Thursday, March 16, 2023

12 Years Free of the LLC

Twelve years ago, I wrote about converting my business from an LLC to an S-Corporation. The common wisdom at the time, which is still the common wisdom, is an LLC is an easy way to protect what would normally be your sole proprietorship. This is sorta true. It mostly protects your investors since almost everything you do as a small business also involves your personal guarantee. That's a side issue, as the real problem with the LLC advice is it depends.

LLCs, limited liability corporations, are state entities. The IRS doesn't care about your LLC, and treats it like a corporation, usually an S-Corp. An LLC in Wisconsin, created under Wisconsin LLC laws, is a very different animal than an LLC in say, California, where you'll find my business. An LLC in California is pretty awful. So how has converting to an S-Corp worked out for me?

There is a really obvious good side to the conversion and a painful side that haunts me to this day. The good side is LLC versus corporate fees. If you had an LLC in Wisconsin, my example, you would be paying ... let me get my calculator out ... $25 a year in fees. Whether you gross a hundred dollars or a million dollars, Wisconsin wants their $25. It makes sense in Wisconsin to recommend an LLC. California is a very different, some would say very aggressive, animal.

LLC fees in California are on a sliding scale, based on gross income. This focus on gross income is important, because retail stores make a very high gross and a very low net income. If my buddy in financial services makes a million dollars a year in gross income, his net income might be 25%, or $250K a year. My net income in retail, grossing the same amount of money, at around a 10% average, would be $100K. In fact, for many years, my buddy and I had the same gross sales, and I grew healthily (back) into the middle class while he grew wealthy. It's not what you make, it's what you keep. Anyway, a California LLC would impose the same exact fee on both of us, $6,000 a year. Taxing on gross revenue is unfair.

So how much money did converting to an S-Corp end up saving me? Over time, my S-Corp profits grew healthily, with a couple years of corporate fees rivaling LLC fees. However, we also had years where we had losses, despite over a million dollars in gross sales. In those years, my LLC fees would have been full boat, $6,000, but instead I paid a hundred bucks or so. In no year did my S-Corp fees exceed LLC fees. Overall, I saved $38,094 over the past 12 years by converting my LLC to a corporation. 

In the chart you can see a shift from $2,500 to $6,000 in LLC fees, when our sales hit seven figures

There was a painful down side. There is the constant problem that continues to rear its head, and that's the relationship with existing businesses, and even the federal government, who initially have your LLC on record. You would need to change your name and move to avoid seeing the dreaded LLC pop up from time to time. Any relationship you've had is likely to refer to you as an LLC at any time, which also means referring to your old EIN number, corporate dead naming. 

When I applied for an emergency loan from the SBA, they initially had trouble finding my business, because their records showed an LLC, while I had been an S-corp for ten years. Could you imagine being denied funds because of this technical irritation? It was an emergency, so they waved it off, giving my S-Corp a loan despite their records showing an LLC. 

My payroll company and alarm company likewise LLC me, despite asking them to stop, and I just recently created a new S-Corp bank account. Under banking regulations, changing EINs requires a brand new account. That is reason enough to be cautious. It took me 11 years to comply with that one, and only after my account was hacked.

Changing to an S-Corp was a big hassle, but was it equal to a brand new car worth $38,094 big hassle? Oh yeah. Of course, if the SBA had denied me a loan and I had gone out of business, mmm, not so much. The only way to be sure you've eliminated your LLCishness is to burn it with fire. Open a new bank account, change payroll companies, move somewhere else. It's the witness relocation of business entities. But you can't argue with $38,094, especially in a state that taxes my barcode scanner.

Tuesday, February 28, 2023

Static Cling

If you were going to write a hobby game store business plan, an honest one, you would have to look at the headwinds. I wrote about the problem with Games Workshop fulfillment today, with the bottom line for me being a shrug. I refuse to reward inefficiency by doubling down on product, so I shrug with the state of affairs and move on. I simply can't get the product I need for my store. But how many times can I shrug?

Magic the Gathering is a huge line for me, and boy does Wizards of the Coast have a lot to unwind there! I'm sitting on tens of thousands of dollars of overstock from COVID times. I've got new product about to be released being sold online at near my cost. The price points of some of these new Magic releases are stratospheric and potentially alienating. I've got 20 play formats where only three work in my store with 17 potentially unhappy groups. The player base is still irate over their 30 year anniversary, $1,000 box flop. Shrug.

