Wednesday, December 16, 2015

The Game Store Venture

We begin with Jack Turner, game store entrepreneur in the offices of Poplar Capital. Meeting with Mr. Turner today is the founder of Poplar Capital, the often grumpy, Mike Heart, the wild card, Jack Lee and the enigmatic Janet Neapolitan.

Heart: Mr. Turner, I see here you're looking for $50 million to start a chain of hobby game stores.

Turner: Yes, that's right.

Neapolitan: How is that different than Game Stop? They closed thirteen stores this year and their position is uncertain in a digital age.

Turner: Oh, this is hobby gaming. It's completely different than electronic gaming. We won't sell anything electronic.

Lee: You mean like Settlers of Catan? Love that game! We play it with the guys over at Google.  I haven't done the market research on hobby gaming. Tell us more about market size. Half the electronic gaming market? A quarter?

Turner: Well no, it's roughly... uh, slightly less than one percent, maybe approaching a billion dollars? It's hard to say. Nobody in the industry really knows. That's compared to $111 billion for video games. Everybody knows the Gartner numbers. Unfortunately, there's no game trade Gartner.

Heart: Such a tiny market, why should we care?

Turner: Well, it's growing rapidly, 20% a year at last count.

Heart: Look, I'm a really smart guy. I know what people want. I know what sells. So I'm going to tell ya, 20% of nothin' is still nothin'.

Lee: The Internet is tiny in comparison to brick and mortar and we invest heavily in that because of the rapid growth, no?

Heart: The Internet is exciting. It's not wood for sheep!

Neapolitan: I see here that you plan to open 100 stores in markets that we normally consider secondary. Smaller cities with half to three quarters of a million population for the most part. Why these regions? It looks like you're intentionally ignoring the biggest markets.

Turner: Yes, we searched for areas with a proliferation of small, undercapitalized game stores, places with cheap rent, suburban sprawl and low barriers to entry. Our feeling on that is they're priming the pump for us, and we can swoop in with a well capitalized operation and crush them in our orbit. The more game stores per capita, the better.

Neapolitan: And I see you're looking at purchasing real estate?

Turner: Yes, our research shows the biggest barrier and threat to game stores is not the market as much as it is poor property management they're forced to deal with. By avoiding landlords and their skepticism and biases against hobby gaming, as well as the down market locations made available by that bias, we're able to avoid many of the common pitfalls.

Heart: Got something against massage parlors and nail salons? I met my first wife at a massage parlor. Great Chinese lady.

Turner: We've also determined that there's significant savings versus leasing, enough to pay our managers market salaries, which is unheard of in this trade.

Heart: Your market analysis shows small turn rates, like in the three range, compared to eight with big box. How do you plan to manage this operation when you're essentially running dozens of tiny boutiques? Small turns say boutique to me and boutiques are incredibly hands on. I don't get how you'll nail that market fast enough.

Turner: Good question ...

Heart: Of course it's a good question, I asked it.

Turner; Ah yes, well, with savings that come from buying a building rather than renting, as I mentioned, we'll be able to hire store managers at the market rate of around $45,000 to $50,000 a year. That means we can poach all the best store managers from around the country who never dreamed they would be able to own homes or put children through college. These are people with a huge variety of skills who accomplish great things on tiny budgets. They're all guerrilla marketers. In most scouted locations, we've already got our eye on that special guy or gal.  These experts are adept at building customer bases, marketing directly to the consumer and gauging local markets and doing it quickly.

Heart: I like it.

Neapolitan: I'm looking at this $500,000 per store. I see a down payment on buildings for roughly $100,000, then $150,000 in inventory, another $100,000 for what looks like high end FFE (furniture, fixtures and equipment). What's this other $150,000?

Turner: Our market research shows the importance of Third Place Theory, meaning a gathering place that's not work or home where people can congregate, socialize and spend money. It needs to feature concessions, comfortable seating, and a friendly atmosphere.

Heart: I know about Third Place Theory. I practically invented it with my hotels!

Neapolitan: I see here the creation of a holding company. Turner Game Supplies? What is this?

Turner: Oh yes, we plan to create our own distribution company. With our purchasing power, we should get 60% off most games, rather than the industry standard of 50%. We can go direct to publishers and twist arms for a better deal. There's an economy of scale that offsets a lot of the costs associated with a premium boutique operation. The publishers will be begging to get into our stores. Even one copy of a game per store is 100 copies.100 copies might be half a print run!

Heart: Twisting arms. Now you're talking! Twisting arms is how you build a business.

Lee: So whatdya got going on besides just games? Coffee shop? Restaurant?

Turner: Our market research, primarily on the Internet, showed our customers want a full bar with coffee, beer and hot food, so that also includes a kitchen.

Lee: Cool. Cool. And you've seen this done before?

Turner: In various configurations, mostly in the Seattle area. It works if you can get the right people working for you, and I think we've shown we're doing that.

Heart: They're nuts for coffee in Seattle. In fact, I once dated a woman who want me to put my ...

Neapolitan: (sigh) Yes, we've heard your Seattle dating story, Mike. Now what concerns me is your ROI.

Heart: That's Return on Investment.... She wanted me to dunk them right in her coffee!

Turner: Um, yeah, that's where it's a bit rough. The fans know exactly what they want from a game store, but the ROI on that is slightly less than ten years.

Lee: Whoa, that's a long time. Did you look at what a more standard three years looks like?

Turner: Mmmm, it's mostly milk crates and a Keurig machine. Kinda how it is now.

Heart: I think maybe you're wasting our time Mr. Turner.

Turner: But if you look at the plan, in ten years we'll have $3,000,000 in real estate equity and we'll begin to own the market. Jeff Bezos at Amazon relies heavily on real estate to ...

Heart: Turner, I've met Jeff Bezos. Jeff Bezos is a personal friend of mine. You are no Jeff Bezos.

Lee; Yeah man, I'm sorry, ten years is a long time, even to dominate a market, but a billion dollar market? Why bother? Be careful listening to Internet trolls.

Turner: I was afraid the ROI was going to catch me up.

Heart: Also, what's this in your competition analysis? Your competing with your publishers, your distributors and even your customers? What kind of crap is that?

Turner: It's what allows all the fly by night stores to prime the pump for us. The barrier to entry is really just some card tables and folding chairs. Everyone sells to everyone and even the customers sell to customers in the secondary market.

Heart: (speechless, his mouth hanging open)

Neapolitan: I'll tell you what, Jack. You've clearly done a lot of market research in a ... challenging ...  industry. Come back to us with a real estate plan and maybe we can put something together. Your work on that section is top notch. Or tap into that coffee shop trend. I hear roasting your own beans is the competitive advantage.

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