Saturday, January 28, 2017

Reasons For Your Unearned Success (Tradecraft)

This is a harsh trade. When I first started, employees of other stores would come over and tell me how badly I was gong to fail. Their store had been around for decades and there was no way I could compete. So you say? Another competitor would come once a quarter and give me the bad news that the game trade was failing and there was no hope going forward. So you say?

Eventually, you outlast those people. There were six local competitors when I started thirteen years ago. Every one is gone. There are some new ones, but the original ones are ancient history. You usually don't have to do anything to fight competitors, if you've got a sound business model. Failed business owners self exit. The primary key to living is not dying. Then just do a little better tomorrow.

After a few years, they stop taunting you about how you're going to fail. Instead they give you excuses why you succeeded. They will come in and tell you this. I get it in my store reviews sometimes. Most people, including game store employees, have no idea what it takes to run a small business, so they have no idea what decisions are necessary to be successful. As store owners, we work exceedingly hard to set the stage. The audience arrives and gazes at our wonders. They leave and tell their friends. Most assume we stand around watching them gaze at wonders all day, having no idea what it took to set the stage. How hard can that life be?

I've compiled a list of excuses you're likely to hear. I've heard just about all of them. By the way, I would like to think I'm not a hardcore narcissist who believes success is all mine, acquired in a vacuum. I do believe many people have been instrumental in our success, including a community that provided me opportunity to succeed, be it this great country, which encourages small business and offers a safety net for failure, the state of California with its many opportunities that have enriched my area, or the SF Bay Area, with a culture of appreciating small business and quirky endeavors. That's what President Obama was getting at in his infamous "You didn't build that" speech. I'm grateful and aware of this assistance and it's a major reason I live where I do. That said, nobody succeeds without smart, hard work. So here's my list.

Reasons Your Success Is Not Your Own:

  1. Luck. Right place, right time. Ignore the feasibility study and the business plan, it was luck. I'm about to run a Norse D&D campaign and nobody is a hero without Luck. Nobody is noteworthy without snatching victory from the jaws of defeat. That means Luck is risk taking. It's not something that just happens.
  2. Easy Local Market. Anyone can succeed where you are. Over here? Much harder. This is true in the SF Bay Area, which is sheltered from a lot of Game Trade concerns. However, it also requires overcoming tremendous barriers and costs, along with high taxes and fees. I had to interview with my first landlord and the answer was no until I revealed the nest egg I had ready to invest. The barrier to entry is why we don't constantly fight pop up stores. Start with six figures or GTFO.
  3. Timing. Something was going up and you road the coattails. After a few years, my main competitor retired. I also started at a time of relative calm. Imagine starting your store the month of 9-11, or in 2008 during the financial meltdown. That said, timing is just one factor.
  4. Bad Competitors. Clearly since they're all gone, they weren't very good. Now if you had real competition, bam! Running a store is like flying. To paraphrase Douglas Adams, the goal is throw yourself at the ground and miss. Making sure you miss is where the work comes in.
  5. Staff Are Smarter Than You. The brains behind this operation is clearly not you. In fact, you're holding this place back from its true potential. This might be true, but it's also true hiring smart people is a management strategy. Bottom line: I can't run my business the way I want without smart people helping me. Thankfully I have them.
  6. Volunteers Smarter Than You. You've built this on the back of organized play and coordinators. Again, it's a team effort, and we're grateful for the assistance.
  7. You're Rich. The "you think you hit a home run, but you started on third" argument. One of my well known competitors was thought to be a dot com millionaire. I asked him and he laughed. "Ha! I'm sitting here in my back office eating my tuna fish sandwich." Ask Wizards of the Coast about this. I recall a story about the local Wizards of the Coast store manager installing a six figure mosaic in the front lobby of the store. There's no amount of startup capital that can save a business from a bad model. 
  8. You're Lying and You're Not Successful. I have one competitor who couldn't believe my sales covered the expenses I revealed. I must be lying on one end or the other. Then there's the question of defining success. My definition at year 13 is very different than year 6 and year 2. The definition of a 20 year veteran is likely very different than mine. Do I have to wait to be a 20 year veteran before I'm allowed to speak? Most 20 year veterans I know would rather just take a nap. Also, I can think of a combination of not inconceivable events that could easily destroy my business today. That's just the life of a small business owner.
  9. You Cheat On Your Taxes. This is usually the excuse successful store owners give for why pipsqueak start ups haven't failed yet. They're often not wrong. Having a really conservative accountant and business partners looking over my shoulder helps keep me honest in this area.
  10. Your Business Model Isn't Pure. Perhaps you've diversified into another area like used video games or cell phone repair. Perhaps you've vertically integrated your distribution or publishing business with your game store business. There are people who do this and offer a reverse excuse: The game store is only possible with such a model. 
  11. You Get Special Treatment From Suppliers. This might be true, as business relationships are not entirely transactional. In the game trade, your margin is determined by your purchasing loyalty and there are side deals and opportunities if you know where to look and who to ask. Opportunity doesn't just knock on the door.
  12. The Internet. Either you sell enough to survive on the Internet or they'll tell you the Internet will crush you any day now. Only a fool shops at the LGS. Notice they drop the "F".
And there you have it. Feel free to add your own to the list. I hope you'll excuse the negativity. I would like to think the vast majority of this blog is not about excuses but talking about how to succeed in this excruciatingly difficult field. 

