Monday, October 23, 2017

Stickiness (Tradecraft)

The board game market has a stickiness problem. Games are being produced at a fast, many would say unsustainable, pace. Traditional publishers are competing against the Game of the Moment via Kickstarter, their traditional business model going up against the unsustainable passion of Makers rather than the long term strategy of a competing company. Many have or will join this Game of the Moment model, rather than being left behind, and there are some solid marketing reasons to do so. Perhaps the gatekeepers no longer represent the majority of market demand. There is not enough product security, value in the supply chain, to gain traction and it's hurting everyone.

Retailers are in the middle, with games arriving on their shelves with no guarantee they'll ever be back. Unlike the traditional publisher, the Kickstarter publisher is fine with a "one and done" model and are far more concerned about getting stuck with the "hot potato" of unsold product more than their desire to establish a long term presence in the hobby game channel. Getting everything I'll ever want of a product on release is not an unusual strategy.

With their reprint, the Kickstarter publisher is willing to sell to deep discounters online, just for the inventory security. After all, who cares about product devaluation of a one shot product? They're about the passion, getting the product into the hands of players, and having the income security to do it again. They don't have time to see their inventory sit at a warehouse where some distributor may pay them one day. They're ready to move on to the next project, or just be done and pay back their home equity line of credit.

Retailers would like there to be some stickiness to games. A solid business model would include extensive support of new games with a guaranteed supply chain. The "demo table" exemplifies this, where retailers become tastemakers, teach new games to new customers, and in return obtain stratospheric sales levels. It's the American Dream of planning, putting in the effort, and reaping the reward.

Unfortunately, it's hard to find such games as most aren't sticky enough in the supply chain. The new ones tend to be "one and done" and restocks are not guaranteed at all. Often when they arrive, the online retailers have gobbled up vast amounts of supply to dump at deep discounts. Even if you do get your strong restock, you're competing with the online giants in a devalued marketplace. Product has died on the vine and no effort to push that great game to an eager customer will overcome a 40% discount online.

So the status quo, one which my store is certainly guilty of, but trying to break from, is what they used to describe in the RPG trade as the periodical model. You don't hear about the periodical model so much anymore because RPGs have, for the most part, died a horrible death in the game trade. Retailers don't talk about RPGs. What's there to talk about? I love RPGs, sell a good amount of RPGs, but I have to constantly remind myself the scale of the other departments, how we sell six times more board games and six times more CCGs. RPGs are a shell of its former glory.

Oh sure, there have never been more fantastic RPGs produced than right now, but the game trade has mostly turned its back on them, especially when there's so much more money in board games. So board games are dabbling with the periodical model, where my store gets in the game of the week, we promote it as best we can for a product we may never see again after Thursday, and then next week we do it again. There is little to no stickiness. The end result of going down the periodical model path is there will continue to be great games via alternative distribution methods, just like RPGs, but stores will stick with known quantities and just dabble with indie hits. We'll have a special indie board game distributor we'll order from once a month, if there's extra cash in the budget (or not). There are signs we're heading in this direction already as we talk about protecting brand value and a flight to quality.

I will attempt to restock the best sellers in my one and done model and maybe one or two will gain traction. However, if it's being devalued online, if supply has evaporated, if the publisher decides to raise the price 40% after the first print run, I shrug and move on. Next week we'll have an entirely new game to pimp. The last thing I want to do in this model is expend energy on any one title.

I am only penalized for treating board game as anything but a commodity item, like soybeans. It's the periodical model. I could run with this model until the board game segment is a smoldering crater in  the game trade. We'll start selling a four volume set of paperbacks describing what went wrong, picked up by nostalgic customers who once played board games but no longer have wood for sheep.

This is not a long term retail strategy for the game trade, this path of least resistance. It's certainly not what I want to do or where I'm spending my energy right now. It's not what publishers need from us, as we're the traditional marketing arm of the traditional board game publishers. But I'm not sure tradition matters so much anymore.

