Tuesday, October 10, 2023

Magic: The Supply Problem

How did we get to such a severely devalued situation with Magic the Gathering? There are a number of factors. I think we had a unique set of circumstances, a perfect storm of product expansion, COVID fear leading to a flight to quality, and an inability to calibrate supply and demand because of all the noise. It was exacerbated by a publisher who not only pumped out a tremendous amount of product SKUs, but likewise dumped it alongside frantic retailers. It is a closed loop system, unable to self correct, because of a publisher likely grappling with the same issues. Let's look at each issue individually:

  1. Massive Product Expansion. By looking at the chart above, this seems to have started well before 2020, when COVID made Magic a safe harbor. We've seen a huge number of sets, with an expansion of formats and specialty offerings. The end result, I think most retailers would agree, is overall higher sales across many more products. The problem came from how we ordered those sets.

  • Past Performance is Not Indicative of Future Results. Retailers ordered their typical amount of product based on very steady past sales. However, what we discovered were sales were split over a variety of products, with overall higher sales, while leaving us with overstock of nearly everything, as the average SKU underperformed. We were in new territory. We figured this would all work out eventually, so it was allowed to linger on.
  • COVID Money. In 2020 and 2021, many of us were in pretty desperate straights. We had restrictions on customers coming into the store, no or reduced organized play, and there were few sure things to pay the rent. Magic was pretty sure. In 2020, with my store closed, I made personal deliveries of Magic product to my customers homes. It was astounding they were willing to work with us and I'm grateful. Because Magic was a safe harbor, it was easy to not only spend money on it, but to buy deep. 
  • Safe Harbor. Nobody ever lost money on buying too much Magic, if you waited long enough. This is similar to the IT phrase, nobody ever gets fired for buying IBM. In troubled times, when things are chaotic, there are some safe bets out there, and Magic was a pretty safe bet. If you had the aforementioned COVID money, you could simply sit on any slow moving inventory and consider it a retirement account. Unfortunately, this situation continued well past 2020. I think it culminated last month with the near instant price collapse of Commander Masters. COVID money is mostly gone, both for retailers and consumers. Magic is no longer a safe harbor, but more of a boat anchor.
  • Variety Impeded Purchase Reductions. When Magic is a huge percentage of your sales, perhaps the majority, a reduction in Magic sales is a big reduction in overall store sales. Retailers have been attempting to fine tune purchases, rather than just stop them, because as you can see from my chart, overall sales are up. If you could predict the demand for each item, you could crack the code! Unfortunately, there was too much noise in the data, too many Magic releases of different styles and formats to get a foothold on purchasing. You could reduce your orders multiple times and still lose as the bottom fell out. Those years of steady growth had a very simple product makeup, and we're now seeing a lot of expensive experimentaiton.
  • Wizards of the Coast Was/Is Dumping. What hurt sales and the ability to get rid of overstock was WOTC on Amazon. The Amazon price becomes a benchmark. Some customers see it as a de facto MSRP, since it's the only place that has Wizards of the Coast is listed as the seller. Yesterday they were dumping Ravnica Remastered at below cost on Amazon, a set that releases in January that retailers haven't even been solicited on! There will be some who will argue that it's not WOTC on Amazon, it's Amazon itself, but it's happening on Wizards of the Coast's watch. They are responsible. It has their signature on it. When the publisher is devaluing product, selling at retailer costs, there is nowhere for the price to go but down. It's why the market price of so many products online are at below cost. In the race to the bottom, Wizard's of the Coast is the 500 pound gorilla shoving everyone out of the way to the finish line.
So what's the solution? Retailers will continue to attempt to fine tune, to order less. Wizards of the Coast is dumping product before its release, which is perhaps a sign that we are beyond pumping the brakes. I'm at the stage of just slamming on the brake pedal and letting the car go where it must. My holiday profits may be about weathering a much reduced Magic sales environment. If this were the stock market, I think my advice would be to sit on the sidelines with your cash in the short run, focus on your growing non Magic investments in the long run. 