Wednesday, January 25, 2017

Too Many Board Games (Tradecraft)

There are too many good board games on the market for my store to carry, and I think this is true throughout the trade. 2016 was the first year I stopped carrying board games that met all my performance metrics. The primary metric is turns, with three being a minimum turn rate for this category for me. The average is now around six.

With sales so strong, there just wasn't enough money in the purchasing budget to carry everything good, so good games gave way to great games. Inventory, whether it be store inventory or distributor inventory, is a zero sum game. There is only so much money in the pie and if I have to bring in one thing, it means something else has to go.

You might be reading this and thinking, well sure! That's just common sense. However, that's not how this trade usually works. It's often a case of stand out hits propping up a lot of crap. An enormous pink pond of pig poop, surrounding a few prize hogs. For my board games, there is no crap, no propping, the market is on fire. It's all tasty bacon.

I can't find enough product like this in RPGs or miniatures, it's fairly unique to this one category. I would throw thousands of dollars at RPG publishers, if they had something for me to sell. They just don't, at least not without a lot of time consuming farming.

This embarrassment of riches has migrated to purchasing. I've begun using the same strategy as my customers. All things being equal, games are bought on pedigree. A great board game from a top publisher not only gets picked over a great board game from a one off publisher, but it gets bought deeply. And if budget allows, very deeply. There are break out hit exceptions, but we have top 30 publishers where it's not a question of if I'll carry a game, but how many. By the way, this does not mean mediocrity from name brands sells well as in the past. Customers are well researched and don't buy entirely on brand. A solid brand is a guarantee of no surprises, like poor component quality or rule sheets ran through Google translate.

I'm planning a larger board game budget for 2017, but it's not about expanding my breadth, it's about jumping on board game intelligence when I get it. Games like Terraforming Mars and Scythe were hot in 2016, but we couldn't get them without a deep order.  We didn't have the cash, so we lost out. We had an angry review recently from a customer because we lacked product knowledge about Terraforming Mars. That's because we had it for 10 days in October and never saw it again. What can I tell you about that? It's rectangular with nice artwork, as I vaguely recall.

What does this likely mean for the game trade? I think it will mean increased balkanization, with Kickstarter games lacking penetration into brick and mortar. I think it will mean distributors will take the same approach as us, essentially not taking new clients and using their budget for big hits. Small publishers are likely shut out. Metrics for picking up a new game will increase. Good is no longer good enough, we all want great. It should also mean retailers like me need to dig deeper, go to more shows, play more games and network with like minded individuals to crack the code of hotness.

Gloomhaven is one of those "go deep" games in 2017. It's a $120 Kickstarter game, currently at the number one "hotness" spot on boardgamegeek. It's sold out on release but still open for pre order at distribution (I'm encouraging my customers to put theirs in).  I'll get my copies and won't expect to ever see it again. I could be wrong. Also, someone will point out there are areas of the country where a $120 board game is a non starter. I think if you consider it an RPG cross over, with legacy game mechanics, $120 isn't a big commitment for a group. 

