Monday, April 27, 2020

Game Store Problems and Solution in the Age of Social Isolation

After my dismal assessment of the hobby game store, I wanted to delve into the root causes and some possible solutions during this COVID-19 pandemic. There are three problems right now when stores re-open, lack of events and outsized real-estate, the effect lack of events has on staffing, and unpredictable demand of product in breadth and depth. Let's look at each of these and see if there are some solutions.

Events result in a significant portion of store sales. They drive sales of product, either directly with CCGs or indirectly, with games that drive tertiary demand. You play Magic, you buy product to play in the store, while if you play 40K, you buy product later, after you've have your rear end handed to you. When there is no in-store gaming, which is a cornerstone of the modern hobby game store, there is significant reduced sales. Often it's a big event that pays the rent. Events are so integrated into the model, we really don't know to what extent this will effect sales, but my guess is 20-40%. When I moved from a no event store to a store with events in 2008, my sales rose 48% the first year.

We are overstored. Losing events for a year means hobby game stores have too much square footage, too high a rent. 1,000-2,000 square feet of unusable space could cost as much as $6,000 a month. Commercial leases are usually multi-year affairs, although some stores will have month-to-month leases. Those who can downsize would be wise to do it, if they can do it cheaply. Last time I looked at moving, it was going to be a $50,000 expense, so the idea of moving to a small space and then moving back to a big space in a year, is unrealistic. I've suggest mothballing the business, if you can possibly put it away and get a job for a while.

The other option is lease modifications. Right now, most landlords are not having this. If they don't want to forgive rent, they certainly don't want to change your lease. This catastrophe has happened too quickly for them to absorb or comprehend the damage. When we begin to re-open, and it's clear a lot of stores remain closed or simply can't pay rent, cracks in their armor will form. During the 2008 recession, I was able to re-negotiate my lease. I only expect this to happen if we are economically impacted for the rest of the year, such as the predicted comeback of the virus in the Fall. There is no evidence lease modifications will work now, but keep an eye on your neighbors.

Will online events work? When you're out of crisis mode, if you can wrap your head around Magic Arena or D&D online, these are great for keeping communities alive. Our Magic judge has been great in running Magic Arena for our community, and we've had success with volunteers stepping up and running D&D games for kids. The ideal store would have a business oriented partner handling the overwhelming tasks of survival and re-start and a more events oriented partner doing outreach and online event coordination. If you can do both of these yourself, you are far better prepared for this than I.  There is no direct revenue of any significance involved in this, but it keeps your customers engaged, entertained, and hopefully planning to return to your store later.

The second problem is the reduction in staff hours. My store was open 85 hours a week, with at least two to three people on staff most of those hours. My payroll costs have grown 50% in the last five years due to increased event space. This is because of the growing demand for events. The business was pretty relaxed from 10-5, when I worked, but it was hopping after hours until 10 or 11pm. We will likely change our hours from 11-7, like I had when it was just me working the store, with no events. I only need about half my staff to run with these hours.

Knowledgeable staff are critical to a hobby game store. It takes six weeks to train a staff member, but six months to have them truly competent (six years to mastery). Losing any of them is a huge economic loss in itself. How do we retain them during this crisis? The PPP loan is a stop gap solution, one I've received. It will cover my payroll for the next two months, starting this week. I'm giving starting bonus hours to help compete against overly generous unemployment benefits. 

PPP is set up very badly, in that it starts while businesses are still sheltered in place. Businesses are competing against the government who gave employees huge bonus money, more than they would have made working. I never thought I would use the term "burn rate" again, but here we are. I need to get my payroll burn rate up, regardless of the value of that labor. If I can maintain high payroll costs, my PPP loan is forgiven.

We're using PPP hours to populate our new point-of-sale system with item descriptions and photos to sync to a new online store. Hopefully some of that money will be used for generating direct revenue in June. What will happen in July, when PPP runs out and demand is a mystery.