Dungeons & Dragons? OGL shenanigans, culture wars, and floated rumors of subscription gouging? Half a dozen different OGL clones emerging from mostly direct to consumer publishers, to divide the market? Shrug.

Wiz Kids and the ever expanding, 1,000 SKU, always out of stock product line? Shrug.

Asmodee gobbling up publishers and being unable to do basic business functions like invoicing? Shrug.

Smaller board game publishers unable to meet demand while an entire segment of Kickstarter board gamers has moved away from brick and mortar retail entirely? Shrug.

How many distributor accounts do you need to open to get the product you need? All of them? Shrug.

China, the source of most hobby game manufacturing, in crisis with rising wage inflation and geopolitical turmoil? Shrug.

My shoulders are starting to hurt with all this shrugging. If you were writing a business plan, you would have to assume this trade is in crisis, and you would need to include all of these shruggable offenses. You might correctly assume that all of these practices are intended to put the publisher first and you, as a retailer, a far distant second or third. It's why I write for you and don't expect change from them. The trade itself is having tremendous growing pains. That's right, it's a crisis of growth, not a crisis of decline. Things are really good.

The market is likely five times larger than it was when I started in 2004. The entire culture is now oriented towards hobby gaming. I spend most of my time out of the store and I kid you not, a common overheard restaurant discussion is how some young person is into hobby games and it's just so perplexing. Nervous laughter about how they're dedicated to Magic the Gathering, 40K, or Dungeons & Dragons. 

Yes, Dungeons & Dragons still exists. It's pervasive enough to be a topic of regular conversation and with the D&D movie releasing next week, it's likely to continue. Hobby gaming is part of American culture. Movie stars have D&D clubs. Geeks have inherited the Earth. But we saw that coming.

However, because geek culture is so pervasive, there's so much money on the line, it would be very easy for geek adjacent companies to swoop in and change the nature of the trade. The fear is that once you as a store owner, help grow a segment large enough, the growers are no longer needed. It's like what happens when we see a great game we've championed end up with Mattel or sold and then deeply discounted in Target. If you spent a decade demoing Blokus or Catan, only to see that game crushed under the foot of the mass market, you know what I mean. 

Everyone asks who could possibly swoop in and take control of segments? Well, anyone who thinks they can who has the money, and there's a huge amount of money floating around out there. Who would have guessed a French parking lot conglomerate would own the board game segment ten years ago? You could certainly predict (and I did) it was a segment without a market leader. There are no more of those.

This is all very scary if you have a static perspective of the trade. If you look at what you're doing now, or what you plan to do in your business plan, it's likely you'll need to shift dramatically in the future. If you cling to a static position, this looks really scary! This is clearly not a place to ride out retirement, or install employees while sipping margaritas on a beach. It's clearly not a safe place to invest your money into someone else's business. This is a trade that requires constant pivoting, provided your shoulders aren't too sore from all the shrugging.

Remember your job is primarily to pivot. Don't get too tied down to any one model or product line. Don't spend too much money improving someone else's property. Always keep your eyes on the horizon. We are front list driven. The question of what to buy is the question of what's coming soon. Any one segment is likely to fall into decline at any given moment, while another rises up to take its place. Stay diversified, both within the trade and beyond the trade. If you're the kind of person who suffers tremendously when you experience change, you need to make a different plan. 

Monday, February 27, 2023

Purchasing Is My Life

After my store re-opened after being closed for two and a half months from California COVID shutdowns, I stayed home. My thoughts were that I had shown mastery during this shutdown and did not need to worry about stepping away. So I stepped pretty far away, not coming in any longer. My job was now purchasing. 

Purchasing is something every store owner does, but it's part of a huge list of tasks. Purchasing went from maybe 10% of my job, something I did when I had time, to my sole job. I still manage finances and some marketing, but I am mostly a buyer. 

What happens when a job that's 10% of your activities becomes nearly 100% of your job? It expands. Or at least it does if you're thinking about it a lot and like growth. You could certainly go home and half ass purchasing like before and spend your time on your Warhammer models. That's not me. Purchasing as a sole pursuit became pretty serious.

