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.