Monday, October 9, 2023

Magic Mystery: The Elusive ROI

There is a mystery. I wrote yesterday about the disaster that is Magic the Gathering, however that is half the story. The other half of the story is the success of the product SKU expansion. From a sales perspective, this should be hugely successful, and the numbers say it is. Overall sales of sealed product, according to most of my peers, and Wizards of the Coast, is up. Looking at my chart below, on the surface, there's not much to complain about.

Looking at the chart, you'll see some pretty boring Magic years, a dip in 2020 because of a COVID shutdown and then 2021-2023. 2021-2023 represents the new era of Magic, strategy of expanding SKUs. We see rapidly rising sales and gross profits (although that's faltering a bit). Looking at this chart, we appear to have a win! 

The Mystery: Many stores have a similar chart. However, this is only half the story. This is a report of what sold, but it is not a report of what didn't sell. So basically, if you had perfect information, and knew precisely what to buy, there would be no complaints, no overstock, no unsellable product. The chart would tell the whole story. Data like this is all that Wizards of the Coast has from stores. 

The metric that best tells me how I'm doing with money I'm investing in product is called Gross Margin Return on Investment. GMROI for Magic is pretty bad for me. My GMROI is 1.6, which means for every dollar I spent on Magic, I made $1.61 back, which is not very good. Last year Magic was at 1.2! I've been grappling with this for a while now. 

A good GMROI is about 3.2 and my overall store is at 2.9 right now, no doubt pulled down by the low GMROI of my top brand. My store is fine, with Magic at around 30% of sales, but imagine if Magic is most of your sales. You might be looking for a job, while sitting on a stockpile of what would have been your retirement just five years ago. With the exception of the legendary Fallen Empires, nobody ever lost money with too much Magic, until now (Fallen Empires is at $550 a box, btw).

As a side note, My Lorcana GMROI, a game in which I possess not a single piece of stock, is the best in the entire store at 323. It would be nice if these two companies could find some middle ground when it comes to production.

The Solution: With a low GMROI for Magic, and high sales, you have large sales numbers, but you need all that money to pay the inventory bills for the (near worthless) product you have in the back. Rather than just complain about this, you can see there's an opportunity in the numbers. If retailers can crack the code of buying the correct amount of inventory, we'll see the same sales levels but better GMROI numbers. That means more profit, rather than great sales, but layoffs. I can imagine where bean counters at WOTC might not understand this, because they only have the sales data. They can't see the overstock as they don't collect that data from stores.

The solution is obvious, you order the correct amount of product. Easier said than done. The problem is it's a moving target and the sales dynamics have changed. I can order less, but customers are becoming shy at around the same time. Prices are falling instantaneously, making them unwilling to take a chance. Devalued products don't sell at near any price, at least in brick and mortar, which is why they don't show up in reports as reduced profits. Usually you can see a clearance sale in the data, but there's no data if you can't clearance anything. 

It would be best if Wizards of the Coast took the initiative and did this themselves by printing less product, which they may have done with the upcoming Doctor Who set. Magic is lucrative and it's tough for many small stores, relying on a large amount of their income from Magic, to take the steps to forego potential income for the sake of a stable supply. WOTC should do it for us, sad to say. But they're no white knight in this battle, having been guilty of dumping themselves. Solve this mystery and we'll have a historical blip to look back on as this strategy of expanded SKUs pays off into the future. 

Sunday, October 8, 2023

Magic Price Collapse

I started my store in 2004 with the whispered stories of Fallen Empires from a decade before. Distributors, stores and even Wizards of the Coast took a big hit when in 1994, after a series of allocated Magic releases, suddenly everyone got everything all at once. The set was over ordered, over produced, and the storage costs alone threatened WOTC. Everyone vowed not to make that mistake again. According to MTGWiki:

After Fallen Empires, WotC would carefully decide how much of a particular product to print. It was a total swing of the pendulum. A formula was established by the Sales team at Wizards, and how much new product the distributors received was based on how they scored on the profile. How much the local retailer got was in turn determined by the distributors, each of whom had different ways of deciding how much of their allocation would go to the retailers. 