Purchasing as my sole job allowed me to open up to the full spectrum of what was available. I opened new distribution accounts, in fact I believe I have an account with every first and second tier distributor. With the segmentation of brands across distributors, it means I have a primary distributor, a secondary distributor, a new release Magic distributor, a restock Magic distributor,  and several last resort, fill in the hole, distributors. I also opened many new direct accounts. Here's my list from the past few years:

  • AEG
  • Asmodee
  • Cephalofair
  • Creature Curation
  • Darrington Press
  • Euorgraphics
  • Foam Brain
  • Hasbro
  • Hipp and Horn
  • Indie Press Revolution (not new, but don't forget them!)
  • Leder Games
  • Monument Hobbies
  • Pandasaurus
  • Penguin Random House
  • Squishables
  • Stonemaier
There are others I tried, but they didn't work out, and I quickly moved on. There are a half dozen other accounts I've outsourced to my manager. "Hey, I don't know anything about this pop culture nonsense, please spend a bunch of money on this." That's mostly Bioworld, Pye Games, Faire (Wild Bill's Craft Sodas) and the like, along with being responsible for Costco orders.

My new purchasing job is now, much to my dismay, a real, full time job! These extra duties have coincided with a tripling of my inventory, so there's always more to order. In any given week, I'm likely to place an order with Asmodee, a new order and restock order with Games Workshop, two orders with my primary, one or two with my secondary, and usually two or three orders with a direct account. It's all based on my Open to Buy worksheet. If there's still money in the purchasing budget, I look to spend it with direct accounts. That money must be spent, unless I'm saving for a big CCG release.

My store is probably a top 10% store, in the multi million dollar category (low multis). This system works very well for me. My understanding is stores that are much larger, or stores that are highly focused in one area, are having problems getting the volume of product they need. Those folks are being hamstrung by the system and that should be addressed. If you are not one of those stores and you find yourself having trouble sourcing product, consider diversifying beyond your one or two suppliers. It doesn't cost anything other than your time. Lots of time. Like all your time. All this work is interfering with my planned life of leisure (a myth I refuse to give up).

Wednesday, February 15, 2023

Thou Shalt Not Discount

You have trained as a martial artist for years and you appear at a convention center for your first competition. To your left is your mentor, you call him sensei. To your right are your teammates, cheering you on. On the perimeter, excited fans cheer from the bleachers. In the ring is a judge, steeped in tradition and rules of your art. Your opponent enters the ring. You both bow. You step up, your arms loose, fists not too tight. And you kick them squarely in the crotch and watch as they go down in a heap. The crowd gasps. Sensei bows his head. The judge is apoplectic.

Discounting in retail is a kick to the crotch. It is the lowest form of practice. Discounting is a systemic problem that undermines everyone around you and makes everyone else's job that much harder. Discounting bucks tradition, tradecraft, and if you believe sensei, all common sense. From a collective standpoint, discounting is salting the earth. Discounting is bad. Perhaps evil. They may even ban you from the convention center next time you arrive. However, discounting is also a good strategy.

We are not formal karetekas. We do not have formal training, a sensei, a body of tradition and mores. We are retailers. Retail is about supply and demand. It's that simple. There are plenty of times, and even a couple business models that allows for discounting. It is hated because it is powerful. If you know how to use it.

If you're new to retail, discounting will bury you. You have no idea what margin you need to obtain, so you will work yourself to death when it's too low. Therefore, because it is death to the novice, and it's a kick to the crotch to everyone around you, new retailers have been taught to never do this. You need to get over this. As a 55 year old formal martial artist, let me tell you a kick to the crotch is how I'm starting all my fights, and hopefully ending them. I didn't ask to be in this fight, so I will choose the rules and how it ends. If it didn't work, they wouldn't hate you for it.

When do you discount? When you have to, for as long as you need to, and not a moment longer. There is money on the table you are giving away for momentum. As an overall business model, you may have lower overall costs that let you use this as a strategy. You may be peeing in the pool, but the pool is big and there's enough chlorine between you and me, that I'm feeling pretty safe over here. 

