Thursday, May 6, 2021

The Phantom Business and the Placeholder Customer

I recently read an article from someone who declared the hobby game store finally dead. In sixteen years of flogging this dead business model, I've seen many such articles. This is the "standing on the COVID corpses of dead game stores" version. What struck me about this article was the misperception of how stores run their event space.

This customer went to local game stores, used their game space paying some nominal fee, and bought all his games online. He had no idea how this game store could possibly operate under such conditions. He's choosing to ignore the busy register, ringing up sales, or the many customers that come in throughout the week to make purchases, all of them cheaper and easier online.

Put simply, he is not their customer. The nominal fee, social gatherer game, is not how stores survive and prosper. Their value proposition does not align with him. So why is he there and why is he confused? It's because he is the product, not the consumer. His living corpse is being used as a placeholder for actual customers who wish to engage in that stores value proposition, which is community. His role is filler, a cardboard stand in. He's more Facebook user than Amazon consumer. Unfortunately, store owners have a difficult time sifting the wheat from the chaff, so these people sit amongst the real customers, sometimes confused.

Many customers are eagerly awaiting stores to re-open their play space. There is tremendous demand for this not just because it is our core value proposition, but because it's an impossibly good value. Asking a nominal fee or tiny buy-in for access to this core feature doesn't begin to cover costs. And to a mercenary customer only interested in the best price, who takes advantage of this near free feature, it causes legitimate confusion. How do they do this? Why are my peers supporting this? So the game store is once again declared non viable.

The solution to this is to actually charge what that space is worth. I figure its value is at least the cost of a movie ticket, probably approaching $15 an evening. But will stores ever charge that amount for an evening of entertainment? Doubtful, but they should charge something. Do it for your bottom line. Do it to clear up confusion in the market place. Do it because you've seen this business model works without events and how events drag down your store to a micro managed chaos that impedes your progress in life. Or don't do it. The model was viable before. It's viable now.

Monday, March 8, 2021

Scarcity and Profit

 It's a time of unprecedented scarcity in the game trade, combined with some rather unprecedented demand. We are allocated product from most of our major supplies: Wizards of the Coast, Games Workshop, Pokemon, and even Ravensburger, who is insisting we buy cases of their choice of games if we want extended terms. The demand is also unprecedented as we see "investors" buying up Pokemon and driving prices through the roof. We would be making bank on this if Pokemon wasn't shipping in waves and cutting allocations. I have distributors who have zero Pokemon on their shelves. A hundred SKUs and not one Pokemon item on their shelves.

Scarcity is also the way of board games. It has been like this for a while, but it's more pronounced now. I can "feel" demand of scarce product. What sells is what's scarce. Good and scarce is a gold mine. I've never felt it more acutely than right now. For the most part, the bigger the store, the higher the velocity. I try not to get jealous when I see peers with pallets of scarce product, but I know my market and its limitations. It's strong but shallow. We might sell a case of a product and it's gone for months and I just shrug, while that case might be a pallet of product for a larger store. 

Meanwhile, Kickstarter game projects have increased significantly during the pandemic, and we're struggling to find products to back. My impression is even my most loyal alpha customers across the gaming spectrum have tilted their purchasing to Kickstarter over in-store. It's probably 60-40, and they'll often ask me to back a game so they can pre order through me (or just as often back it first, and then ask). Alphas have always been omni channel consumers, but it's odd to see this so pronounced across the spectrum. Scarcity is not just a condition, it is becoming my business model.

Distributors are sometimes good at managing scarcity and sometimes bad. Those who came out of the early pandemic strong have war chests allowing them to corner the market on some product. It's not unusual for me to have a record sales weekend and barely be able to scrape together an order on Monday morning, due to scarcity, whereas I would be ordering ten times that amount in normal times. While a distributor may be the king of the mountain in one area, their fields are fallow in others. Smaller publishers with niche, one off games are often absent from their shelves, and thus absent from mine. So we get a big shipment of a thing, sell it out in a week, and we wait for the next shipment.

