inventory budget. If you're coming off a good period, rather than spending on something, keep it in reserve so you have the flexibility to use this tool.

Open to Buy allows you to purchase what you need, when you need it, regardless of what's going on in your business. Just as regularly paying yourself a salary allows you to firewall business finance from personal finance, OTB allows you to firewall purchasing, the lifeblood of your business, from day to day business finance. This gets you into the Success Cycle with your inventory:
  1. Knowing what customers want
  2. Having the budget
  3. Receiving on time
  4. Satisfying demand
Leveraging Open to Buy
On its face, inventory seems a bit dismal and mechanical. You've got X amount of inventory and through diligence you can fine tune it to increase turn rates. Your inventory performance tends to improve in a relatively narrow band only after years of hard work. However, once you get the basics down, it's far more dynamic than this. An advanced technique, you can leverage this resource for your financial needs. Better yet, the stronger your inventory, the stronger the leverage.

Why would you want to do this? There are a couple reasons you would leverage your inventory, involving both drawing it up and drawing it down. First, through Open to Buy, you can draw up your inventory far beyond normal levels to take advantage of seasonal sales. Without OTB, this would be dangerous, as you wouldn't know where to stop or how to reverse the trend once it started. It's still a bit dangerous, but with good data, it's the usual risk management we do every day.

To give an example, during the holidays last year, my inventory peaked at $15,000 over my budget in mid December, to take advantage of holiday sales. By December 31st, two weeks later, I had a balanced budget, important since my excess inventory is subject to taxes. That $15,000 was leverage that allowed me to double sales in December from a normal month. Because I use Open to Buy and have sales data from previous years, I could forecast demand, budget inventory, and most importantly, draw it down in a condensed period. That's powerful leverage.

Inside Leverage joke
Drawing down inventory is usually an affliction, something that happens to people who don't track using Open to Buy. The dreaded Inventory Death Spiral is when a store is having trouble paying their bills, they use their purchasing money for expenses, which then results in poor sales because they have nothing to sell, which again starves their inventory budget, until they're standing in an empty store. Not spending your Open to Buy money is just as dangerous as overspending, but also just as powerful.

Through Open to Buy, you can carefully draw down your inventory budget during an off season, or perhaps for upcoming expenses where you would like to avoid a costly loan. That's something I did recently to pay taxes. Drawing down inventory over a longer period to pay temporary expenses, and then drawing inventory back up, again over a longer period. This leverage works far better with established stores with bigger inventories. That's because of how sales and inventory is structured, following the Pareto Principle

Pareto Principle
The Pareto Princple, also known as the 80/20 rule, applied to inventory says that 80% of your sales will come from 20% of your inventory. It's not an exact thing, but it mostly works. When you're a new or small store, inventory is relatively flat. You're an inch deep and a mile wide, with 80% of your inventory usually having just one item on the shelf. As your store and inventory grows, that begins to change. Sure, you add some inventory breadth, but the majority of your sales are still that 80% from before. Now you just have more safety stock, deeper amounts of those items in which you expect higher variation in demand or supply. That's opposed to current demand stock, items you have for right now, which is the other variable.

Safety stock is where you can find that draw down cash, which in a new or small store applies to only 20% of your inventory, but in a larger store, it's up to 80% of your inventory. A bigger budget means more leverage to draw down. The key is to only draw down safety stock so you can lean out your store, without adversely affecting sales.

You can draw up and draw down provided you've established your Open to Buy budget and provided you've got the financial leverage to make this happen, meaning terms or credit cards to pay for your inventory. Leveraging inventory  is a bit advanced, so I don't recommend it for everyone, but it's a tool in your toolbox.

Saturday, March 15, 2014

First Rule of Game Center Expansion

The first rule of Game Center expansion should have been:

  1. Don't talk about Game Center expansion.

Why? The unknown variables are enormous. We've got the city, the property owner, the gaggle of consultants (architect, electrical engineer, mechanical engineer, lighting consultant), and the contractor and subcontractors involved in giving estimates. Plus your financier, the bank, is salivating at the prospect if your business is established, or rejecting you outright if you're not. My advice for the future (or my past self using a time machine) would be to avoid talking about it until the last possible minute, as in, "Please excuse us folks, we're closing our Game Center for a week while we install a second floor." "Whaaaaaaaauuuut?"

Since I've already talked about this wildly variable project with a huge chance of failure, I suppose I need to post an update. People have been asking. Our current situation is a classic Catch-22. In this scenario, the architects needs to proceed with devising the very costly "permitted" plans, including using a gaggle of consultants. It's a Honda Accord level expense, for those who like my economy car financial analogies.

However, the catch is we don't know we want to proceed with the project until we can present these plans to the contractor for a more accurate construction estimate. Plus there was the question of whether the bank would give us a loan without the architectural plans.

