This is (perhaps) a series of posts about the basics of understanding how a game store works, and as it's fairly typical of retail, how most stores work. I'm going to attempt to keep this at an extremely basic level, covering things most consumers don't understand, and admittedly, some concepts I didn't understand when I started my own store. If you have concepts you're having a hard time wrapping your head around, please leave them in the comments and I may write about those next.
The purpose of the game store is to make money. When I say "money" I mean net profit. Net profit is what's left over after you pay for product (50%), rent (15%), wages (15%) and the rest of store expenses (15%).* If you just did the math, you may have realized there's a missing 5%. That's your net profit. So when you sell a customer a $100 board game, your net profit will end up being about $5. If you've got your business really dialed in, it may be as high as $10. It will never be much higher than that. Retail in general is in the 1-10% range of net profit. Most of the business world tops out at 15%.
Making money is incredibly hard. Some will look at my statement of purpose and become offended, but let me tell you, nobody accidentally makes money in retail. Look at your personal income and expenses now and how hard they are to manage. Now blow them both up by 10 to 20 times while trying to come out with that 5% excess at the end to be profitable (not at the beginning, which is how personal finance works best). You are like a millionaire who has to worry about toilet paper prices. Half the community feels sorry for you for your toilet paper problems while the other half thinks you are wealthy because of your gross income. You will be pinching pennies while being regularly asked for donations.
Money is made in the buying. Stores buy from suppliers or directly from the publisher, receiving a discount from the retail price, also called margin. So a $50 board game might cost a store $27.50, providing the retailer a 45% margin (which also equals a Cost of Goods of 55%).
You buy product based on your cost of goods. This confused me in the beginning, but if I sell $10,000 of product this week, and my costs of goods is 55%, then I have $5,500 to spend on games the next week. In fact, I very much need to spend this money to maintain sales levels and pay expenses. If I spend under this number, I am screwed as my sales will fall and I can't pay my bills. If I spend over this amount, I won't get increased sales, and I won't have money to pay my bills. You need to spend ALL the purchasing budget, no more and no less.
The hobby game store is built around a roughly 45% gross margin on product (which used to be higher). All retail is based on a particular margin with a particular level of sales acceleration (or turns) that provides a traditional gross income to cover traditional expenses. When the margins begin to shrink or the sales begin to slow, stores are forced to modify their traditional model, perhaps with weaker locations with cheaper rent, less staff, or tricks to make it all work, like selling high margin used merchandise. Store owners work harder for less. As you see the retail tier of the hobby game trade begin to falter, you see an increase in hybrid stores designed to counter changing conditions.
The traditional retail model is on shaky ground. Despite having 7-10 times as much commercial real estate as the country needs, rents seem to only go up. Minimum wage in many urban parts of the country are rising 5-10% a year with no end in sight. Energy has gotten more expensive resulting in higher electricity and shipping costs. Prices are inelastic in the game trade, so they cannot be raised to compensate for rising costs. You can only sell more, find a cheaper way to run an operation, or close. This level of crisis is baseline in retail.
Why do publishers need game stores? Publishers believe game stores get their product out to a wider swath of consumers than they could accomplish through their own marketing, which is often weak to nonexistent. They believe game stores create community and build markets, but they almost all sell direct to consumers anyway. They want it both ways.
In the game trade, publishers compete directly against the retailers. Publishers often provide customers discounts, sell early at conventions and offer unique incentives to undercut retailers and capture sales. This use of "multiple channels" has many excuses attached to it, but in general, publishers don't believe they can sit and wait for retail stores to push their products in a crowded marketplace, and they're generally correct. It's their stuff, they can do what they want.
There's a general tension in the partnership between publishers and retailers. Although nearly every relevant publisher is also a competitor, retailers let this slide, providing publishers are competing against them on only a slightly tilted playing field, often while providing some brand value protection (which protects retailers from each other). So although Games Workshop will sell direct only items on their website, they also provide enough brand value protection to make selling their front list product a profitable endeavor.
Companies like Paizo offer PDFs and a discount to subscribers that retailers can't participate in, which results in many retailers deciding not to carry Pathfinder products. Publishers will all compete against retailers, they'll all find minor advantages, but when a minor advantage becomes a huge advantage, most retailers walk. The same is true with product badly devalued online. The marketplace is big enough for retailers to shun devalued product.
The exception is when velocity overcomes margin and a product is just too good to drop. Consumers can buy D&D books on Amazon at distributor costs and Wizards of the Coast is now selling Magic boxes at very low prices. The de-facto MSRP of a Magic box is now $95, leaving a 17% margin for retailers. Is that enough to crush retailers who are Magic centric? Not if they can keep their velocity up (Pro tip: they can't, so don't be Magic centric).
But what about Amazon and the Internet? It depends. The Internet only accounts for around 12% of all sales nationwide, but it might be as high as 50% for hobby game product. There is still a lot of meat on the bone, so to speak, although those with distressed local markets, which is a godawful lot of the country nowadays, will feel Internet price pressures more than higher income, urban markets.