I've added new suppliers during this time of scarcity. I recently added the last national distributor I wasn't doing business with. I'm leaning heavily on my Canadian distributor and returning to my toy distributor. I've also opened an account with Penguin-Random House, since even D&D books are becoming scarce. I have to admit I was not prepared and I'm being reactive instead of pro active. I have left a lot of money on the table, but at the same time, I've made a good amount by just breathing and doing my usual routine. I am skeptical of anything that smells of juiced demand, since I've been burned so many times before.

I still have all the money in the world, thanks to government loans, but I generally don't have anyone to spend it with. I've told a couple suppliers to "just send it" without quantities. You have Pokemon? I will take it. How much? All of it. It usually gets me a couple cases that last a week or two. This is what's so striking about "right now." I have all the resources to buy, but the time to buy was three months ago. Some suppliers are treating such product as commodities on their end and raising prices to me. Don't care, send it all.

To summarize, we're not seeing record sales, but we're seeing very efficient sales while running a very efficient shop. We're diversified enough to be able to succeed with just a taste of product, but sad we're not getting boom time sales due to supply. We're not buying new homes with the Pokemon boom, because the supply is so very weak. We are down about 5% from a year ago, a number about to change dramatically as we're nine days away from our shutdown anniversary. 

Running one shift in the store, without gaming, means such a significant cost savings, we're surprisingly profitable. But I can't help be a little jealous of those pallets on my neighbors sidewalk. I also worry about opening in store play more than anticipate it. It's not just the danger, it's the inefficiencies in a time of scarcity. For example, why would I want to run Pokemon events with no Pokemon to sell? 

Thursday, February 4, 2021

Stages of Stocking

 I've watched the game trade nearly double in sales velocity since I started in 2004. It wasn't uncommon to consider a three turn a year game store a success, and now that number seems to hover around six. That means if I had $100,000 in inventory at retail, I was seeing $300K in sales in 2004, and $600K in sales in 2020. Success means efficiency in this example, which equals getting as much money as possible from a minimal investment. You might define success as sitting on a treasure trove of games with one turn a year. No kid, get away from that, THAT'S not for sale!

For me, the difference between a three turn a year store and a six turn a year store is the difference between peanut butter sandwiches and home ownership. This is highly subjective, of course, as we have no solid data, but you'll probably agree the trade has breached mainstream culture in a way that didn't exist 15-20 years ago. You can have a middle class lifestyle with a reasonable, six figure, investment. I wrote a book on that. We are beginning to see more top tier stores, with solid policies and procedures, sell to others, rather than just liquidate. 

When it comes to inventory, this success didn't come with a larger investment.  We saw the same level of inventory out perform throughout the years, with minimal additions, at least until 2020. Rather than expand inventory, capital was thrown at large projects or extracted from the business to regular exercise my return on investment, expected by most business owners. Inventory didn't seem to matter all that much as reinvestment. 

The pandemic killed sales, thanks to the cancellation of public gatherings. In the SF Bay Area, where my store is located, we were technically closed entirely for two months. It's clear now that events were responsible for 15-20% of our sales volume, although at low margins and super high management costs. When we received government loans,  the goal became finding a way to efficiently offset that loss with new inventory people actually wanted. Inventory for inventories sake was not going to do the job. This stuff had to perform and now. 

When I moved stores to a three times larger space, I massively increased inventory and learned some hard lessons. My attempt at diversification away from the trade was a huge failure that took two years to unwind. It was the wrong read on the market, with the wrong inventory at the wrong time. So adding new inventory was going to be a bit more conservative, using what I had learned. There was no time to waste, and I knew we were looking at 18 months at least to return to normal, if there was a normal to return to. 

I wasn't the only one doing this, so it got me thinking about where I and others were on a spectrum of purchasing. I've got this theory of inventory tiers based on store makeup. It's really defined by how successful a store can be within the confines of the three tier game trade. I've got four store models that look at this, with each building on the one before it:

  1. High Efficiency: Inventory is highly efficient, but that efficiency also loses opportunities. More inventory would go to reduce the friction of that high performance with depth of stock. You might take your six turn inventory performance down to four, reducing stock outages with some sales increases. It's a low risk, low reward inventory increase, but it's necessary to progress. This store likely has a direct account or two, like Games Workshop or Asmodee. Perhaps 20% of their product is outside the trade.
  2. Newly Diversified: Having satisfied depth of stock, this store needs to diversify within the game trade to appeal to a larger customer base. This often coincides with capital improvements to attract a broader range of customers. You can't just throw general public appealing inventory into your Gamers Den. This is going to be a medium risk, medium reward increase, as you're likely tapping your existing base and asking them to spend more. It's not as lucrative as a new customer base, but also not as risky. Perhaps 40% of their product is outside the trade, mostly with direct accounts to obtain product available within the trade. 
  3. Beyond Diversified: This store has mastered depth of stock, has diversified as far as they can within the trade, and now needs to seek out new product lines through direct partners. This is a high risk, high reward strategy, as they're appealing to a new customer base, if they can find them. They are probably a Wizards of the Coast Premium store, based on the capital expenditures needed to appeal to the general public. If they're not ready in appearance and service for the new customers, this could be a disaster. This store may also begin to chafe at the allocations and available inventory provided by distribution, even with deeper buys. Perhaps 60% of their product is outside the trade.
  4. Fully Diversified: This store has tapped out all known sources and constantly needs new product from a variety of sources well beyond the game trade. They likely have dozens of active direct accounts, work with toy companies and distributors, and go to publishers first to guarantee supply of product. They back many Kickstarters. This model is medium risk, medium reward as they've already created the customer base expecting to be regularly delighted. They are now capitalizing on tier three risk taking. They are really a more sophisticated tier three store than a new model. Perhaps 80% of their product is outside the trade.
What I personally discovered with an unlimited inventory budget is there wasn't a lot of obvious diversification options left on the table. There wasn't much low hanging fruit. That's because I was probing all along for new opportunities. Although I did some diversification in my buys in 2020, which increased my inventory 55% at one point, most of my buys were in depth of stock. I'm probably a 2.5 in this model.

It was interesting to watch my store transform into what I had seen in many stores before, a larger, more mature store with the depth of stock that represented the appropriate sales velocity. You wouldn't have guessed our sales levels by just looking at us before, but a store owner would know now. That sounds like an admission of guilt.

I did diversify, mostly into puzzles (a whole wall of them), product from the book trade, and toys. We now carry every first and second tier Games Workshop product. But the bulk of my buys were broadening my game trade stock and deepening depth. Depth of stock was simplified by dividing stock by annual turns. That was a blunt hammer, so that large bump in 2020 was fine tuned by the end of 2020. We also spend a few thousand dollars on new store fixtures, as the deluge had us using folding tables for several months, just for a place to put everything. I once said I could double the inventory in my 2,000 square foot showroom, but the true number, it turned out was a 50% increase.

These tiers don't necessarily correlate with sales numbers. You can have a multi million dollar tier one store and a very low performing tier four store. In fact, it would be highly desirable to have a lower number with higher sales, as the infrastructure is lower. If I could have a multi million dollar store with four product line, that would be amazing, but brittle. 

The reason the tiers don't correlate with sales is because there is no acknowledged formula that says, I'll do six turns at tier one, then shift gears to two. It's highly subjective. There used to be a ton of tier four stores with one turn a year, the museum store. Most of those are gone or have reformed. Those of us in the trade know the difference, by the way. Customers love the tier four store, even when it's unprofitable. Store owners can tell if it's a powerhouse or a $#!*house. When it comes to gossip, this is a hot topic.

Anyway, those are my thoughts on inventory after a very interesting year of having all the money in the world and no easy answers on how to spend it.

Wednesday, January 20, 2021

Applying for an IT Job

 Here's how I would apply for an IT job at this stage in my life. I do not want a job again, but here's my general impression of how I would go about it. My guess is the approach isn't effective, but who knows:

Dear Hiring Manager,

My decade of experience in IT and 25 years of managing employees, clearly qualifies me for the position, but I wanted to touch on something you may not have considered. Running a small business for the last 16 years has provided a perspective on IT that I'm sure few of your IT employees possess. You see, I dislike technology.

I am not enamored with technology, nor do I wish to burden your company with a bunch of soon to be useless gadgets and computers. In small business, you quickly learn that IT is a cost center, an expense that you wish was unnecessary, and to the extent you can make it unnecessary, you do that. Clever technology is not so clever when you're troubleshooting a computer on your office floor on a Saturday night, rather than being with your family. What I'm saying is technology needs to be applied intelligently, and most often in IT, it is not. IT experts are often on to their next gig, long before the return on investment fails to materialize.