The last several years has been quite the Magic ride. It is clear Wizards of the Coast is not putting any restraints on their print runs. Imagine Fallen Empires, as a three year period of releases, culminating (so far) in Commander Masters. Commander Masters saw its value plummet days after release. I've never seen a Magic product sell alright on a release weekend and simply stop selling entirely on the following Monday. The market price dropped to below cost that quickly. 

Whereas I couldn't understand my income statement back when Pokemon was selling over keystone, I couldn't understand my income statement in September because I had become a discount seller, selling Commander Masters slightly over cost. Sales were wonderful, but where was the money? Both of these were new experiences. 

I do expect something to change soon, for no other reason than I can't afford to keep doing this; nobody can. A sell out of future Magic sets, much like how we treat Yugioh, would be more welcome than extra stock. The Yugioh strategy is to print a set, distributors take pre orders, stores get in their boxes, and within a short period, it is hopefully gone everywhere. Nobody wants to be caught holding. 

In the past, Konami would reprint every high value card into future products, much as Wizards of the Coast is doing with Magic, killing any secondary market opportunities. This is the Yugification of Magic. The secondary market, the activity of selling singles, is the "collectible" in Collectible Card Game. That's not my market, but I absolutely benefit from it when I sell sealed product. I'm punished when that market fails.

Here is a visual understanding of this problem. Below is a table showing the Magic products I have on clearance in my online store. These are all from the last three years. The chart uses TCGPlayer market prices, essentially the stock market for trading cards. This is an idiosyncratic list, but I think it's fairly representative of the market. Nobody will buy this product at just about any price. I have $8K of dead Magic inventory, and another $12K of Commander Masters, which hasn't been declared dead yet, but might as well be, as I attempt to sell it at a dismal 16% margin (well above market prices). At the beginning of the year I had a similar value of dead Magic, so this has not improved for me.

Click image to Embiggen

There is speculation Wizards of the Coast is attempting to boost revenue, possibly in hopes of selling the company. There appear to be signs of tying up loose ends. I hope buyers realize the damage done to the brand by this pump and dump strategy. When you overprint a collectible product, you don't just kill the value of that product, you undermine confidence in the market as a whole, collectible cards going back decades. Which valuable vintage card will be reprinted next? Where will the hit come with the next press release? It's why we're seeing long time sellers of singles, multi million dollar companies, exit the Magic singles market. The only one winning in this game is WOTC short term profits. The brand may never recover. I wouldn't want to buy into that mess. In fact, I plan to buy a lot less. The empire may be falling.

Saturday, October 7, 2023

Anatomy of a Time Traveler

They say a store makes money in the buying, but I think you can also say a store loses money in the restock. I run a front list driven retail store, dependent on new releases. However, I've never turned down a reasonable restock. The key to a successful restock is understanding the product. 

You cannot just rely on performance metrics, which is why buying is not an easy job to delegate. Buying requires understanding the meta of the store, the game, and the customer. There is a story behind every product and you either know it, or you don't. The more you know, the better your buying performance.

Let's take a look at a single product. It happened to sell this morning, so it's on my mind. Today we'll examine the Necron Chronomancer.

The Product: Immediately, you may notice it is a blister from Games Workshop. It's a special character or command option and it will likely be a slow seller. That's all I really know about the game meta. It is likely to go out of print quicker than a box set, so if I want to have this for the holidays, I may want to buy more than one.

How is it performing? This is the first step in deciding if I'll bring in another model. However, it is not always simple. Looking at the Sales History table below, I've sold one in the last month, and five in the last year. I see that I've sold 14 in its history, which tells me it's not a new model from the recent release. It's a steady seller. 