Increase labor demand. Reducing head count is inevitable without some other method of increasing demand for labor. Increasing non conventional sales may take care of some of this. Curbside delivery, contactless home delivery,  and online shipping can be part of the solution. Right now we're seeing artificially high online sales of around 20-30%, all for home delivery. Most game stores who did online sales in the Before Times will tell you it was only in single percentage digits. Online sales for most stores was supplemental, and it was neither necessary nor relevant to most stores.

When people can shop again, I anticipate a larger than previous percentage of online shopping using various delivery methods. It would be wise to have your store set up so customers can shop at home for pickup or delivery. This demand should last a year to eighteen months, but it may just entrench a trend that was already growing.

I'm considering leasing a vehicle for the business for deliveries. That's how confident I am this will continue for a while. These type of sales are time consuming and lower margin than in-store sales, but if they maintain your most important asset, your staff, they're worth slogging through for a while. If I can afford it, I plan to give up most of my store hours as an owner to provide a much needed shift to an employee.

Product demand relates to what degree of sales decline we're likely to see, if any, and what sales patterns will change, if any. During The Great Recession, a lot of vanity product dried up and disappeared. A lot of cool things you see on Kickstarter today would have been carried directly by innovative game stores ten years ago. I was proud of that extra effort. Our ability to be the curator of cool has shifted online, at least for the alpha customers.

Right now I'm sitting on a pile of low interest, long term, six figure, EIDL loan money, that could transform my business. I could double my inventory. Quadruple it, if I were a mad man. I could turn my game space into shelves. I could transform my store into a gamers dream, and I could do it now and have it ready when we re-open. I would be a dark lord of games, all shall love me and despair!

That assumes I know what's going to happen. It assumes I expect normal, and not dark times ahead where I lose money every month for a year. It most importantly assumes I know what customers will want when I re-open. Do I double my 40K offerings? Do I go deeper on board games? Do I finally buy six figures in Magic singles? I simply don't know what they'll want, and to what degree, and neither do you. I must wait and see. I may diminish and go into the south (I'm learning Spanish).

I'm expecting a bit of a W recession, where we've been hit hard, we'll see a strong initial recovery, and then we'll get hit again in the Fall. Governments will be more reluctant to close down then, and they'll likely use technology to aim closures and re-open more aggressively. If I thought this were actually over, if I believed in the V instead of the W, I would make very different decisions. With a W, you keep your powder dry and look for opportunities to keep everyone working and the money flowing. If I believed in the V, I would make a grand gesture or plan to return to normal earlier. Pick the wrong letter and you move at the wrong time.

Saturday, April 25, 2020

The Future of In-Store Gaming

Without in-store gaming, the hobby game store business model is broken. Let's not pretend it's not. If we survive the year, it will be because of charitable customers. A store with game space has a Useful Value Proposition. It's not unique, not special, but it's expected and it's critically important.

Social gaming is something you can't get online. You can't get the breadth of social gaming at home with your friends or family. It's a critical loss leader of a service that defines the hobby game trade. Our stores are designed around it and our staff and hours reflect it. A straight retail store is not a long term viable business, at least not for anyone who has space and staff set up for such a store. It wouldn't surprise me if upwards of 40% of our sales are tied to in store gaming.

Customers ask, when will you have in-store gaming again? I don't know. I can tell you we may have closed our in-store gaming a little late, carefully following bare minimum CDC and county guidelines, but we won't be opening it too early. There's no amount of pressure or economic injury too great to risk what we know is a killer. There are stores planning to open with customers wearing masks, playing in pods. Umm, no. I guarantee you, there will be stores doing this, but it's grossly irresponsible and you shouldn't engage. One of the things I dislike about this community is the inability to hold bad actors accountable.

The key term is social distancing
. As long as there is social distancing, meaning you stay six feet from each other in public spaces, there is no in-store gaming. Let's not pretend the 40K crowd can play their game while carefully abiding by the six foot social distancing rule. It's a fantasy. Let it go. As long as social distancing is recommended, there will be no responsible in store gaming.

What happens next?  There are half a dozen studies suggesting we'll have some sort of reverse social gathering recommendations. We'll start with curbside delivery, then no more than five customers in the store, no more than five people gathered for an event, then 50, then 100, then maybe it will be normal again. This could take a year or longer. Some customers will never in-store game again, just as some people will never go to a movie theater again.