It's possible there may be a ratio of customers to brick and mortar retailers that falls dramatically with Internet price pressures that is felt more keenly by smaller markets with fewer customers. For larger markets it's possible to grow faster than the shrinking ratio. A bit like finding a job, you only need one customer base and what everyone else is doing is not so important.
How much do most store owners make? This is the realm of bistro math, as we don't have much data to go on. In general, most game stores are small. Lets call them $200,000 a year endeavors. A $200K a year store has a working owner who makes a small salary. Lets call it $30K a year. If they have a 5% net income, that's another $10K a year, bringing their income to $40K. This is known as a Buy a Job, and the owner can't get sick, go on vacation, retire or likewise show any value from this bought job after they decide to quit. Their businesses are valued at the liquidation number.
About 5-10% of stores are alpha locations that do over a million dollars a year in sales. The owner might make that same $30K base salary, but their net profit on $1,000,000 is $50K, meaning they make $80K as their income. As an alpha store has usually been in business 10-30 years, that might provide a reasonable lifetime salary range for a long term retailer ($40K-$80K). Neither amount is very much money, considering the skills needed to run such an enterprise, and most store owners in a Buy a Job are usually trapped without the ability to grow or expand to alpha status.
Got questions? Ask below...
* Yes, it's usually something like 55%, 14%, 13%, 13%, but you get the idea.
Friday, September 28, 2018
Sunday, September 23, 2018
Inheritance
Just a quick post to point out that employees don't inherit or otherwise wrestle control of businesses from their owners. Every once in a while I hear talk like this, but no matter how good an employee might be, they will not become an owner unless the owner decides to somehow sell it to them.
Most game store sales are of this variety, usually with the owner disengaging while the employee provides a certain amount of profit for a certain amount of years. If the employee founders, the owner can step back in and take over, per the stipulation of the contract. Most are likely to just shut down at that point, as they clearly have life goals that no longer align with running a store.
I'm not sure it's necessary to explain US contract law or how an LLC or corporation works to maintain control of a business, but that's where you might want to look when you're mentally voting on who should own a store. These exist to protect business owners from each other, the public, employees and anyone else who wants to have their hand in the pie (except the government). On top of these, we have partnership agreements, which add additional protections, like allowing owners a chance to grab shares before a divorced spouse has a chance to become their new partners. No where in our partnership agreement do I see the validity of game room leadership coups.
Also note that most excellent managers have seen how the sausage is made and usually have no desire to own their own store. I've offered such ownership or other attempts at retaining their talent on a couple of occasions. The community may believe they should own it, but not only is it unlikely, the candidate is not interested in the position.
Finally, my job is to create processes and procedures and hire excellent managers and employees so that they are doing most of the heavy lifting and I can do other things, like have vacations, family life, or one day retire. The more successful I become, the more my staff will shine. This is by design.
Most game store sales are of this variety, usually with the owner disengaging while the employee provides a certain amount of profit for a certain amount of years. If the employee founders, the owner can step back in and take over, per the stipulation of the contract. Most are likely to just shut down at that point, as they clearly have life goals that no longer align with running a store.
I'm not sure it's necessary to explain US contract law or how an LLC or corporation works to maintain control of a business, but that's where you might want to look when you're mentally voting on who should own a store. These exist to protect business owners from each other, the public, employees and anyone else who wants to have their hand in the pie (except the government). On top of these, we have partnership agreements, which add additional protections, like allowing owners a chance to grab shares before a divorced spouse has a chance to become their new partners. No where in our partnership agreement do I see the validity of game room leadership coups.
Also note that most excellent managers have seen how the sausage is made and usually have no desire to own their own store. I've offered such ownership or other attempts at retaining their talent on a couple of occasions. The community may believe they should own it, but not only is it unlikely, the candidate is not interested in the position.
Finally, my job is to create processes and procedures and hire excellent managers and employees so that they are doing most of the heavy lifting and I can do other things, like have vacations, family life, or one day retire. The more successful I become, the more my staff will shine. This is by design.
Wednesday, September 19, 2018
Honesty in the Balance (Tradecraft)
You know what needs to go. I'm referring to the small business with the blind spot on their balance sheet or income statement. Most stores have a blind spot. Maybe it's an employee. Perhaps it's a luxury you think you can't do without. Perhaps you refuse to properly manage inventory because you're afraid of disappointing customers. For successful stores, who have conquered all the big problems, it's often owner compensation.
Some blind spots are a refusal to admit you are defeated. Rent that's far too high is often a sign you're doomed, as it's usually non negotiable. If you've got a bad lease, you may be sunk, spending your time re-arranging the deck chairs in hopes to slow the intake of water on the lower decks. As Dave Wallace lectures, when he attempts to acquire stores, the only deal breaker, the only unfixable thing, is a bad lease. If you're in this situation, you may be trying to wait it out, although it's possible to re-negotiate a lease. Everything is negotiable all the time. If this is you, bring your broken financials to your landlord and lay it out before it's too late. I did this during the recession and got a steep reduction with no increases for the lease term.