Our job is to be that Third Place, a venue for new discoveries and experiences. Schilling the board game of the week to exhausted board gamers will eventually dampen their enthusiasm, just like selling a 5th Edition of D&D after just recently talking up a 4th Edition that I swear was a solid replacement for a Third and a Half edition, that had to upgrade because of something something, the Ranger. You want to sell entertainment, but you don't want to feel like an entertainer, some half wit carnival barker, doing it.

So I struggle to gain traction without a sticky product category where I can plant my flag. Publishers struggle as well. Customers are not immune to the struggle, with this embarrassment of riches, where I don't even look at bringing in a new game unless it scores an "8" or a couple thousand "Wants" on Board Game Geek. Don't get me wrong, I am a huge seller of board games, but we've definitely hit our limit, the store peaked in this category. We just need some stickiness, some brand value protection, to make our stand.


Sunday, October 22, 2017

Cost of Goods: The Closed Loop (Tradecraft)

This article is about the closed loop system known as Cost of Goods Sold. Anyone who's not a buyer for a game store is not likely to understand the importance of this data, which often gets sloppy when entered into point of sale systems by harried game store staff. This is written with my staff in mind, but it might be useful for everyone who works at a game store. Feel free to share, of course.

Cost of Goods Sold is the term used to track inventory value as it goes through your store. As the name states, it's the cost of the goods the store pays from its suppliers, with the difference between the Cost of Goods and the price you sell it for being the gross profit. It's gross because it doesn't include the many expenses, like your paycheck, that reduce the slightly less than half of gross profit down to about a 5-10% net profit. For example, a $100 board game might have a cost of goods of $54 and after all the expenses of the business are taken out, may only have a net profit of $5-10. If the store is lucky.

Product is not only the lifeblood of the business, but too little inventory can lead to a catastrophic death spiral, while too much inventory can lead to an enormous end of year tax bill or outright business failure, as all the money is tied up in inventory. No new money is poured into an inventory budget, so for new product to come into the store, old ones have to be sold to produce a purchasing budget surplus. Even if your store is doing great, you might be putting older product on sale just to create this necessary surplus. There is no input without output.

Let's take a look at the full cycle of Cost of Goods, to better understand its importance. This will include looking at adding items to the system, receiving new product, and finally, Open to Buy, which which is what your store buyer is using to determine how much money is available to spend on more product. I'm using my POS system (Lightspeed Onsite) in the examples, because that's what I've got, but it worked the same way when I had Microsoft RMS and I'm guessing it's not much different for other full featured systems. 

The first time a store encounters cost of goods is on a product invoice. 

The Unit Price here is the Cost of Goods. It doesn't include things like shipping, COD costs or other "not product" cost of good expenses.

This unit price gets entered into the POS system Purchase Order, hopefully accurately. As stores tend to order product from a variety of distributors, it's important the actual price for this particular order gets entered properly onto the Purchase Order correctly, since it cascades throughout the system.

Purchase Order where the cost is grabbed from the product record, but can be overwritten if necessary

Most POS systems have a place for the Cost of Goods on the product record. It's important that the record is accurately updated and bad data isn't allowed onto the Purchase Order.  If the Cost is not entered correctly, that incorrect data cascades through the POS all the way to the purchasing budget, which we'll get to in a moment. 

Product record, where the cost is copied over to the Purchase Order when a PO is auto generated
At this point, most game store clerks stop worrying about Cost of Goods (Cost), and if they entered everything correctly on the produce record and the purchase order, everything is in good shape. But where does the data go from there?

The Cost of Goods is collected from end of day reports that track sales, noting the cost paid for each item sold. This report takes that hopefully accurate Cost of Goods number and provides it to the buyer.

This Cost of Goods number is then entered into an Open to Buy spreadsheet or hopefully some similar tracking mechanism. To be honest, most buyers don't have an Open to Buy tracker, but let's assume they're using something to track Cost of Goods so they know how much they have to spend.