What I would like my customers to understand is:
  1. I have a strong financial motive to get in-store gaming back up and running as quickly as possible. Don't think I'm dragging my feet. Peoples livelihoods depend on it eventually happening.
  2. I know you're young and invulnerable and aren't overly concerned with dying of a virus that mostly harms the old and infirm, but we need to work together to keep our community safe.
  3. I won't compromise the health of my staff or my customers, even if staff or customers are willing to take risks. Please don't come to me with justifications or reasonings as to why your event is different. 
  4. Likewise, there will be those who think we are reckless for following new opening guidelines. If you can't abide by our painfully difficult decisions, please leave. There were angry people on both sides before and that won't change.

I need to ask customers to support small business during this critical transition period with their money. New games are being released. Buy that friend you haven't seen in a month a gift certificate. Store owners know our value proposition, what we offer, is compromised. We need customers to vote for our survival with their wallets. Please continue buying from us, even though it's scary and we aren't offering your regular event.

Right now, stores doing home or curbside delivery will tell you they're only doing 20% or so of their previous sales. That means 80% of previous customers are not helping. If you want to see your local store continue to exist, we need you to actively spend your money to make this happen, even though we aren't offering the same experience you've grown to love. We'll get through this together.

Wednesday, April 22, 2020

Treacherous Government Loans and Account Segregation

My small business received both the EIDL and PPP loans. Yes, thank you, it was a bunch of work, but no harder than creating a Pathfinder 2nd Edition character for the first time. I have some unique experience in creative financing my business, so I saw the opportunities and jumped on them. This is my area. However, these loans are treacherous. I'm going to briefly go over why they're treacherous and how you can navigate these waters.

The EIDL loan has approved uses and disapproved uses. A lot of disapproved uses are things you might do all the time, like issuing profit or paying off old debt. This is theoretically a thirty year loan. Are you not going to have profit for 30 years to prove the SBA Gods that you've used the loan for legitimate funds? No, but you need to be able to prove profit taking and debt retirement did not come from this money.

Likewise, the PPP loan, to act like a grant and be forgiven, can only be used for (some) payroll costs, some insurance, rent, utilities (whatever that means) and mortgages from the Before Times. Payroll has to be kept at 75% with the same number of full time employees (30+ hours?) to be forgiven. I am not an authority on this. Nobody is an authority on this. It''s complicated and likely to change, so you need to handle this money in a special way, although it doesn't quite need the same level of segregation as the EIDL money.

Here's what I've done. The first thing I did was create money market accounts at my local bank. This earns something like zero point zero nothing percent interest, but the account segregates the money from my general funds. Now I can transfer money from loan accounts to the general fund for specific uses with specific notations. I can use my own money without bumping into loan money restrictions. I created these entries in my Chart of Accounts:

I am not an accountant, but my accountant approves of what I'm doing. Step two is to create Long Term Liability accounts for these debts, which is nothing special, just how you would track a loan. 

Finally, how do you actually track expenses? I was discussing this with friends and the issue of Class came up. I've never used this before now. Setting up Class, an option in Quickbooks, allows you to note each expense line with a Class notation. So most of my Payroll taxes are allowed to be paid with PPP money, except federal taxes. I can line item each tax type as PPP approved using Class, except federal taxes. This allows me to track my usual expenses without too much interruption in work flow. When it comes time to prove how I spent the money,  I can run a report using the Class and it takes me minutes instead of it being nearly impossible.

Yes, you do need to be this detailed, and no, you probably don't need an accountant. You do need to be very clear on what is allowed and what is not for each loan. Getting your PPP money deployed in approved usages in the short period required is going to be a chore and will take creativity. My 15 year old is suddenly back on payroll. My old manager is back. Employees are being tapped to work from home on projects that don't exist yet that I'm scrambling to create (online store). Once the PPP money hits my account, the race is on to spend it properly and quickly.

