Monday, October 29, 2018

5 Reason You Shouldn't Start A Game Store

Here are five reasons you shouldn't start a game store, right now, in California specifically. Some of these apply to other regions, but it's specifically my market. Later I'll write about five reasons you should start a game store in California right now. There are few times when it's clear you absolutely shouldn't start a business, and they tend to involve national catastrophes. Most of the time, there's a little of column A and a little of column B. But for today, here are five reasons you shouldn't start a store in California right now:

1.  Wages. While other regions of the country work with the very low national minimum wage of $7.25 an hour, California's minimum wage is at $10.50 an hour and rising dramatically with no end point in sight. In three years it will be double the national minimum and it will continue to rise by law. This is because we've got a mismatch of education and jobs and we're trying to turn every job into a living wage position. I don't know how traditional retail stores will survive this without double digit growth and robots. Retail stores that use an MSRP system cannot raise prices to make up for higher wages and the only hope is a "rising tide" scenario where all these workers (about 50% of the workforce and climbing) have more money to spend with us. But you know where they'll spend it? Let's look at number two.
2. Rising Inflation. The Western region consumer price index rose at 3.4% last year, over 50% faster than the rest of the country. This means not only are your expenses rising, but the expenses of your customers are on the rise. The game trade addresses inflation by shrinking your margin, which we'll get to, rather than raising prices. With all that wage growth in California, you may wonder about the net result. California income rose 4.5% this year, which only leaves a small 1.1% net if you look at that 3.4% inflation. Wages are rising, inflation is rising, nobody is getting richer, but your store is become more expensive to run.

3. Retail Apocalypse. The report of the retail apocalypse is mostly overblown, however, there is some truth to this as the United States has roughly ten times more retail square footage than other developed countries, with large retailers falling off cliffs regularly at this point. There are simply too many stores, that are too large, selling the same things and scraping by.  The likelihood of a recession nuking as many as half of retailers -- permanently -- is rather high, leaving survivors like us in strip mall ghost towns. There are only so many nail salons and massage parlors to fill in the holes. At least half of retail, right now, are dead stores walking. A recession is coming (it's always coming) and there will be a retail reckoning. Although game stores are counter-cyclical, meaning we'll survive fine, the retail infrastructure is likely not to be the same afterward.

4. Shrinking Margins. The big publishers like Wizards of the Coast and Asmodee reduced retailer margins by several percentage points each. This means you have to sell more product to make the same amount of money. My store needs to sell $7,500 more each month, just to offset Wizards of the Coast's margin shrink. That's an extra 150 D&D Player's Handbooks, or 1,500 copies if you're Amazon, who sells these books at our cost. That's pure fantasy. We're moving towards mass market margins, which means you'll need rapid growth and high sales velocity to stay in business in the future.

This makes it increasingly difficult to start a store with Magic as the cornerstone, and that's probably half or more of new stores. When Magic is no longer the cornerstone, it also means stores will be smaller, with less game space and less marketing power for the rest of the game trade. Those who don't believe game stores are a positive marketing force for their game, may be in for a surprise when they change formats.

5. Massive Instability. Traditional retailers, who rely upon a catalog of games, built over decades, are struggling to survive due to the constant pressure of one-off crowdfunded games. There are ten new board games released each day. While traditional retailers build a business with traditional relationships with publishers, crowdfunded game designers are interested primarily in getting a game directly to the consumer, rather than building a catalog and a brick and mortar company. This instability leads to disintermediation by desperate game publishers, which often harm brick and mortar retailers. Crowdfunding is something we've embraced as retailers, but for the most part it's a disintermediating force. Publishers of all stripes desire to get as many direct sales to consumers as possible. You are the middle man. The middle is friction and cost. Nobody wants to feed the middle, if they don't have to.

Doom and gloom is easy. Retail is about two steps forward and one step back. Anyone can talk about that step back. In the next post I'll talk about the two steps forward, why you should start a game store. In reality, it's a poor business model in a ramshackle industry and you should do anything else if you can. However, if this is really what you want to do, there are good reasons to get in now. Or at least that's the sunshine I'll be selling with my next post.

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