Many a project dies in this intermediate stage, I'm told. This is where risk enters business. It actually took me a while to realize that, because most of my risks since our move nearly seven years ago have been small. Continual, daily, but small. I haven't made a big risk decision in quite some time. That muscle was feeling a bit flabby. I am now risk averse. It's what happens when you run a profitable business and you consider a change that could nuke it. That risk muscle is the one competitors use to smack you around with, by the way. It's easy to have balls of steal steel when you've got nothing to lose.

We already have pretty architectural drawings, tentative city approval, and a big smile from the property manager. There are sunk costs hovering around a used Civic. So what to do? Well, you take a risk, but try to make it as small a risk as possible. Risk management is about getting more information.

I spoke with the bank to find out exactly what they needed to give me a loan. They were so very happy to see me. Really, quite ecstatic. Sit down old friend. Banks love to talk to businesses when the business doesn't actually need the money. If I had spoken to them trying to open a store, they would laugh in my face. But ten years of being in business? Some of those years profitably? Oh yes sir, please take a seat! I won't mention my last bank negotiation involving my mortgage.

It turns out a $50,000 business line of credit to do whatever the heck I want is a handshake. Really it's a two page sheet about your business and proof your corporation actually exists. But they don't care what I do with the money; no architectural plans needed. Interest only for five years, 6% plus or minus, and if you don't pay it off in five years? No problem, fill out the sheet again and we'll just roll it forward (big smile). I'm not special, this is just the deal for those who qualify.

Over $50K and up to 10% of my annual gross income and there's a personal credit check, which again, is what you would expect when applying for a credit card, but a lot less than say, a mortgage. Oh, and the whole thing takes four days, compared to four months or more for a commercial mortgage or refi. Money, it seemed, would not be a problem. Getting the investment to comply with my Return on Investment (ROI) scheme is another story and remains to be seen. In other words, I can get the money, but I haven't decided if I want to spend it yet.

The architects, meanwhile, worked to find out exactly what we needed from the city to move forward while having plans that are just complete enough to satisfy the contractors.
Wiseman: "Did you speak the exact words?"  
Ash: "Look, maybe I didn't say every single little tiny syllable, no, but basically I said 'em, yeah."
This is important because you don't want to spend Accord levels of cash to explore a maybe project, but might be convinced to spent the smaller sum of Toyota Yaris money (sorry, no Honda was cheap enough to compare). Hopefully we'll have that compromise soon, which should allow us to present what we have to the contractor for a quote (my brother), while working towards the full plan to satisfy the city.

That's where we stand at the moment. We've been working on this since Summer. There have been no delays at any point in this project, even a single day of hmmm, let me think about it. Full speed ahead. Will it happen? I believe it will. I give it a 75% chance at this point. If it doesn't happen, it won't be because of acquiring funds or planning, it will be because, a) It became way, way too expensive and we decided not to, or b) someone important along the way didn't want to cooperate at a critical juncture. There is also the unlikely. "C" involves "outside influences," like a serious economic crisis or the collapse of the game trade. We'll just call "C," other.

The goal is to seat 120 people, legally, with the blessing of the fire marshal, and to extend our lease another 5-7 years. As painful as it sounds, it's probably still a lot easier than opening another game store.

Damn. The first rule of a second game store:
  1. Don't talk about the second game store.

Saturday, March 8, 2014

Game Store Resources (Tradecraft)

What You Need

 If you're starting a game store, I think you should seek out resources from four areas:
  • Specific Game Trade Resources
  • General Retailing Resources
  • Business Plan Resources
  • Ongoing Support
Specific Game Trade Resources
There are two books you should read before doing anything else. The first is an older book, and harder to get, but it's the foundation of many successful game trade retailers. 

A Specialty Retailers Handbook: Games and Comics, by Dave and Kelli Wallace. There are some core chapters in this book that will save your business, especially the ones on negotiating your lease and the perils of discounting. The book isn't online, but you can get it by calling The Fantasy Shop at 636-947-8646 or If you get a chance to see Dave Wallace present at a trade show, schedule your trip around him.

The second book was recently published by Lloyd Brown and is called Game Retailer Guide. It's a comprehensive guide to running a store with over 300 pages of information. Nobody needs to write another general game trade book now that Lloyd has written this monster. Get this book. Get the Dave Wallace book too, because Wallace goes into a lot of important detail you don't want to miss. 

Behind the Counter: Read these articles by Marcus King, who has been in retail for over 20 years. I've been to several of his seminars at GTS and you want to listen to what he says. He's the most tenacious retailer I've ever met and all his accolades are hard earned. 

Read This Blog: There's a lot of it, and I think you'll get the best value by working your way backwards. That's because you can see my mistakes after I make them instead of before. "Wow, I really think toys is a great way to diversify my destination store!"will come after, "God, I'm so glad all those toys are moved out now." You have 1,465 posts to wade through over seven years. You don't get to see the monumental flailing in my first three years of business, so don't get discouraged when you flail.