Debt is also one of those things you may be trying to wait out. I'm in that situation after a big expansion. As long as you can proceed slowly and it's not getting worse, you're not going further into debt, it's the bed you've made and you've got to lay in it. Debt can be re-negotiated as well though, as in restructuring it to kick the can down the road and smooth it out. It's a logical thing to do if you're against the wall. I did a little of that earlier in the year.
Staff is a hard one because you've invested in people and through no fault of your own, you can't afford them. It may also mean regressing in your personal lifestyle. You may need to work an extra day a week or take a pay cut to get things back in balance. You may need to stop expensing your personal life through your business. This is often the necessary strategy when sales take a steep downturn. The economy is strong in most places, but it won't always be. Rolling up your sleeves is something to consider and plan for, as a contingency. If you have employees, know who can cover what areas, and make sure staff are cross trained.
What I see are elaborate plans to avoid obvious imbalances. Any experienced small business owner in your field can look at your income statement and point out your obvious problems. It doesn't take an expert, an accountant or a broker to point out you're off course. So why is it so hard for many of us to do the same? The good news is when I see a bad income statement, I see profit. I don't see terminal mismanagement, I often see what's known as SDE, or Seller's Discretionary Earnings, all the dumb things you do that I would change to equal profitability. If you think you're in trouble, if you want to sell or restructure, maybe take a look at your SDE, take a deep breath and do the hard work of fixing your business. You go first.
Some blind spots are a refusal to admit you are defeated. Rent that's far too high is often a sign you're doomed, as it's usually non negotiable. If you've got a bad lease, you may be sunk, spending your time re-arranging the deck chairs in hopes to slow the intake of water on the lower decks. As Dave Wallace lectures, when he attempts to acquire stores, the only deal breaker, the only unfixable thing, is a bad lease. If you're in this situation, you may be trying to wait it out, although it's possible to re-negotiate a lease. Everything is negotiable all the time. If this is you, bring your broken financials to your landlord and lay it out before it's too late. I did this during the recession and got a steep reduction with no increases for the lease term.
Debt is also one of those things you may be trying to wait out. I'm in that situation after a big expansion. As long as you can proceed slowly and it's not getting worse, you're not going further into debt, it's the bed you've made and you've got to lay in it. Debt can be re-negotiated as well though, as in restructuring it to kick the can down the road and smooth it out. It's a logical thing to do if you're against the wall. I did a little of that earlier in the year.
Staff is a hard one because you've invested in people and through no fault of your own, you can't afford them. It may also mean regressing in your personal lifestyle. You may need to work an extra day a week or take a pay cut to get things back in balance. You may need to stop expensing your personal life through your business. This is often the necessary strategy when sales take a steep downturn. The economy is strong in most places, but it won't always be. Rolling up your sleeves is something to consider and plan for, as a contingency. If you have employees, know who can cover what areas, and make sure staff are cross trained.
What I see are elaborate plans to avoid obvious imbalances. Any experienced small business owner in your field can look at your income statement and point out your obvious problems. It doesn't take an expert, an accountant or a broker to point out you're off course. So why is it so hard for many of us to do the same? The good news is when I see a bad income statement, I see profit. I don't see terminal mismanagement, I often see what's known as SDE, or Seller's Discretionary Earnings, all the dumb things you do that I would change to equal profitability. If you think you're in trouble, if you want to sell or restructure, maybe take a look at your SDE, take a deep breath and do the hard work of fixing your business. You go first.
Tuesday, September 18, 2018
Board Game Analysis (Tradecraft)
Welcome to the annual jumping to conclusions event! I hope you're wearing your special jumping shoes, because I have a tiny sample of my sales data that I'm going to tweak into a narrative that provides me meaning and allows me to sleep at night. Ready?
This came from a discussion in which some game store owners will avoid games that rank highly on Amazon. Some will also avoid game exclusives out of principle or laziness, exclusives being games only sold by one supplier. Publishers will claim exclusives provide various benefits, including brand value protection by implementing control over where their product goes. Is this true? We'll take a look.
I'm also noting games that were crowd funded. This will show whether crowd funded games have penetrated my best sellers, as many believe Kickstarter will be the death of the game trade. I think you'll find that's not quite true.
Below are my top 50 sellers over the last twelve months. Past performance is no indication of future results, so if you're a new store owner, staaaaaaaap. Buy new games going forward and avoid the strong temptation to back fill. This is not a buyers guide.
So what do I see?
- 14 of my top 50 board games (28%) were crowdfunded. Most are at the bottom of the top 50 though. I've managed to back two of those, despite backing eight board game projects in total. Most were terrible. The other 12 top crowd sourced games came through distribution, making their origin more of a footnote for me. These numbers are significant, so I certainly wouldn't want to be shut out of the Kickstarter market. It's clearly part of the ecosystem. However, my ability to pick winners via crowd funding is sorely lacking. Years ago when I tracked every KS board game product, my conclusion was Kickstarter games were no better ranked nor worse ranked on Boardgamegeek.