Saturday, January 21, 2017

The Struggle is Real (Tradecraft)

I've got five days of cash flow, a huge sales tax payment due, a massive credit card bill, payroll, and the need for a new cars worth of sales in the next ten days. This makes me happy.

"The struggle is real," is a popular meme, but the struggle is often the only "real" part of this business. Success is ill defined. Money in the bank, real money, capital expenditure money, is a rarity for most store owners, at least until they've become well established. The need for things far outstrips cash flow. Entropy is a bitch and she demands replacement fixtures and an endless flow of toilet paper.

We're poor because we just paid off tens of thousands of dollars of construction debt, enough to enter the new year with a sliver of a chance of making it through January without dipping into some form of debt. But it's a pleasant place to be, especially knowing I won't be writing some of those monthly checks ever again. It's mostly pleasant because it removes decisions from my life. You work, you get paid, you pay the bills. We sold the van and tweaked our insurance to save $400 a month. This is the comforting work of the ancestral merchants. Wash, rinse, repeat. Routine has a warm embrace.

It's far easier to obsess over what's in front of you than forecast the future. It's like that person whose always busy at work, who has to constantly work late to catch up with what's in front of them. Those of us who've gone beyond that level know they're just poor planners, that resources haven't been allocated, that they're poorly managed in one aspect or another. It's a weakness of sorts, a comforting one that enshrines them in long suffering work and avoids the complications of social interaction or happiness seeking.

What I should be doing is planning. I should be working on a marketing plan. I should be setting up our demo programs. I should be planning those mini cons I talk about wanting so badly. I should consider a path to a book, but I question the value of such things. I should really find a way to swing the GAMA Trade Show this year. What I really should do is go on vacation. But five days of cash flow, man. I better put my head in the sand and and get back to the grind.

Monday, January 16, 2017

Less is More (Tradecraft)

Much of the last several years has been more about dropping games than adding them. This particular post is about saying it's a viable strategy for a profitable store. Don't be afraid of making hard decisions. I'm not talking about culling the herd, dropping slow board games or low performing SKUs. I'm talking about identifying broken game trade participants and showing them the door. The end result has been slower sales growth, since it's turning your back on gross, but much higher net.

Our net income topped out in 2015 at an astonishing 11%, and that's without significant sales in used product or other (highly profitable) cheats. It was straight up game trade retail at MSRP. This does require you to stop the genitalia measuring, which is gross, as in gross sales. I've written about that before, so no need to go into the "nothing but net" mantra again. Gross is a lie. You can't pay your mortgage on gross.

This is, of course, one way to do things. It's saying it's not necessary to be the one stop shop for all things games, because all games are not worth it for you, personally, to carry. We're talking big titles like Yugioh and Warmachine and for you, it might even be Magic. There are no sacred cows. There is nobody worthy of your unquestioned loyalty. This is also about crafting your store identity, admitting to yourself where you stand in the marketplace, acknowledging the limitations of your demographics.

No publishers are immune. If Wizards of the Coast can't protect their brand value and you can't make a profit selling it, drop them. If Warmachine can't discontinue SKUs in their creep towards infinite models, well, let them go. If Konami can't address the violence inherent in the system, send them on their way, give up their low margin product and troublesome crowd. Also, because this is business, it's not personal, so don't take it that way (your customers will). Also because it's business, reconsider if companies change.

Focus on net and the slow roll to higher profitability. Like fertilizer, take the money you get from dropping the bad actors and spread it liberally where it's needed to enhance growth. What you'll likely find is a lot of pent up demand in cash starved areas. We put our Warmachine money into Game Workshop and it paid off wonderfully. You might do the exact opposite and have the same results. It's a weird field. What you'll likely find though is a lot less cash crunch, a lot more time to explore new opportunities, rather than the churn of low margin, high gross nonsense.

Thursday, January 12, 2017

Report to Stakeholders 2016

This is my second year writing this report, a public document meant for our various stakeholders, modeled after the Steve Jackson Games annual report. I hope it provides our stakeholders as well as the rest of the industry a view into how we do business, which is just one of many viable ways. 