Sometimes products are just low margin. What makes a product low margin? When you can only sell it at a low margin; supply and demand. Some products are dead and just need to go. Cut quick, cut deep, cut once. Some markets are just trash and your community might only respond to discounted product. I personally think you should move on to another business or another community, but maybe that's some elitism on my part. You might be doing great in your trash market, with regular kicks to the crotch. You do you.

What we need to avoid is an overall rule that you never discount. That's nonsense. Retailers discount all the time. It's a street fight, even if it's on main street. The problem with discounting is if you do fail, you'll likely never understand why. You'll fail slowly, while your sales might even be stratospheric. Discounting is best left as a strategy for high velocity products and dead products. If you discount overall as a business model, I will bow my head in shame when I look in your direction, but you're still alive and your opponents are swearing at you from the mat. There are worse things.

Wednesday, February 8, 2023

Magic Box Prices

Discussions over box prices and how the FLGS should really focus on their snacks tend to arise on the Internet every few years. It is believed that: A) Game stores are ripping off their customers with their box prices and, ironically, B) Game stores can't possibly survive by selling a commodity product like Magic. This "it can't be done" attitude arises because nobody understands business. It's not surprising when our margins are so thin, you need a spreadsheet to figure it all out. Here's a primer on Magic box prices and how they work within my business.

Box Prices

My best price is $91.12 for a box of Phyrexia All Will Be One draft boosters. Draft boosters are unpopular nowadays. Before they were just boosters, the boosters, with the 36 count format everyone is familiar with. The oldest box I can find in my point of sale system with a verified price is Saviors of Kamigawa from 2005 at $74.39. That price, adjusted for inflation, should be $115.25. Wizards of the Coast has done a fine job at keeping the price low.

Let it be known there is no set net price for this product. I pay $91.12 from one distributor, $92.70 from another, and $95.16 from a third. I may pay any of those prices based on availability or possibly to round off an order for free freight. In the case of Set booster boxes, I needed all three of these suppliers, at three different price points, to get the amount of product I needed. The allocation from each of these suppliers failed to meet my needs, despite a pre order from all of them.

The price I pay is based on my business with that distributor. A smaller store likely pays more than me. A larger store could see somewhat lower prices, but not by a lot. This contributes to the confusion amongst the uninitiated. How much does a game store pay for a box of Magic? It depends. Probably between $89-95. We're a long way from the days of $74.

What I Charge For a Box

I sell only to my local market. I do not sell online. That means I only order an amount to satisfy my local market. It's still a Toyota Corolla sized order, a Camry if it's a hot set. I have no strong incentive for volume purchases, which would result in my pricing more competitively to move that product. I buy for my people.

There are stores who don't care about box sales and will simply keystone a box, meaning doubling the cost. Keystoning a box of draft boosters would bring the price to around $190. Very few people will buy a box for $190, and that's fine for those store owners trying to hold the line. The price a few years ago, when there was an MSRP and the costs hadn't gone up, was around $145 a box. Many customers still live in this world, with boxes discounted to under $100 online.

But that doesn't answer the question of how much do I sell a draft box for.

Commodity Pricing

My goal is to competitively sell this commodity product, a plentiful staple of Magic players, available everywhere, at market rates, tracked like a stock. I do not care what my local competitors are selling for, I am competing on the national market for sales. My price is around the TCGPlayer median price, plus or minus. It can be higher to a degree. I run a premium store with higher costs and I would like higher margins. If I have a smaller supply, I can afford to sit on higher priced product, but that's generally not how Magic works. Still, there is maybe a 10% variance before I lose a significant portion of my sales.

I currently sell my draft boxes for $125. If you look at the graphic above, that is within a penny of the TCGPlayer median price right now. Because I don't sell to a worldwide market, if I reduce my price to something lower, like $110/box, my local customer base won't move the sales needle. Sure, they'll buy another box or two, but at a significant cost to me.