- There's not much difference between Amazon discounts of distributor exclusive games. The distributor exclusive games average a 15% Amazon discount versus 17% for non exclusive. Those are averages, however. If you look at very deeply discounted games, more than 20%, you see they are 2:1 more likely to be a game that's not exclusive. With exclusivity we usually see a brand value protection strategy, which for brick and mortar stores is quite welcome.
- Amazon top selling ranks make no difference. 8 of our top 50 games (16%) are on any of Amazon's top 50 lists. The average ranking of both distributor exclusive and non exclusive games is around 1,000. That might be because Amazon has already saturated that market or perhaps we're a little too niche within the game market. I personally don't look at Amazon rankings for games, although I'm intensely curious about how my book ranks (#144 in starting a business, but anything is possible if you create small enough categories).
So what did we learn? Amazon rankings are meaningless. Kickstarter is important for the board game ecosystem, but my ability to pick winners is poor. Distributor exclusives aren't especially brand value protected online, but those without exclusivity tend to be very deeply discounted.
| Crowd | AMZ | AMZ | Distributor | ||
| Game | Funded? | Backed? | Rank | Discount | Exclusive? |
| Catan | No | No | 7 | 10% | Alliance |
| Gloomhaven | Yes | No | 105 | 0% | - |
| Betrayal at Baldur's Gate | No | No | 640 | 18% | - |
| Charterstone | No | No | 354 | 30% | - |
| Betrayal at House on the Hill | No | No | 36 | 31% | - |
| Azul | No | No | 86 | 0% | GTS |
| Dead of Winter | No | No | 408 | 10% | Alliance |
| Scythe | Yes | No | 65 | 21% | - |
| Cards Against Humanity | Yes | No | 10 | 0% | CAH |
| Arkham Horror LCG: Core Set | No | No | 74 | 17% | Alliance |
| Mysterium | No | No | 4724 | 10% | Alliance |
| Legend of the Five Rings LCG | No | No | 584 | 21% | Alliance |
| Twilight Imperium | No | No | 1778 | 27% | Alliance |
| Mansions of Madness | No | No | 1615 | 0% | Alliance |
| Pandemic | No | No | 33 | 20% | Alliance |
| Codenames: Disney Family | No | No | 55 | 36% | - |
| Stuffed Fables | No | No | 1203 | 20% | Alliance |
| Codenames | No | No | 35 | 20% | - |
| Harry Potter Hogwarts Battles | No | No | 47 | 36% | - |
| Star Wars: Imperial Assault | No | No | 819 | 10% | Alliance |
| Boss Monster | Yes | No | 209 | 23% | - |
| King of Tokyo | No | No | 100 | 20% | - |
| Warhammer: Shadespire | No | No | 15% | - | |
| Pandemic: Legacy Season 2 - Bl | No | No | 386 | 35% | Alliance |
| Dark Souls | Yes | Yes | 523 | 45% | - |
| Ticket to Ride | No | No | 22 | 14% | Alliance |
| Dominion | No | No | 12 | 33% | - |
| Carcassonne | No | No | 49 | 29% | Alliance |
| 7 Wonders | No | No | 158 | 10% | Alliance |
| Splendor | No | No | 71 | 10% | Alliance |
| Terraforming Mars | No | No | 278 | 0% | - |
| Sagrada | Yes | No | 127 | 6% | - |
| Massive Darkness | Yes | No | 3,770 | 21% | - |
| Eldritch Horror | No | No | 279 | 23% | Alliance |
| Fallout Board Game | No | No | 337 | 20% | Alliance |
| 7 Wonders: Duel | No | No | 165 | 10% | Alliance |
| Exploding Kittens | Yes | No | 2 | 0% | - |
| Bears vs Babies | Yes | No | 37 | 0% | - |
| Rising Sun | Yes | No | 769 | 25% | - |
| Near and Far | Yes | No | 701 | 36% | - |
| This War of Mine | Yes | No | 26% | - | |
| Century: Spice Road | No | No | 1323 | 24% | GTS |
| Mice and Mystics | No | No | 536 | 14% | Alliance |
| Sushi Go! | Yes | No | 11 | 0% | - |
| Axis & Allies Europe 1940 | No | No | 627 | 29% | - |
| Pandemic: Legacy Season 2 - Ye | No | No | 1452 | 21% | Alliance |
| Small World Board Game | No | No | 10591 | 7% | Alliance |
| The Grimm Forest | Yes | Yes | 2213 | 3% | - |
| Takenoko | No | No | 535 | 10% | - |
| Dragonfire | No | No | 6376 | 26% | - |
| Overall | Avg | 924 | 17% | ||
| Dist. Exclusive | Avg | 1113 | 15% |
Saturday, September 15, 2018
FLGS: The Card Game
"I really like your book, but what I missed was customer stories."