The Game: One thing I might do is look back at the history. I may have sold five in the last year, but did I sell all five, say seven months ago? Could there have been a spike in demand hiding in the numbers? If it were later in the new Necron Codex release, that may be the case. I may have a product where the demand was satisfied early on and now this was the last one, rather than the latest one to sell. The numbers can lie.

What do these numbers even mean? I'm looking at turn rates on individual items like this. In this case it has a turn rate of five in a year, which may or may not be distributed throughout the year, as mentioned. My 40K department has an average turn rate of around four, which means this model is well within those performance metrics. The Necron Chronomancer appears to be solid.

There are other inventory considerations as well. For example, there are many slow selling, underperforming Games Workshop items that are considered part of their core offering. I must carry these, if I want to engage in various promotion programs. I'll have a notation on the product code to let me know not to make the smart inventory choice, but rather nod to the marketing department. It all gets lost in the sauce, to use a Miami Vice line.

There are products that are often part of a collection or set that I want to promote. The Necron codex was recently released, and for a while at least, I want to have every Necron item available. Unfortunately, about half are out of stock, but I'll keep trying. If the turn rate on the Chronomancer were really low, like perhaps one, I might decide this was my opportunity to finally move it. I also might second guess myself and figure the Chronomancer might be good in the new codex. Since it took several months for this to sell after the codex was released, I'll assume it's about the same. I might even ask somebody.

The Store: How is my 40K community? Is it on the upswing or downswing? Our coordinator coordinates for a couple different stores, a relic from the COVID times of attempting to get events restarted. I consider that shaky. Do they have events scheduled for the future? Is the community drifting towards other games? How many starter sets are we selling (not enough), which often determines if we have new entries into the hobby or if I'm selling to the same people. 

With a Necron model like this, it shows long term success over time, but there are often times where we see spikes in a new model, then nothing. That community got the model they wanted and there are no new people coming in to buy it afterwards. This happens a lot with miniature games. It's where all our Fantasy Flight miniatures games are. We sell a ton of new releases, while the middle period releases are dead, and the starters barely hang on. Veterans will buy out the new releases, but you often need new players for your restocks.

How do you teach this? That's my big concern with anything I do. How do I transmit my considerations to a new buyer? Do my fuzzy, subjective criteria even matter? I believe they do. When I first learned performance metrics, I broke a lot of stuff. It turns out you need a lot of stupid inventory to support the smart inventory. But how do you know which is which? It turns out there's a lot of art to the science.

We had a manager who was exasperated at my 40K buys, thinking I was clearly incompetent as a buyer. I let her take a theoretical stab at the new release and she was picking inventory no better than chance. Customers were not making logical choices! My performance with the line is probably just a little bit better. There are just too many competing factors, including the company itself trying to outsell me. In these cases, it's better to hope for a sell out than a long tail.

It would be easy to error on the side of not buying. At the end of the month, you're rewarded by not doing your job with a pile of money. You can do that once or twice a year, if you need to, but there's a cost. My first attempt at delegating buying, during a ten week trip, resulted in needing to talk with the manager. "You don't understand, you must buy. The amount you must buy is your Open to Buy number. Spend all those dollars." 

Finding things to buy on a daily basis is really easy. The hardest work comes from finding new lines, new companies, new departments to expand into. I could very easily continue to buy deeper and broader hobby games, and my systems says I should, but I do believe my market is being served in that arena as best as I can fathom. I get better results nowadays with hobby adjacent products, like stuffies, pins, magnets, and yes, toys. All of these new items must be carved from the existing budget. All of these items are the first to die in a recession.

So back to our time traveler. Maybe I decide to only stock Necron Chronomancer one deep, providing me $22 (the cost) to buy a couple stuffies. Can I sell these stuffies five times in a year, like those Necron dollars? Looking at my reporting, my Toy department turns at 5.42, so I think the answer is yes. Then again, it often takes me a month or longer to get a solid Games Workshop restock. I might need what we call "safety stock" to weather the typical Games Workshop outage. Perhaps two on the shelf would be safer. I just don't know. Neither does anyone else.