The Open to Buy spreadsheet (or whatever) tells the buyer they now have $2,027.32 to add to their purchasing budget to buy product. If that number is off,  the buyer may not spend enough and is now under budget and losing sales. If the buyer spends too much, they are over budget, and not only will profitability suffer, but the business will incur taxes on the difference between the previous year's inventory value and the current year (it's good to check the difference and adjust at least quarterly). 

Open to Buy: Available = Previous Available + Cost of Goods - Purchases

So how accurate is all this? Not very. The true Cost of Goods, the only one that really matters, is in the accounting system. Last year our Cost of Goods in the POS was 53%, while Cost of Goods in the accounting system was 56%. Some of that 3% difference are Cost of Goods that are not inventory, like shipping and finance charges, things you definitely don't want polluting your POS system. That's maybe 1% of the variance. Most of that slop is bad POS bookkeeping. The most important thing for me is making sure my purchasing budget is balanced at the end of the year to avoid excess taxes.


Monday, October 16, 2017

Selling Your Store (Tradecraft)

I have neither bought nor sold a (whole) game store before, so let me give you some advice on how I think it's done. Right? It's the Internet. You decide which orifice I'm speaking from. There are many stores closing right now and sometimes owners ask me how to value their businesses for sale. The truth of selling a store is somewhere around 70-80% won't sell, they'll just close and liquidate at pennies on the dollar. If you can't show value, this liquidation route is where you'll spend your time, and as you probably didn't value your time highly in the first place, you'll likely scoff at that pennies on the dollar and spend months selling it off yourself for twenty cents on the dollar. Let's work on a better outcome by understanding what work needs to be done.

The same value creation necessary to run a successful store is the same work it takes to create a sellable store. High value businesses don't sell often, because they don't need to. They can be run from a beach or passed on to family. Stores without that value are worth a tiny fraction of their furniture, fixtures, equipment and inventory.

Although I don't have direct experience selling, I run my business with the intent of one day selling, retiring, or otherwise spending time on that metaphorical beach, which might include starting another business. Creating value worth buying is not a thing you do when it's time to sell, it's a think you bake into your business from the beginning.  Selling a business comes down to three fundamentals: profitability, dispensability, and diversity, along with the end preparation for the sale, which I'm not going to cover here (buy the Nolo book).

Profitability is the tough one, since most business owners don't want to give up a clearly profitable business. I doubt many profitable store owners would use the word "clearly" though. With thin margins and high variability between years, many game stores are "sometimes" profitable. Profitability is also something solo owners avoid, since profit is taxable. I would like to see tax returns showing profitability, but there is the helpful term Seller's Discretionary Income (SDI), that can tease out profit where there is none, according to your tax forms.

Small business owners like their deductions, with books on how to take hundreds of them. This reduction in profitability lowers taxes, but also prevents you from getting a bank loan or selling to others. However, another experienced retailer can tease out the SDI, showing potential profit where there was none before. That cell phone expense, owners health insurance, "necessary" business travel to Essen, an inflated advertising budget, leased car, and your over market salary are all profit to a frugal buyer. The difference between showing profit and not showing profit is the difference between liquidation and selling at a multiple of your net income. If you can't show profitability with your tax forms, you sure better become familiar with calculating SDI.

Dispensability is how dependent the business is on you, the owner. If you've single handedly built this business from scratch, have all the processes and procedures perfectly nailed down in your head, and have personal relationships with all your customers, memorizing what they buy, how they buy and why they buy, you have failed in small business. You might be an amazing owner, but if you're hit by a bus on the way to work today, your business is done, your family in trouble. All the value has been smooshed on the pavement. You are indispensable, which is what you want to be, how we've trained you to be as a society, when you work for others. Indispensability is a trap in small business.

Being dispensable is a process like any other. It's layering processes and procedures and training staff to run the business in your place, as well as you. When I first hired people, I would come back after the weekend and the store would be a mess, tasks only I do would be undone and I would spend a couple hours every Monday morning fixing things. After developing better processes and procedures, I could leave for a trade show for a week without the place burning down, return the next week and fix things. Now I can leave for up to a month before my processes break down, mostly my owner processes that I now need to create (and maybe later, delegate). Next year I'll leave for six weeks, outside the country where some of my current processes and procedures will cease to work, so I'll be working hard over the next six months to streamline and improve processes so I can work (or not work) anywhere in the world.