-- customer
I laughed and said it was a terrible idea. It would be my last act as a store owner, before they strung me up. In my book (currently 13, 5-star reviews on Amazon - go check it out), I was careful not to include the interesting cross section of humanity I call my customers. I love these people. They are my tribe, as much as they like to divide and question authenticity.
I don't actually know if they're any more insane than the rest of the general public. However, despite their unusual antics, they're far more predictable and rational than regular people. I've said it many times, if I had to sell things to mundanes, I would quit. I've got better things to do, for more money and less stress. Which brings us to the card game.
FLGS: The Card Game is all about quirky customers. It's basically a Guillotine knock off, since I lack creativity and skill in the arena of game design. If you're questioning whether it's legit to copy game mechanics, let me refer you to a little black box known as Cards Against Humanity. Each card in FLGS is a customer and each player is a store owner.
Your goal is to acquire high value customers, the alphas and the angels, while fobbing off the difficult customers, the vultures and parasites to your store owner opponent. These are categories I wrote about eight years ago in a blog post called Law of the Jungle, and they work very well for a game (stereotypes are like that). As the customer comes up to the counter, you can be your smooth self and retain them or use action cards and such to fire them and and send them on their way to your competitor. My real-world competitor actually collects these people, providing an important service to the gamer ecosystem.
The point of this game is the cards are amusing. That's it really. The game mechanics are pretty standard fare. If you find the idea offensive, first you have no sense of humor, and second, this game is not for you. I've got 14 years of anecdotes and customer stories I can't share publicly. But I'll happily put it in a game. This may only appeal to other store owners and my readers, so who knows if anyone cares, especially in an age when people take themselves far too seriously (gotta maintain subculture authenticity).
I've got to be careful to file the serial numbers off. I know from experience people will think I'm talking about them, so when possible I'm creating a composite. Your crazy behavior is probably not unique to you. My fading memory is actually a help here. For example, my energy drink swilling and candy binging Doctor Goodbar card is a composite of my next door neighbor dentist who buys Red Bulls (diet) and the dental staff who binge on candy bars.
My plan is to make maybe 25% more cards than needed in the prototype and let an editor weed out stuff only I find amusing. If it's all funny, who knows, maybe we can be idiots and launch the expansion at the same time as the base game. Did I mention I can pillory the rest of the game trade with the action cards?
Although the vast majority of my customers are white males, a trend that is changing rapidly, I'm trying to be as gender neutral and inclusive of people of color as possible, without falling into stereotypes, of course. Writing the book, the proof readers pointed out quite a bit of Ferengi-level sexist crap I had acquired over the years in the trade to describe various business practices, and the book was better for removing it.
I've posted some card concepts on my Facebook author page. I've got one mildly interested publisher (not my book publisher) and I've thought about using Kickstarter. The pitfalls of a first time game designer are many, even if it's a bunch of cards, so I would rather not do this on my own. If you're an interested game publisher, let me know. For now, I'll be working up (really writing up, since mechanics are established) a prototype.
-- customer
I laughed and said it was a terrible idea. It would be my last act as a store owner, before they strung me up. In my book (currently 13, 5-star reviews on Amazon - go check it out), I was careful not to include the interesting cross section of humanity I call my customers. I love these people. They are my tribe, as much as they like to divide and question authenticity.
I don't actually know if they're any more insane than the rest of the general public. However, despite their unusual antics, they're far more predictable and rational than regular people. I've said it many times, if I had to sell things to mundanes, I would quit. I've got better things to do, for more money and less stress. Which brings us to the card game.
FLGS: The Card Game is all about quirky customers. It's basically a Guillotine knock off, since I lack creativity and skill in the arena of game design. If you're questioning whether it's legit to copy game mechanics, let me refer you to a little black box known as Cards Against Humanity. Each card in FLGS is a customer and each player is a store owner.
Your goal is to acquire high value customers, the alphas and the angels, while fobbing off the difficult customers, the vultures and parasites to your store owner opponent. These are categories I wrote about eight years ago in a blog post called Law of the Jungle, and they work very well for a game (stereotypes are like that). As the customer comes up to the counter, you can be your smooth self and retain them or use action cards and such to fire them and and send them on their way to your competitor. My real-world competitor actually collects these people, providing an important service to the gamer ecosystem.
The point of this game is the cards are amusing. That's it really. The game mechanics are pretty standard fare. If you find the idea offensive, first you have no sense of humor, and second, this game is not for you. I've got 14 years of anecdotes and customer stories I can't share publicly. But I'll happily put it in a game. This may only appeal to other store owners and my readers, so who knows if anyone cares, especially in an age when people take themselves far too seriously (gotta maintain subculture authenticity).
