Friday, September 22, 2023

Margins (Tradecraft)

Your sales are strong, but your profits aren't where you want them. Margin may be to blame. Strong POS reporting can help you determine weaknesses. Likewise, you may find yourself with a perplexing abundance of cash, and margin may get the nod for that success, once you identify it. I'm questioning margin this morning, so where do I look?

The first thing is trends. My margin this month is no different than my three year average. I'm probably fine, or if I'm not fine, I'm no worse than average. If you don't have a fancy reporting package, you might have to crunch some numbers to get this data. I have this calculated on my Open to Buy spreadsheet as well.

Next is individual departments. I might be hitting my average when it comes to margin, but I feel like some of my departments are under performing. I feel a disturbance in The Force. Let's take a look:

In this case I've massaged my numbers and added some color. The green departments are doing pretty well, above average of around a 45% gross margin. Some of this is a lie. For example, my puzzles with a 51% gross margin don't include shipping charges, which are often part of purchasing. I offset those when possible. Dice include non inventoried loose dice with no cost associated with them, which can boost the reported margin. Statistics are lies, but if you know which ones you can and can't trust, they're still useful.

Of all the colors, the blue departments are most irksome. CCG Supplies should generally be a high margin department. However, we've had a bit of a purge, and with a clearance sale comes a hit to margin. Board games are in the same category, a perpetual cavalcade of clearance. The question there is should I order fewer board games? I decided several months ago I should be more cautious, but that's not reflected in the numbers yet. 

I have a strong FOMO instinct when it comes to board games, mostly because I'm not a board gamer and don't want to miss a chance. We sell 700 board games and none sell more than 100 copies in a year. I have a strong Bilbo Baggins feel about my board game.

Finally we have the red departments, the problem children. CCGs are commodity priced, so I see their low margin as systemic, part of the deal. I don't sell singles or lump "events" into this category, which could raise margins. This is systemic for many stores, part of their deal. I was also hurt by selling Commander Masters at market prices, which is pretty much a fire sale. CCG margin has held up pretty well, regardless, if you can accept those numbers. A diversified store is able to sell CCGs at a 35% margin all day long, but a card shop? You better have volume and low overhead.

Miniature Games are a bit vexing, as it feels like sales are primarily comprised of new releases and clearance items. Again, I've decided I should slow down on ordering some of these games, but that's not reflected in the numbers yet. We lack enough new players to keep these lines strong; they are somewhat static. We can't give away Games Workshop rulebooks. Despite a new 40K edition, there does not seem to be a lot of energy in the category. It's a tough category to crack with an uncertain economy, but that's probably just an excuse.

RPG miniatures have also seen a deep clearance of dead wood. I've dumped a huge amount of WizKids dead miniatures, while at the same time bringing in a ton of back orders that finally came back into production. The restocks aren't reflected in the numbers, but they offset the dump of dead plastic in sales.

To summarize, we want explanations, not excuses. We want action items, otherwise we're just wasting our time. What we don't want to see are perpetual low margin categories, if it can be avoided. What are some of my action items?

  • Price Increases: Boost prices on snacks slightly to return to higher margins (50% at least)
  • Diversification: Crack low margin CCG titles for singles. Commander Masters, for example
  • Fine Tune Ordering: Order about 15-20% fewer board games, maybe when you're thinking about ordering 6, you order 5. The biggest change would be to order none rather than speculate.
  • Stop Ordering Multipacks: Fine tune RPG Miniature ordering based on performance metrics, and not a sleeve of 6 of everything. I order a six pack of paints from one company that doesn't require me to, because Games Workshop trained me.
Low margin is a buying problem. You primarily have a low margin because you're an inattentive buyer (blaming myself here). Sure, marketing could be improved. You could demo board games better to not have to clearance them, but low margin generally comes from blowing out dead product. You have dead product, because you didn't forecast demand properly. Be better at forecasting. Build a more robust supply chain so you can re-embrace just-in-time ordering. Get your sales team to promote fewer titles at higher volume, rather than a shotgun approach. Easier said than done!

Gross margin is also just one metric. If I look at a seemingly healthy department, like puzzles, what do I really see in sales? My staff despise puzzles, and they've been a thorn in my side, but they've been managed since COVID and have a turn rate of four for the year, which is really good. My 3.14 GMROI is slightly above average too. If puzzles were sitting on the shelf at full margin with a turn rate of one or two, that would be a problem. Margin won't tell you about those shortcomings.

Turn Rate


Then again, my CCG turn rate is currently four, but before COVID it was 18. Somewhere between 4 and 18 would be better. You have to have a grasp on what's normal and what you're trying to accomplish. Four is actually up from two at the beginning of the year, so I'm not complaining too loudly.

Finally, this is dynamic. I can't think of a time where all departments were firing at 100%. There is always a problem child. Try to not make it the same kid every time.

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