The goal of dispensability is not to have a turn key business, the 4 Hour Work Week approach. The goal is to hire and train people in processes and procedures just as complex and service oriented as when you ran your store like a champ, maybe even better! There's a dispensability trap where you start turning your back on service because it's too complex to create into processes for others. To some extent this is necessary as you grow and delegate, and you will leave money on the table and opportunity for competitors, but the heavy streamlining approach in most business books is not suitable for a hobby game store. It's a persnickety business, a perfect expression of hobbyists within a ten minute drive time, which might be vastly different from a store just across town. Flexible policies and procedures and workers empowered to serve customers even when it goes against your P&P is key to running such a unique business.

In an ideal dispensability scenario, there is a process for outgoing management to train up new managers, or creation of a middle management level if you're big enough, so when key people decide to leave (or they get hit by a bus), you're not rushing back to rebuild your business. However, this is more a goal for keeping your business, rather than selling. If you've got management in place, and you're on a beach, that's good enough to show dispensability.

Diversity is the flexibility or brittleness of your business model. In a service business, you might not have a sellable business if a large chunk of your sales was one client. If making auto parts for Chrysler was 70% of your business, I would be wary of buying your business no matter how profitable you were. Where Chrysler goes, your business goes, and I don't speak Mandarin.

Likewise, if 70% of your business is selling Magic the Gathering (MTG), you're likely to only find a buyer that's equally evangelical as you about MTG. The more diverse your business, the more value it has to an outside buyer. As I run my business, I get nervous if I can't drop a department. I would ask myself, if MTG were to drop off the planet today, would my business survive? The answer two years ago was a definite yes. The answer today, with a heavy debt load from expansion, is a resounding no.

Anyway, those are my thoughts on selling. After you decide to sell, there's a huge amount of work to find a buyer and probably about as much work in selling your business, with legal documents and legwork as there was in opening in the first place. As most store owners are demoralized, burnt out, broke and otherwise at the end of their ropes during this stage of their business, it's no wonder they can't get this last part right and simply liquidate.

Wednesday, October 4, 2017

Not In Need of Saving (Tradecraft)

It's the boom times when we ask the hard questions. If times were tough, complaints and introspection would just be complaining, so you keep quiet and put your nose to the grindstone. Revolution comes from the middle class, according to Marx, because they are the ones with the free time to explore such things. So we've got a lot of talk right now, because the game trade is booming.

The game trade has doubled in size in just a few years, if you believe ICV2 results (which you should seriously question). According to ICV2, the hobby game  trade has grown from $700M in 2014 to $1.4 billion in 2017. That's an astonishing growth rate.

Many brick and mortar hobby game stores are enjoying this success, as they should since they helped tremendously in creating it. It's not all a bed of roses. What I thought would happen is starting to happen, where large stores are better positioned to handle the consolidation in the industry, while there remains a steady stream of doomed, under capitalized clubhouses willing to risk their savings on poorly planned retail stores. There is an insanely low bar to entry in the game trade, so anyone can do it with almost no money. There are a lot more low end clubhouses than top tier stores, although you can find top tier stores in most regions of the country.

If your local retail environment is a sad shell of its former self, if it's been devalued by bottom feeders or your unemployment rate is stratospheric and you're not enjoying what's a solid economy for many, you probably see a lot more doomed clubhouse stores than you see top end stores. If you were to make a value judgment on game stores, it might not be very positive. You probably see distressed stores catering to a distressed market. However, as with the parable of the blind man and the elephant, your perception is incomplete.

The blind man walks up to the elephant and feels around, and the first thing he touches forms his perception of the creature. He walks up and touches a tiny tail and slips in piles of elephant shit. He thinks elephants are frightening tentacled, smelly creatures. The blind man is not wrong, it's just his information is incomplete. For many local markets, you wouldn't be wrong thinking game stores are the ass end of an elephant.