I've got to be careful to file the serial numbers off. I know from experience people will think I'm talking about them, so when possible I'm creating a composite. Your crazy behavior is probably not unique to you. My fading memory is actually a help here. For example, my energy drink swilling and candy binging Doctor Goodbar card is a composite of my next door neighbor dentist who buys Red Bulls (diet) and the dental staff who binge on candy bars.
My plan is to make maybe 25% more cards than needed in the prototype and let an editor weed out stuff only I find amusing. If it's all funny, who knows, maybe we can be idiots and launch the expansion at the same time as the base game. Did I mention I can pillory the rest of the game trade with the action cards?
Although the vast majority of my customers are white males, a trend that is changing rapidly, I'm trying to be as gender neutral and inclusive of people of color as possible, without falling into stereotypes, of course. Writing the book, the proof readers pointed out quite a bit of Ferengi-level sexist crap I had acquired over the years in the trade to describe various business practices, and the book was better for removing it.
I've posted some card concepts on my Facebook author page. I've got one mildly interested publisher (not my book publisher) and I've thought about using Kickstarter. The pitfalls of a first time game designer are many, even if it's a bunch of cards, so I would rather not do this on my own. If you're an interested game publisher, let me know. For now, I'll be working up (really writing up, since mechanics are established) a prototype.
Saturday, September 8, 2018
How I Knew
The question people sometimes ask is "How did you know you were going to be successful as a game store owner?" You might be surprised to learn it was fairly recent. I spent far too much money building my stores, and it wasn't clear if these sunk costs would ever pay off. You can easily overbuild a business with no financial benefit and a really, really, long return on investment (ROI). I still wince when I think of the startup losses for the first year, and what I could do with that money if I hadn't been paying to learn retail. I could start a store now for a lot less, that's for sure.
I took no significant profits from the business for the first five years. We moved to a bigger location, with stratospheric costs, after three years, expanding with loans and the like, so eventual profitability was in doubt. That's right, after five years, which included writing my blog for the last two, I wasn't entirely certain this whole thing wasn't a boondoggle. When the profits finally did arrive, what did I do? I expanded again. Too much money leads to risk taking.
During the early years, I started doling out ever increasing distributions in the $1,2000-$2,000 a year range, as a kind of success place holder. Maybe if I faked profitability for long enough, it would actually happen. It's kind of like budgeting for your salary, even if you know you can't pay it in the beginning. Getting up to speed on profitability was critical, because my financial life had a five year period where I had an artificially low mortgage, and at year six, I needed to make nearly double my salary. My mortgage was set at fives years of "interest only," something banks don't do anymore. Year six was a wildcard.
So for five years, I felt like we had overbuilt. It was like we were waiting for demand to catch up with the supply we were providing. We were overstaffed, over-inventoried, and growth was slowly putting wind in our sails. I say slowly but it wasn't uncommon to have 10-20% growth a year during these early days, but with corresponding infrastructure and staffing headaches to manage it. We talked a lot about gross sales, but I carefully avoided the "n" word.
By the end of the fifth year, profitability started to climb. It appeared to be enough to guarantee I wouldn't lose my house solely because I couldn't make the payments. Was it a blip on the radar? Maybe, but my trend lines in Excel told me we were onto something. Just sit back for a moment and think about that. After five years of my life, maybe I wouldn't go broke. How is that rational? Who does that? If you think I'm bragging, let the stupidity of these statements sink in.
2013 was year six in business and I had enough steady profits to know I was doing the thing. I was making a steady middle class income, enough for the Bay Area even, but still not quite as much as when I worked in IT, nine years previous. Even with painful construction loans taking a big cut of profits, I still managed to maintain profits and my extravagant rise to the middle. Although the trade is constantly changing, I'm fairly confident I can weather most storms and continue running a store in some fashion.
I say in some fashion because I've gotten a lot older over the past 14 years and I need to consider retirement options, which might mean a second business, getting another job, or reducing my costs, like living someplace cheaper while running the store remotely. It's either that or keep doing this thing for the next twenty years or so. If I had been working in IT over these game store years, I would have a million dollars in the bank easy, just in salary differences. Instead I have an economic engine that doesn't always need me, but it's a volatile engine running on moonshine and false promises. If you can't decide which is better, let me suggest you take the million dollars.
I took no significant profits from the business for the first five years. We moved to a bigger location, with stratospheric costs, after three years, expanding with loans and the like, so eventual profitability was in doubt. That's right, after five years, which included writing my blog for the last two, I wasn't entirely certain this whole thing wasn't a boondoggle. When the profits finally did arrive, what did I do? I expanded again. Too much money leads to risk taking.
During the early years, I started doling out ever increasing distributions in the $1,2000-$2,000 a year range, as a kind of success place holder. Maybe if I faked profitability for long enough, it would actually happen. It's kind of like budgeting for your salary, even if you know you can't pay it in the beginning. Getting up to speed on profitability was critical, because my financial life had a five year period where I had an artificially low mortgage, and at year six, I needed to make nearly double my salary. My mortgage was set at fives years of "interest only," something banks don't do anymore. Year six was a wildcard.