The EIDL money is a little easier. I'l be paying my vendors with a big chunk and mostly leaving that money in its account for the duration. Its segregation is the most important thing, so as not to run afoul of the government.

Good luck! I know getting this stuff is hard. If you haven't gotten the PPP yet, keep trying. It's to your advantage to get it as late as possible in this crisis, when your people are going to be able to work doing something useful. Stop lamenting about large corporations getting unfair shares and start working on this. You will be far ahead of me if you get it later.

Saturday, April 4, 2020

Rescue and Recovery

I own a hobby game store but one of my other hobbies, the one that takes all my meager disposable income, is overlanding and off roading. I have been stuck many times in my Jeep. For a while, it seemed like that's what you did, drive until you got stuck. I learned a lot during this time, both about preparation and technique as well as wisdom in avoiding mistakes.

Once I tried to get up a muddy hill and slid back down sideways, nearly over an embankment. I tried several more times and slid into the exact same nook on the hill, a little closer to the edge each time. Eventually I got half way up, avoided the slide, and winched my way over the top. My friend who didn't get stuck was focused on getting me to learn how to navigate the vehicle up the hill. I just wanted to get to the top. My installer thought I was foolish to buy a winch, "I've been off-roading for 20 years and never used my winch." Well, he never went with us. I ended up using the winch several more times that year. There are some fundamentals to off-roading that apply to business.

Be prepared. In my Jeep sliding situation, I had the original, street tires on the vehicle. I had no business being in mud. A wiser me would have looked at that hill and said "Nope! We go around." In business this means having some form of reserve. A cash reserve is the most obvious. Before we had our large construction project, with tremendous debt, I had cash reserves. We would look around and try to solve problems with money, rather than seeing problems and putting them on my white board of shame, a list to be solved another day.

Being prepared also means having a plan. What would you do if you were forced to shut down for a long period of time? Would you continue the business at all? That's the first question. Is it worth it? If so, how? Having checked your resolve ahead of time means you are acting on your plan while others are searching their hearts. This is a discussion I've had with friends and family many times, and the weekend before I was shut down, we revisited this. Is it worth continuing if they shut you down?

Self rescue. Rule zero of survival is nobody is coming. Be self reliant. With rule zero in mind, how are you going to self rescue in a time of crisis? You should certainly call for help, but remember, nobody is coming. Hope they come, expect they won't. My solution was to set up an online store and do no-contact home delivery. The best time to have set up an online store was a year ago, but you do what you can in the time of crisis. In coming days, I will change that to far less profitable, but safer, shipping of all orders. Nobody is coming. I'll believe there is an outside solution when the money hits my bank account.

Call for help. Nobody is coming, but they might. I've got a ham in the Jeep, but I really want a satellite communicator. The price tag and subscription throws me off, but before every big trip, I consider it again. How remote is this trip? Who am I going with?

In the case of the business, I'm refinancing my house to acquire cash out and tapping investors for a "cash call." This alone is probably enough to self-rescue, assuming things go back to normal. They'll never be normal again. When I went to initiate a refinance, the first several days the banks were swamped and stopped publishing rates. The next week, my mortgage broker added me to her schedule. It has been three weeks and she hasn't called me back. I'm half way through a refinance with a second broker. Is it possible this falls through? Absolutely. Should I have relied on the first broker? Nobody is coming.

I'm also applying for an SBA economic injury disaster loan, and was recently approved for one. Next is the PPP payroll protection plan, which really will employ my staff for more hours than I would give them otherwise, probably building a new online store I should have created a year ago.

One of these things needs to happen. I need the mortgage refi or the SBA loan and gravy if I get both. Let's turn failure into an embarrassment of riches. Since nobody is coming, sending out a request for help on every frequency might increase my chances somebody comes. If nobody comes, the online store becomes an even hotter priority. Everyone is screwed. It is to everyones interest to be patient and allow self recovery. It's the best option since nobody is coming.

The time to be prepared with a strong resolve and resources in place, was before this happened. The time to begin the self rescue and call for help was last week. The time to accept nobody is coming and figure this out on your own is now.