My Margin

My gross margin to survive is around 45%. With a lot of work, last year we managed 47%. Now let's look at that draft box:

A draft box sold at $125, with a cost of $91.12, has a gross margin of 27%. That's pretty bad. If the whole store were at 27%, I would be out of business. Even worse, check out some of the COVID era sets and you might notice that some prices are below these costs. Stores are dumping these titles at a loss, just to pay their rents. It warps the perception of Magic prices, since the floor is artificially lower

So how do I get to my 47% overall store margin? Well, it's sure as heck not selling Magic the Gathering. I run a diversified store. I buy high margin liquidation items and constantly shop for bargains. We should clear a couple million dollars a year in sales this year and CCGs will be about a third of that. The best way to sell low margin product is quickly, with borrowed money, and that's exactly my goal. I buy the amount of product I expect to sell when my bill is due in 30 days. Most stores have no terms, so they buy the amount they managed to save up. I do have a Corolla worth of COVID era dead Magic, but we don't need to discuss that. I can afford to wait. I still believe you should never bet against Magic.

In Conclusion

This is fine. I've been doing this for 18 years. I have sold Magic at full MSRP, and at deep discounted prices. I have tried singles, sold them online, and decided the labor costs are too high and the investment too great. We run three Magic events in store each week that get from 12-40 people. There are 17 other event options customers would love us to run, if we had the interest and the coordinator. How much thinner can we slice this onion?

I make pretty good money in year 18. In fact, I've finally surpassed my last IT job's salary from 2004, adjusted for inflation. It only took nearly two decades and the best earning years of my life to get to parity. I wrote a book on how you can make such wise financial decisions.

I make that money by being well diversified, constantly reinvesting in my business, and focusing intently on where my customer wants intersect with my business needs. For now, a 27% gross margin on Magic boxes is fine. I can imagine a time where it won't be. I certainly won't put up with that with other card games. One day Magic might be viewed as that other card game. I am a retailer; I will find something else to sell.

Please share this to someone who needs to hear it.

Thursday, January 19, 2023

Purchasing Wizard Wanted

Do you like to buy stuff? Do you enjoy shopping? Do you like to find shiny things that delight you and your friends? Are you sad because you have a limited budget and would like to buy thousands of dollars of things? How about millions of dollars? Would you like to surround yourself with a wonder emporium of your own making? Would you like to aspire to making $50,000 a year, while juggling a million dollars of revenue while chasing the Next Big Thing? Boy do I have a job for you!

It seems lost on a lot of people in the hobby game trade that the primary job of a store owner is buying. Sure, they understand we buy, but they have a vague idea of how much we buy, the immense scale. Even the smallest store owner is responsible for a six figure purchasing budget in a year. Larger stores? Seven. That's right, store owners are walking around, spending hundreds of thousands of dollars a year, ten, twenty, a hundred thousand dollars a month, on cardboard and plastic. Even small store owners are likely hitting six figures in a year.

Our buying jobs are ridiculous. Sometimes we buy on sliding discount sales, moving targets. We are expected to place pre orders and back orders using obtuse tools, like static spreadsheets. A million dollars of sales a year in games, with orders tracked on a spreadsheet. We use them, distributors use them, publishers use them. Every week my primary distributor sends me a 900 line spreadsheet of what I have on order, sorted by the order the sales rep put it on the spreadsheet. Astonishing.

How may of the seven Pokemon releases arriving two months from now would you like to pre order? I shall take 5X. Well, I can get you 2X of SKU 1, 4X of SKU2, 1X of SKU3, etc., etc. And we chase this product across the multiverse through a handful of distributors, with a margin of error for the distributor that always ships late, and the distributor who sometimes loses the order (doesn't happen to me, but happens often enough to others). 

We shall get some safety stock from the poor margin, but reliable distributor. We will pay several different prices that will hopefully cost average to success. We chase product through distributors, direct with publishers, and somewhat indirectly and ridiculously inefficiently on Kickstarter. This IS the job of owning a store. Everything else is details.

A lot of small stores have one distributor and take whatever X is. They often have no product, while I'm trying to manage crazy overstock. We are often, like in the case of Wizards of the Coast, forbidden from selling to these stores. They could fill out a form and order from another distributor, but they don't for some reason. Maybe it's scary. Maybe they don't have the budget, so what's the point?

Buying is the most important thing in retail. You could be an entirely incompetent sales person. You could have the personality of a brick. You could shove your product into vending machines and watch behind one way glass. You could have (gasp) no game space, no marketing of any sorts. If you were an expert buyer you would clean up. 