Starlit Citadel: More good business posts. I honestly don't read a lot of blogs, but I take the time to read this one when there's a business related post.

Deadly Fredly: Fred Hicks of Evil Hat has a business blog from the publishing side. This will absolutely help you understand the scope and feel of the game trade. He posts numbers and makes assumptions, something I like to do.

Finally, there is a plethora of game trade wisdom out there from those who keep their mouths shut. Seek out and find them.

General Retailing Resources

You should read business books, especially about retailing. The game trade can give you tunnel vision and you are primarily a retailer now, a small business owner, not just a game store owner. Read far and wide. 

Why We Buy, by Paco Underhill is your guidebook on store layout and customer experience. Read this book. Read it again. Buy a copy for every employee or your spouse. Why We Buy uses research to understand how people shop, and as a store owner, you need to listen carefully. It talks about things like the decompression zone (the transition zone in your store), what direction people in Western cultures turn to when they enter the store, traffic flow, how to avoid the "butt brush syndrome," proper lighting and cleanliness. If you buy only one general retailing book, buy this one.

Notes I made in the back of my copy of Why We Buy while on a plane to a trade show 

Other Retailing Books
The thing about the game trade is it's very specific and even books specifically on retailing are not specific enough. Thus the recommendation of the Wallace and Brown books above. Still, here are five that I found interesting, in order of usefulness:
There are more general business books, for example: Guerrilla Marketing, The 22 Immutable Laws of Marketing, The Anatomy of Buzz, and The Experience Economy, but those you can read on your many vacations away from your business. Ha. Right.

Business Plan Resources

You can find business plan books in every book store, but honestly, they kind of suck. I bought one, back in the day, but I didn't use it. If you're not much of a writer, by all means, steal a template from one of these books, but the majority of business plan information can be found online for free.

You absolutely must write a plan. The research is the plan, so take your time. Questions will come from your plan and you can use the resources mentioned to obtain answers. Don't rush it. Gather as much information as possible because it will absolutely result in a better chance of success. Build your compensation into your plan, rather than attempting to figure out how to feed yourself and your family once the business is going. 

The big secret of a plan is that sales projections are all crap. Nobody knows what their sales will be, but you can certainly nail down your expenses with research. I'm good at sales projection but I was way off with expenses. 

Once you've written your plan, crunched all the numbers, gotten very sad that it doesn't appear to work, have found a way for it to work once again, and you're certain you've got it figured out, seek out the Yoda of business plans, Jim Crocker, and ask for a copy of his. You will weep. Seek him out on the swamp planet of Facebook (see below).

Ongoing Support

On a daily basis, there are several private game store Facebook groups you should join. This has mostly take over from the GIN (Game Industry Network) as the source for information. Get on the GIN too, but Facebook is where it's at:
The Gama Trade Show (GTS) is an annual game trade extravaganza. Although it's the show for the game trade and retailers, it's very much a publisher organization, Gama being Game Manufacturers Association. Many retailers will tell you GTS saved their businesses and many of the people mentioned in this article regularly present at the show. It's next week in Las Vegas and if you've got a new store, closing for a few days and making a mad dash to Vegas would not be unreasonable.

Finally, I just want to thank all the people mentioned in this post. They've saved my business many times over with their wisdom. Remember going forward that this is a tiny trade, usually with companies run by individuals. If you've got a problem, it's possible to ask and sometimes things get fixed. There are only a few mindless corporate entities in this field, so try to work things out with the willing. You'll find they'll remember your efforts to help them improve later on when you need a favor.

Tuesday, March 4, 2014

Inventory Makeup (Tradecraft)

Building on the last post, the question is how much of your inventory is of each type? Primarily, how much is your current demand inventory versus your safety inventory? My impression from talking to other retailers is they perceived their safety inventory to be a small percentage of their overall inventory. What I found is quite different.

  • My current inventory contains 14,391 items. There's currently a purchasing budget surplus, so normally I have more.
  • As an aside, over 10 years, I've dropped nearly 25,000 items (items with a zero quantity). They hang out in my database and slow things down and have dug in, making them difficult to delete.
  • The total SKUs, number of unique items, is 4,761.
  • The average number of items per SKU is 3.0.
  • Inventory with just one item in stock, my current demand inventory is 3,324 or 23% of my inventory. You might argue that one of each of every item over that one item should be included in this number.
  • Rather than safety inventory comprising a small percentage of my stock, 77% of my inventory has some safety built in.
  • Coming up with hedge inventory is a bit tougher, but I'm guessing it's perhaps 10% of the safety inventory, with almost all of it being collectible card games.

Items Qty
1 Item 3324
2 items 691
3 items 235
4 items 132
5 items 79
6 items 72
7 items 42
8 items 34
9 items 6
10 items 20
11-15 items 56
16-30 items 54
31-50 items 37
51+ Items 27