Thursday, August 9, 2018

Sick Retail

I just got back from a couple months touring Mexico and Central America and one thing that struck me was the robust nature of their retail. In big cities, malls were packed with people and storefronts were filled to capacity. American stores that had died in the US were thriving and I visited Sears, Radio Shack and if I had wanted to, Thrifty Drug Store, where I had spent many allowances as a kid on plastic model kits. Retail was strong, and aligned to the needs of the community. Amazon was weak or nonexistent. It reminded me of touring stores in Canada and seeing so many strong retailers there. It is the US that is suffering, overstored by a factor of ten and beset by brutal online competition. US retail needs an unwinding and it won't be fast or pretty.

It got me thinking about hedges, notably the game store cafe model. I realized American retailers are contorting their stores to fight the drag of brick and mortar retail circling the drain. Again, not just game trade retail, but all retail. Brick and mortar retail won't disappear into the vortex, but it will need to be re-aligned, with perhaps 30-40% of stores closing, and a quarter of malls re-aligning. We could really do with a lot more closings, but Americans seem to think they can buck the trend.  The cafe model is used by stores to stand above their peers while the market re-aligns. However, a secret nobody will tell you is it's actually a model that doesn't follow through on its economic promises.

Those successful with the cafe model only do a relatively small fraction of their business with their cafes. They make a huge investment, go through tremendous training, and for what? Granted, any profitable element grafted onto a successful game store is a win, but it's not like you'll double your revenue by adding a cafe. Most are more in line with 15-25%, with only the rarest of stores hitting 50% and usually with professional food services staff. The Fantasy Flight Event Center comes to mind.

So stores spend a small fortune on build outs, hire additional trained staff at higher wages, and for their efforts get a relatively small sales boost, enough to raise them into safe competitive territory with a Unique Value Proposition, but nothing like what you would hope with such a large investment. In fact, I often wonder why spend $50K-100K for such a small boost when I could open a business for regular people who would actually utilize my services. How about a standard coffee shop, for example? It's because these hybrid store owners are retailers who love games and gamers and want to solidify their place in an unsteady marketplace. They have great stores first, and cafe whatever a distant second.

I mention this because store owners believe this hybrid model or some hybrid model is the only way to succeed nowadays. It's certainly one way. It's certainly not a way for those without experience in either retail or food services. It's definitely a good idea in a failed regional market where all stores are terrible and another one is about to open at any moment. In my own sheltered market in the SF Bay Area, selling games and holding events is still a useful value proposition, albeit one that is no longer unique and one where the cracks are beginning to show. In the rest of the country, where retail is circling the drain, I can't imagine opening a retail store without something pretty darn unique up my sleeve. If that's slinging coffee, then so be it. Just don't expect to get full value from your investment. It has always been the case that a pure play is more profitable than a hybrid, whether it's comics and games or games and coffee. That hasn't changed.

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