Buying isn't just ordering, it's a dance of research, finance, purchasing, selling, inventory management, and liquidation. The experts, those really good at this, are expert buyers AND expert sellers. As sellers they know their customers, research product, attend trade shows, and demo the heck out of what works. They manage money like a boss. But if you had to choose buying or selling? They would tell you it's mostly in the buying.

Once the balls are in the air, the inventory bought, todays sales pay for last months invoices, in a Rube Goldberg, perpetual motion machine. Stores without terms, most new ones nowadays, skimp on small releases to save up for the big release. They have been taught leverage is dangerous and to avoid it, rather than credit being a great opportunity.

An expert buyer would be flush with cash, have no excess inventory and no liquidation needs. An expert buyer wouldn't be able to spend the money fast enough. An expert buyer is like Gandalf the wizard: Inventory is never late, nor is it early (Bilbo Baggins). Inventory arrives precisely when you mean it to.

The better Gandalf you are, the more efficient your store, the more money you'll make. It's a painfully tedious job. It's a job that has barely changed in the 18 years I've done it, other than massively growing ten fold. It's a job that could be automated significantly better with technology. It's a job that would have been impossible at my current scale, 18 years ago, without the minuscule technological advances. I love the job. You can't have it. If you were a purchasing Gandalf, I could never afford you. 

Tuesday, January 17, 2023

Customer Service and Profiling

As a bored high school student, I decided to take a community college course at the nearby military base. It was called Patrol Procedure, where we learned how to be a cop. One of the things that struck me was we were taught racial profiling. We learned the Sesame Street lyric, "One of these things is not like the other, one of these things doesn't belong." I didn't think anything of it at the time. This must be what it's like being a cop.

Later I went off to college, bought a beat up muscle car (they were cheap then) and regularly visited the upscale middle class community of my parents. This community was known for their overly attentive police department. I got pulled over in my beat up muscle car a lot.

Officers would look at me, check my license with my parents address on it, and give me a warning for things like going around a corner too quickly. I always made sure my car was in good working order, to avoid getting pulled over, which was hard as a poor college student. I was being profiled based on my out of place car. One of these things is not like the other...

Racial profiling does not work in preventing crime. Let's get that straight. We know this now. You might think racial profiling works, but it's bad because it's a net that drags in every person of color. But that would be incorrect. There is no evidence racial profiling prevents crime. It's lazy policing that intimidates the local community. It certainly has no place in retail.

When I recently received a couple bad reviews because customers felt staff were overly attentive, racially profiling them, I had to wonder. Are my staff racially profiling? Maybe they think this is a form of loss control? You have to assume the worst first.

The assumption is yes, until it's proven otherwise. Our training entails a high degree of customer attention. Customers are greeted when they enter, approached when there's time to see if they need anything, and if possible, a follow up. Three points of contact. You'll likely get no points of contact at Wal-Mart, unless they've got a greeter at the door. It's shown if you greet someone, they're less likely to steal from the store.

Staff are also trained in loss control, but trained to a lesser degree. Ask how many have caught shoplifters and my guess is only the manager will raise his hand. The training is bad because we're bad at it. Where there's poor quality training, there's staff making stuff up, self training. That can be bad. In any case, where there's a negative perception, there is an opportunity for training.

This attention could also be benign. Customer service attention is not only unusual in the big box reality of todays retail, but it might be seen as profiling. Just as "courtesy can be mistaken for flirtation," you could say "service can be mistaken for profiling." Again, you want to give the customer the benefit of the doubt, and start from there. How can we provide a high level of service while making everyone comfortable?

I'm not sure we need to overhaul what we consider good customer service. I do think we need to be aware that our high level of service can be mistaken for profiling. That service might even be turned on to a higher level for people of color, which would be a mistake.

I have to admit in the past I've been overly enthusiastic when people of color (or women) showed interest in hobby games. I try to keep cool, but it's been like living in a California Zen monastery, with a sea of white dudes. That has thankfully changed significantly in the last decade, due to reasons both in and out of our control.

I think the solution to this profiling problem can be as simple as treating everyone with the same level of service, while being aware that people can be sensitive to that attention. The culture may have changed, especially for young people, whose retail perceptions are formed by brushing up against multinational retailers.

All of these things are just like the other. All of these things always belong.