Sunday, May 1, 2016

Retail Headwinds and the Future Survivors (Tradecraft)

With Sports Authority announcing they're simply closing all 450 stores, it led to some interesting discussions both amongst fellow retailers and business oriented friends. Here are a few retail headwinds we have in store and a theory on who will survive and who will not.

Minimum Wage. This has been discussed to death, but being in California, I'm trying to predict what a $15 minimum wage will look like for retail. My basic metrics are this: A third of retail expenses (after cost of goods) is labor. The average store has an annual sales increase of 3% a year. If you raise wages 10% a year, and it's a third of expenses, it means you tread water and don't make additional money. So if you're average, you're looking at 5 years making no money. If you're below average, you will cook like a frog in a slowly heating pot. Bottom line: Be above average.

Will the rising tide of higher wages raise all boats? Nobody knows. If they tell you otherwise, they're lying or confused.

New Overtime Rules for Salaried Employees. If you're on salary and making less than $50,000 or so, the new overtime rules will allow you to earn overtime pay, something you didn't do before. I personally find overworking salaried employees abusive. Paying someone $24,000 a year and expecting them to work 50-60 hours is not only abusive, it effectively puts them below the current minimum wage. Most managers of retail stores on salary will be effected by this ruling. That $24K manager would now be paid nearly $700 more each month, which I think is fair, but that money has to come from someplace and struggling retail stores may not have it.

The End of Volunteers. As mentioned in one of my recent blog posts, and then here and here, the volunteer category is an endangered species in game stores. Events will likely be shifted to employees and independent contractors and those events not economically viable are likely not to happen at all. 

Without events, certain in-store product categories will likely be weakened further and will eventually not be sold primarily in stores. I'm referring primarily to Role Playing Games (already rumored to be over 50% sold online) and Miniatures. These are already marginal categories in most (clearly not all, and I would miss them) stores.

Mass Marketization of the Game Trade. Barnes & Noble is now running weekly game nights at all 640 stores. Top hobby games can be found in Target, Barnes & Noble, GameStop, Wal Mart, and of course all the online usual suspects. Good Games, a franchise of game stores in Australia, announced they'll be opening stores in the US market. We haven't seen a game store chain since Wizards of the Coast closed their 80 retail stores in 2004.

This is both an opportunity and a threat to hobby stores. Those big enough to compete with compelling events and well stocked, in demand product will be able to prosper under the pressure. Those that don't offer a compelling retail experience will be hopelessly outclassed and made irrelevant. Competition is good that way.

Increased Showrooming and Amazon Same Day Delivery. Combined with the rise of a younger demographic more inclined to shop online, online retail and its innovations are increasingly a threat to brick and mortar sales. If you've been around for a decade or more, you've survived in spite of online trends, but they're still mentioned as a reason for store closings, such as with Sports Authority. The pressures will only increase as demographics shift.

So who will survive in the future?

My theory is generally the big game stores will survive. They're compliant with current labor laws and other legal requirements, including the many insurance requirements that small stores often skip. They have growth way above average, insulating them from the frog in the pot scenario.  They have enough scale and diversification to shift when there's weakness in a segment. They often have "war chests" of cash on hand and product to weather a storm or two. A large store is a personal definition that varies, but my guess is it means stores that do a million or so dollars a year in revenue. That's probably the top 10% of hobby game stores in the country.

The small game stores will also continue to survive. The small stores are scrappy. They often have innovative ideas to make rent. Many are not remotely legally compliant with labor laws and codes. Compliance is aspirational for many small stores. They will continue to find ways to eek out a small living any way they can. But they will mostly stay small or fail. The pathway to a medium sized store will be increasingly difficult.

The medium sized stores? Having been one, the goal was always to gain enough scale to tick all the boxes on compliance and get all the work done in order to go from good to great. There was a transition year or two when we simply couldn't break out. I think the bar will be too high going forward for the medium sized stores. My advice if you're medium (we'll call you $400-$800K a year in annual sales) is get bigger as quickly as possible. Get into full compliance, get diversified, and master policies and procedures while you still have breathing room.

Who will survive is all speculation, game trade table talk really. If you've got an opinion on this, I wold love to hear it in the comments.

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