A stakeholder includes employees, event coordinators, shareholders, distributors, publishers and, of course, our customers. This year, it includes private lenders who helped us finance our Game Center. We have four private lenders who lent us thousands of dollars to make the Game Center happen.

We are a single, brick and mortar store with no significant online sales. Online is where we go in the rare occasion we can’t sell something in store. With a highly developed system of clearancing old product, our online sales are something in the neighborhood of less than one half of one percent. 

We intentionally and entirely focus on our single brick and mortar store customers. We have no interest or desire to sell online to any degree, nor are there plans at this point to ever have multiple stores. One great store. That’s the model.

2016 Summary 

Sales for 2016 were flat, +/- half a percent, depending on how the accounting is jiggered. That’s good considering the trials of the year.

2016 was a very difficult year for us. April found us without a lease, still in negotiations for construction and new lease terms. At the time, there was a chance we would have to move, and a smaller chance we might shut down for a short time, if we couldn't come to an agreement. The risk was small, but it was there. I spent the first quarter scouting new locations.

I had been seeking conventional construction funding since January and was unable to secure a loan, so when we signed the lease agreement in April, including the build out, I was financially unprepared to begin right away. Construction was delayed about 10 days while I came up with the first payment of $20,000. I spent the following two months securing the rest of the construction money through private lenders. Although construction was delayed significantly, one reality of funding was I wouldn't have had the money if they had finished on time.

So how did we fund the second half of this $133,000 project? We found private lenders by mentioning our need for funding in a Kickstarter update. It made sense that we were able to find people in the estimated 20% of the 20% of people who used our game center (or supported the project), a really small number. For those wondering, we offered competitive interest rates, promissory notes, amortization tables, and a personal guarantee on each loan. Each loan was slightly different based on other perks we offered or requirements we had to provide. I don't think I would have been able to craft such deals earlier in my career.

It actually went up another $2K since I made this

Construction was scheduled to take 4-6 weeks but instead took an astonishing 6 months. The project scope was just poorly conceived by the project manager, along with some smaller delays. Our sales suffered pretty badly.

The project cost us an additional $15,000 more than planned at the end stage. Things that worked fine at the beginning of the project, often were found broken by the end. To help us make this up, we were given free rent from September through December. These rent concessions were critical in digging us out of a deep hole.

With strong holiday sales, we ended the year broke but happy, with all our “running debt” paid off and our invoices up to date. I had started using credit cards in the fourth quarter to pay distributor invoices, and by January, I had 100,000 new frequent flyer miles (which I've since used for my Summer vacation).

Rather than entering January with a nice bankroll, we now enter it poor but happy with a bunch of great product releases coming soon, along with strong events that come with increased sales. We saw some of this already. After construction completed, we saw a 20% sales increase in November. December was up 12%, making it our best month ever and Q4 our best quarter ever. January is projected to be slightly stronger than last year, with Star Wars Destiny re-releasing, a Magic pre-release and a Pokemon pre-release for the second half of the month.

Winners and Losers 

Sales numbers for this year are suspect, and not worth much, considering the store was in shambles for six months of the year. Some customers kept shopping with us during this time, with the miniature gamers being notable standouts, their department being the only one that went up during construction.

In the beginning of the year we dropped a game we opened with in 2004, Warmachine. The reality of our region is there aren’t enough miniature players beyond Warhammer 40K. There’s a core group that wishes it wasn’t so (as do we). I might bring Warmachine back if we can get a weekly event going, but honestly, the store has functioned much better without the cash flow drain and mediocre sales that have plagued us with this game, and the popular miniature game of the moment.

It’s my understanding that Privateer Press has addressed some of our issues last year, so there’s always a chance it comes back. However, decisions were made. Bridges were burned.

2017 Plans 

With a 7 year lease in place and construction completed, the plan for 2017 is to heal. We still have projects to get the store into better shape. Our board game library is going to be greatly expanded. We have a demo program we plant to develop. However, we are cash poor, and need to better understand our new financial situation with construction loans and the like.

