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.

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