So for five years, I felt like we had overbuilt. It was like we were waiting for demand to catch up with the supply we were providing. We were overstaffed, over-inventoried, and growth was slowly putting wind in our sails. I say slowly but it wasn't uncommon to have 10-20% growth a year during these early days, but with corresponding infrastructure and staffing headaches to manage it. We talked a lot about gross sales, but I carefully avoided the "n" word.
By the end of the fifth year, profitability started to climb. It appeared to be enough to guarantee I wouldn't lose my house solely because I couldn't make the payments. Was it a blip on the radar? Maybe, but my trend lines in Excel told me we were onto something. Just sit back for a moment and think about that. After five years of my life, maybe I wouldn't go broke. How is that rational? Who does that? If you think I'm bragging, let the stupidity of these statements sink in.
2013 was year six in business and I had enough steady profits to know I was doing the thing. I was making a steady middle class income, enough for the Bay Area even, but still not quite as much as when I worked in IT, nine years previous. Even with painful construction loans taking a big cut of profits, I still managed to maintain profits and my extravagant rise to the middle. Although the trade is constantly changing, I'm fairly confident I can weather most storms and continue running a store in some fashion.
I say in some fashion because I've gotten a lot older over the past 14 years and I need to consider retirement options, which might mean a second business, getting another job, or reducing my costs, like living someplace cheaper while running the store remotely. It's either that or keep doing this thing for the next twenty years or so. If I had been working in IT over these game store years, I would have a million dollars in the bank easy, just in salary differences. Instead I have an economic engine that doesn't always need me, but it's a volatile engine running on moonshine and false promises. If you can't decide which is better, let me suggest you take the million dollars.
Thursday, September 6, 2018
Rising Cost of Goods (Tradecraft)
I've been tracking my cost of goods every day since I opened my store in 2004. I wasn't really sure what I would do with these numbers on day one, but I thought they were important. I can't stress how ignorant I was about retail back then, but I knew from working in IT you couldn't over measure.
The numbers I tracked were the COGS I actually got on the sale of merchandise each day rather than what I bought the product for. It doesn't include some tiny categories like used products and card sales, so it might actually be a point or two higher. This was all tracked on my Open to Buy spreadsheet, which today is on line 5,053.
I might have bought a $50 board game for $25, but if I had to clearance it for $30, that's reflected in my numbers as higher COGS. As margins shrink, especially with the recent announcement Wizards of the Coast is reducing margins on Magic the Gathering for a second time, rather than raise prices, I've decided to attack low margins head on.
Usually low margins have historically meant inefficiency. When I'm growing quickly and taking a lot of chances, I make more inventory mistakes, which is reflected in a higher cost of goods. It's like how geologists can look at a cross layer of rock to discover historical events, like volcanic eruptions. Yep, that rise is when we moved and guessed wrong on product. That low point was when we were saving for construction and not taking any chances. For the last three years, cost of goods have risen steadily and margins have shrunk, and with Magic about a quarter of our sales, I can't imagine it not moving a point or two higher next year.
There are a few tools you can consider for addressing low margins. In the past, turn rates have been all I've cared about. If a product moved fast enough, the margin was far less important. I don't think speed is making up for low margins, as the industry margins seem to be shrinking overall. Turn rates are about opportunity cost, and we have limited money, limited opportunity, to pay our bills and be successful. For the first time, I'm running margin reports.
Most point of sales systems can't run a margin report, much like most can't do turn rate analysis. To make your own, run a report with prices and costs, dump it to a spreadsheet and create a new column with a percentage comparing those numbers. Now sort. The first think you'll probably notice is errors, which should be fixed. For me, there are items with no COGS noted. Then look at your lowest margin items. Like working with turn rates, perhaps address your lowest 20% performers.
I've delegated entering data into our POS, so sometimes low margin items get past me. Some companies, like Ultra Pro has laughably low margins, if you use their MSRP, for example, as do some direct accounts where we pay shipping. These are easy to fix.
When I looked at Magic a year ago, I saw how it had shifted from pack sales to box sales and singles over the years. In 2004, it was inconceivable I could sell a box, which I sold at full MSRP ($133). It's 2018 and we're selling them hand over fist at $120 (like $92 in 2004 money). These are inherently lower margin sales, and combined with low margin draft events, Magic doesn't look so hot. Our solution in the case of Magic is to increase our discount prices to less of a discount for these things. Event fees will go up a dollar, box sales by five. If the market won't bear it (customers have shown tremendous understanding), we'll shift.
So now is the time to raise prices, set items not to re-order, or maybe even clearance entire low margin product lines to free up cash for other areas. You might combine this with a turn rate threshold: 50% margin needs to turn at four times a year, 45% turn at five times a year, 40% six times, and anything lower perhaps ten times a year. We're using multiple tools here to get results. There is no impossibly low margin, if performance is good enough. I'll take a 10% margin, if I'm buying a product on Tuesday with a guaranteed buyer on Wednesday. New car dealerships make their living on low margin, near guaranteed sales of 10-15%.