Events are our growth focus. We have space for new and expanded events. Some of these are beginning to blossom. Our board game nights have doubled. We have Magic events six nights a week. The new Star Wars Destiny events are drawing crowds.

We’re working on new concepts like mini cons and board game designer fairies. We’re hoping to see modest sales increases with event attendance and so far we’ve been pleasantly surprised.

For the long term, we plan to settle into this space for our lease term and expand inventory. We’re poor now, but future investment is inventory, inventory, inventory. There are a few things we still need for the store, like a sound system and an upstairs TV monitor, but those are minor items. The primary goal is to build our economic engine, the inventory. We could easily triple it in our existing space.

Finally, the long term plan is also to transition into what I would call a second stage store, complete with full time employees. We’ve ran the store as a scrappy start-up for years, something I credit Michael Parker for designing. As we grow with that model, we sacrifice sales and customer service. In the future, I’ll be looking at full time staff with a full time outlook. There’s nothing wrong with our current staff, there’s just a different outlook when you’re a 40 hour a week, full time employee.

2017 is looking pretty hopeful!

Wednesday, January 4, 2017

The Two Game Stores (Tradecraft)

When we talk privately about our stores, I sometimes feel I need an asterisk next to my name. The asterisk would denote something like "coastal" or a similar notation about geography. Why? There are two types of game stores out there, and their needs and problems are different. The issue is geography.

Most game stores in this country are in markets with unconstrained geography. This means there's plenty of flat space for commercial development and the only restriction is drive time. With near limitless space, rents can be dirt cheap. The barrier to entry for a new store is therefore quite low. This works like a tea kettle that releases steam when the pressure builds up (the Internet does this too).

Rather than boom times, game stores in most of the country instead face amateur competition from pop up game stores that rarely last 18 months, with more prospective owners happy to take their place upon their inevitable failure. With a handful of cash, these store owners see opportunity to make a quick buck, but also lack the skills to keep the business going. Sometimes there are dozens of these stores in local markets. Dozens. Let that sink in for a moment.

This is in stark contrast to coastal stores in states constrained by geography. Real estate is limited, the barrier to entry is high, and pop up stores are forced way out to the margins to where they can do no harm. Rather than a month to month lease with a handshake and a small deposit, coastal stores are looking at multi-year leases with credit checks, experience required, and perhaps $15-20K down to start, roughly the budget of the entire pop up store.  Also, these are not strict geographical terms. The SF Bay Area has coastal qualities, while Southern California does not. I'm sure there are heartland areas with coastal qualities as well.

Why does this matter? When discussing issues in the game trade, much of the problems facing game stores are other stores. While the coastal shops are working on professional marketing plans and looking for where to buy the best store fixtures, most stores are trying to work out why they should bother with a Magic pre-release because the new store down the street is running them at cost -- and that's just the most current new store for them in an endless cycle. This lack of barrier to entry is a game of whack-a-mole, where the new stores pop up, cause harm to the established store while they're busy failing like a chump, and are soon replaced by a new pop up. This is not a problem unique to any one area, the uniqueness is in the coastal stores with their rough real estate markets that insulate them from nuisance competitors.

Not all of these pop ups are nuisances and many excellent retailers will tell you they started with a handshake and some Ikea furniture. That's great! The problem is the vast majority of these stores have no idea what they're doing and they have one lever, one trick they know of to survive, and that's discounting, both in store and online. They race to the bottom because they know no other way. That's why you'll hear store owners talk about good and bad competitors.

Good competitors are knowledgeable and will create that rising tide that lifts all boats. Bad competitors are ignorant and will race to the bottom, dragging down the local market to sometimes permanent levels of devaluation that makes it impossible for good stores to succeed. Any area with a blanket 20% discount on all games is dead in my book. They've salted the earth. It means an owner can't make a proper living without running a crap store. This is the state of large swaths of the country. So for most customers out there, their idea of what a game store is to them, is rather crappy. You can't argue with them, because in their world, game stores are simply not very good.

I am not arguing for artificial barriers to entry. That's not a solution. If I thought there was a solution, and I'm doubtful of this, it would to educate prospective store owners. Unfortunately, with that nonexistent barrier, that's practically educating our customers.