As your new IT professional with a small business background, you hire a skeptical expert. You hire a technologist who doesn't slap a business case onto a shiny piece of new tech, but starts with the business case. I want to learn about your business and how technology will advance it, improve it, make it better in every way. I am also fully satisfied to let the "trains run on time," and keep your operation in tip top condition without change. I have nothing to prove and I'm not obsessed with the next tech gig or building the resume.

In short, I wish to partner with your organization, make it my own, understand what makes it tick, and when necessary, and only then, bring it the latest technology to propel it forward. For sixteen years, I applied just the right amount to my business, resulting in a modest 10% a year growth rate, while technology took a back seat to people. A good IT opportunity should have a solid business case, with a thoughtful cost-benefit analysis and prompt return on investment. I can't promise to make your IT a profit center (although I've seen that done), but I can make it a less painful center of cost, while focusing on what matters to your company, the people.

I would be happy to discuss this position and your needs in more detail. 


Ex IT Guy

Getting The EIDL Loan

With some perspective and some mushy memories, I'm better able to describe to the narrative of the EIDL loan process I went through in April of 2020. Having survived the 2008 housing crisis and not getting my house in order until 2010, I made this a massive priority to educate myself on this loan and be first in line. Some people camp out at Best Buy on Black Friday, I have Google alerts for SBA portals and hit refresh a lot. 

I wanted in first, because being the government, they would: a) run out of money, and b) there would probably be a first mover advantage in scrutiny, meaning they may be too overwhelmed to make good judgements or might implement new rules later, after they ran into problems. As it turns out, I have stellar credit and they really wanted to give me money, which was a bit of a problem.

When I was approved for the loan, they offered me an enormous amount, over a quarter million dollars. I was applicant number 10,000 or something. I was early, I understand finance and paperwork, and they had a lot of money. Eventually they would run out of money and limit loans to a smaller, more reasonable amount. Once I was approved, they offered me a villa in Mexico amount of money. I asked them if I could just take a smaller amount. They told me not to worry. I don't know where this will go, and I can just take what I need, like a line of credit. That made me happy. I can manage a line of credit. But that much money? Are bank accounts even insured for that much? 

They are not.

Then they just dumped the whole amount in my bank account. No line of credit. That's when I learned there are SBA contractors just kinda winging it. So wow! All the money I could ever ask for, business wise, for my completely shut down business that may never open again. I was thinking Guanajuato or maybe the outskirts of Oaxaca. With so little faith in the government and the pandemic raging (really just getting started), I had one foot in Mexico while trying to restart the business. 

And then they came back and asked for something I read about but didn't fully understand. They needed a property lien on everything the business owned, but they needed me to file that with the state. That took a day of figuring out, but it let me read about the "hooks" involved in this loan, and to better understand the requirements.

By the simple loan language, I can't pay myself dividends. Really? Ever? It's a 30 year loan. Are businesses with an EIDL loan over their head forbidden to ever realize profit? Oh, well you just can't pay them with the EIDL money. So if my business makes $5K this week and I use it to pay investors while I borrow $5K from the EIDL fund for allowed expenses, everything is fine? Exactly. Just show a paper trail. Then there was the car. I needed a car to do deliveries. Doing the research the EIDL loan was fuzzy about capital expenses. Ask a lawyer and they interpreted that as allowed. You can buy a car. Ask an accountant and it was certainly not allowed. The accountant had a different understanding of capital expenses, probably one more in line with the government, since it's their job. I bought a car anyway and made $57,000 in deliveries.

My final understanding was this: If you pay back the loan, nobody cares. Nobody is going to look at your delivery vehicle and send you to prison (an option), if you pay back your loan. Don't pay back your loan and there will be scrutiny and open books and questions about everything. So the answer is win, don't lose. And if you think the SBA is clear in their writing or understanding of how the law is supposed to work, talk to Congress about that. They've been yelling at the SBA for nearly a year now. And with todays shenanigans for EIDL disaster grants, I'm sure they're just getting started.