Like turn rates, blowing out low margin items is about opportunity cost. You need to have a better place to put your money when you do this. If you don't have a better place, you're better off leaving well enough alone. In a small market, low performance may just be your lot, and a Subway franchise may be in your future.
Another option is to use GMROI, which I talked about in this blog post. Gross Margin Return on Investment is the perfect tool for calculating inventory performance when margins are all over the board. You'll definitely see under performers using this tool. In my example from that post, I beat up on toys for not performing. After I wrote that post, I ditched toys. Classic games also underperformed, and we streamlined that department, treating it as a seasonal department.
Here in California, inflation is a staggering 3.6% and wages are rising around 10% a year. We're being eaten alive by expenses while cost of goods is going up, and we're seeing a re-alignment in our product mix, resulting in lower board game and CCG sales. It only makes sense we look deeper at exactly what we're doing and make some hard choices.
The numbers I tracked were the COGS I actually got on the sale of merchandise each day rather than what I bought the product for. It doesn't include some tiny categories like used products and card sales, so it might actually be a point or two higher. This was all tracked on my Open to Buy spreadsheet, which today is on line 5,053.
I might have bought a $50 board game for $25, but if I had to clearance it for $30, that's reflected in my numbers as higher COGS. As margins shrink, especially with the recent announcement Wizards of the Coast is reducing margins on Magic the Gathering for a second time, rather than raise prices, I've decided to attack low margins head on.
Usually low margins have historically meant inefficiency. When I'm growing quickly and taking a lot of chances, I make more inventory mistakes, which is reflected in a higher cost of goods. It's like how geologists can look at a cross layer of rock to discover historical events, like volcanic eruptions. Yep, that rise is when we moved and guessed wrong on product. That low point was when we were saving for construction and not taking any chances. For the last three years, cost of goods have risen steadily and margins have shrunk, and with Magic about a quarter of our sales, I can't imagine it not moving a point or two higher next year.
There are a few tools you can consider for addressing low margins. In the past, turn rates have been all I've cared about. If a product moved fast enough, the margin was far less important. I don't think speed is making up for low margins, as the industry margins seem to be shrinking overall. Turn rates are about opportunity cost, and we have limited money, limited opportunity, to pay our bills and be successful. For the first time, I'm running margin reports.
Most point of sales systems can't run a margin report, much like most can't do turn rate analysis. To make your own, run a report with prices and costs, dump it to a spreadsheet and create a new column with a percentage comparing those numbers. Now sort. The first think you'll probably notice is errors, which should be fixed. For me, there are items with no COGS noted. Then look at your lowest margin items. Like working with turn rates, perhaps address your lowest 20% performers.
I've delegated entering data into our POS, so sometimes low margin items get past me. Some companies, like Ultra Pro has laughably low margins, if you use their MSRP, for example, as do some direct accounts where we pay shipping. These are easy to fix.
When I looked at Magic a year ago, I saw how it had shifted from pack sales to box sales and singles over the years. In 2004, it was inconceivable I could sell a box, which I sold at full MSRP ($133). It's 2018 and we're selling them hand over fist at $120 (like $92 in 2004 money). These are inherently lower margin sales, and combined with low margin draft events, Magic doesn't look so hot. Our solution in the case of Magic is to increase our discount prices to less of a discount for these things. Event fees will go up a dollar, box sales by five. If the market won't bear it (customers have shown tremendous understanding), we'll shift.
So now is the time to raise prices, set items not to re-order, or maybe even clearance entire low margin product lines to free up cash for other areas. You might combine this with a turn rate threshold: 50% margin needs to turn at four times a year, 45% turn at five times a year, 40% six times, and anything lower perhaps ten times a year. We're using multiple tools here to get results. There is no impossibly low margin, if performance is good enough. I'll take a 10% margin, if I'm buying a product on Tuesday with a guaranteed buyer on Wednesday. New car dealerships make their living on low margin, near guaranteed sales of 10-15%.
Like turn rates, blowing out low margin items is about opportunity cost. You need to have a better place to put your money when you do this. If you don't have a better place, you're better off leaving well enough alone. In a small market, low performance may just be your lot, and a Subway franchise may be in your future.
Another option is to use GMROI, which I talked about in this blog post. Gross Margin Return on Investment is the perfect tool for calculating inventory performance when margins are all over the board. You'll definitely see under performers using this tool. In my example from that post, I beat up on toys for not performing. After I wrote that post, I ditched toys. Classic games also underperformed, and we streamlined that department, treating it as a seasonal department.
Here in California, inflation is a staggering 3.6% and wages are rising around 10% a year. We're being eaten alive by expenses while cost of goods is going up, and we're seeing a re-alignment in our product mix, resulting in lower board game and CCG sales. It only makes sense we look deeper at exactly what we're doing and make some hard choices.
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