Wednesday, August 31, 2016

Starting a New Game Store: Choosing A Location (Part 5)

In part 4 we went over inventory. In this section, we're looking at the costs associated with choosing a location. Location costs will depend on a number of factors, such as where it is in town, store size, signage requirements and improvements it needs to have done.

The first step, before we even look inside your space, is signage. You generally have no choice when it comes to signs. You have to conform with the signage standard set by your landlord and by the city. For my first store, I had a light box and a new sign cost about $1,500. For my second store, I had channel letters. It required a contractor's plan be submitted to the city planning office for approval. That sign cost $7,500. You have no choice in the signage decision, so keep that in mind when choosing a location. Nicer areas generally have nicer signs.

Going inside your store, the first question is how big is it?  The amount of inventory plays a key role in size. You've got $70K of inventory starting out, which you'll buy slowly over the first year. That takes a lot of space.  You could just barely squeeze it into 1,000 sqft, but 1,500 would be much better. 

You also need game space. I spent a lot of time figuring out 1,000 sqft of game space is the perfect size for almost everything you can do in the game trade, other than really large Magic events. You could go smaller, but ideally we would get you in a space where you can stay long term. Many small stores end up moving after their first lease and that's risky and expensive.

This puts us at around 2,500 sqft of total space. Going back to Part 3, that puts rent at around $1.25/sqft/month to stay on budget. That's not impossible to find in a metro area (which seems to average around $2-3), but it tells you right away that your game store won't be in a prime location. It will likely be on the outskirts of what's considered a good area. You might decide to cut the size a little smaller and give yourself 1,250 feet of retail space and 750 sqft of game space, or some other combination so you can start out in a better location.

This is a problem for retailers in the game trade. The business model is rigid due to a combination of MSRP and a discount structure. It doesn't allow the flexibility you need for a variety of game store expressions. If we were in the toy business, we could modify the plan based on our desired location. We could raise prices, for example, and cover that extra rent. In the game trade, there is a rigidity that keeps stores necessarily down market.

Triple Net: When we talk about rent, we're including triple net, also known as common area maintenance (CAM) charges. These are things like the power to light the parking lot, fixing the roof, and generally anything outside of your space. Leases are all different, so carefully consider what's included and what's not. My first least required our landlord to fix the plumbing and interior infrastructure, while our second lease found us buying toilets and doors. When I'm quoting rent numbers, I'm assuming CAM charges are included in that total amount. 

When comparing spaces, carefully examine CAM charges and try to factor whether they're reasonable or at least comparable to other locations. Try to determine if CAM charges tend to stay the same or fluctuate over the years. Talk to the neighbors, if you can, both about the CAM charges and the likelihood they would renew with the current management. 

You don't want surprises, like a landlord that likes to randomly re-pave the parking lot or tar the roof, passing the charges onto you. My previous rent was high, but the CAM charges were low. My current rent is below market, with very high CAM charges. Luckily those charges are high enough to prevent surprises and I get a check back each year of unspent monies. 

This article is just going over the money side of choosing a location, rather than the softer, subjective questions, but here are a few: You want a solid location with good street visibility. You need parking for those 50+ people you'll want seated in your game center. Is there a train station or bus line nearby? Are there anchor stores that could bring people to your area or are you isolated? Is there a turn in from the street to your parking lot or does it require a U-turn? It's also much better to be in a smaller location with high traffic than in a large light industrial space in the middle of nowhere. 

Rent and advertising play an intimate role. If you find an isolated location to save on rent, you'll compensate by having to constantly advertise. Likewise, you might find a place that has excellent foot traffic above your budget, and you can skimp a bit on advertising to afford it. How much can you skimp? You could probably shift a couple percentage points from "other" to rent. 

Location Improvements: Finally, there is likely going to be some improvements needed in your location, like wall demolishing, wall construction for your event space or bathroom upgrades. My first store had minor improvements, while we spent $15,000 building a separate game space in the second store. We're currently doing a six figure mezzanine project, since we've got a clear ROI and a new 7 year lease. Your choice in location will have a lot to do with how much work it needs. Sometimes you can get the property owner to pay for improvements, but a new store is risky and they're unlikely to want to do anything but white box the place (an empty shell). We'll assume very minor modifications of $5,000. 

The tally:

First month's rent: $1.25 * 2,500 sqft = $3,125
Rent deposit:  $1.25 * 2,500 sqft = $3,125
Sign: Worst case scenario: $7,500
Location Improvements: $5,000

Total: $18,750 (location costs)

We've got you into an empty space. We've got your inventory budget figured out. We're approaching $90,000 so far. Still with me? 

We'll go over furniture, fixtures and equipment (FFE) in part 6.

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