Who can blame you for thinking nothing good can come from the excrement you're experiencing? There certainly isn't much community being created, product champions evolving or new games being marketed in such a dismal, excremental place, right? You're not wrong.

However, if you open your eye, you'll discover great hobby game stores out there to be explored. I've taken amazing road trips across this country and if I do the research ahead of time, there are always great stores in every state I've visited. All game stores are great, due to my planning, and I might make the same mistake in reverse, thinking there are no ass end of an elephant game stores. I regularly visit clean, well lit stores with strong events, game demos, and a community of customers who spread the word and help build the hobby.

I know there are online folks who will believe their digital community has spontaneously arisen through gamer immaculate conception and that they drive the game trade forward, but everyone in the industry, those who pay their mortgages with game trade money, know it's simply not the case. They play a role, but meat space is where the critical work gets done.

Publishers put their money where their mouths reside, supporting brick and mortar game stores as an important marketing function of their business, referring to Internet only sellers as "free riders," as in they're not doing the necessary work to propel the market forward. Price protection schemes to protect publisher brand value comes out of these discussions, providing safe channels for the brick and mortar while punishing free riders. Price protection is not popular with free riders or their very noisy, insanely entitled customers, so we're seeing push back. I get that, but open your eyes folks. It's not an either or situation. You also might want to grab a shovel while you're at it.



Sunday, October 1, 2017

Working the Float (Tradecraft)

I paced the sales floor on Friday, a major release day for Magic. I was hoping it would result in a figurative pay day on what was also a literal pay day. So far, most of the the sales were paid with credit cards. I was looking for more cash as I was expecting the bank to call at any moment to tell me we were short with our payroll run. A midday deposit was on my mind. I had already raided our small cash reserves. A customer came in to sell Magic cards to my assistant manager and I had to go back to the office to hide my irritation. Cash out is not what I wanted.

Is this what failing looks like? I ask that sometime. As a veteran store owner, I know exactly the steps of failing. I've written about it in my Defcon article. I spend a lot of time avoiding taking that next step down the ladder, to the point of unnecessary risks and gambles, like working the float between bills and income on a payday. Working the float should be somewhere in my mission statement.

On the bright side, we had just passed a million dollars of sales over the last four quarters for the first time. A million dollars. I'm going to write it out, because this is new and exciting for me: $1,000,000.00. Our sales are up 16% for the year, which is a big accomplishment as we start year fourteen. Margins are good as we only sell in-store and our gross profits are strong. Net? Umm, let me tell you more gross things.

We're reaping the reward of expansion. Some departments are expanding rapidly, with RPGs and miniature games up in the 40% range. Our bid departments, areas where other stores are seeing a decline, board games and CCGs, are static, which is still a win for us. This is due to doubling our play space, doubling our events. My predictions of a modest sales increase from expansion were correct, and even a little understated, which I was hoping would be the case.

Friends asked if I was going to write a blog post about the million dollars. Ha! No way, people don't want to hear that. But then I thought I would put it in context with what comes along with the million dollars of sales. Much more stress. More hassle. Pacing and working the float. Work the float.

We are in the first year of an expansion. When you expand, you budget for the expansion. You plan ahead for unanticipated expenses. You acquire financing. If you're lucky, the expansion goes according to schedule, or maybe it went long by ten percent or so. Our six week expansion took six months, long enough that we were compensated for what were clearly some mistakes. I'm so grateful our customers supported us during this period, especially our miniatures players, the only department not to sink, despite not having room for them to play. One retailer suggested I have six months of cash reserve before doing such an expansion. If I had six months of cash reserves, I would retire. Or buy a building or five.

Right now we are lucky to be in business, to be entirely truthful, and even with free rent for a quarter, which in our case would buy you a new car, we were still severely over budget, due not only to construction but sales losses over that period. You survive or you don't in that situation and use all the resources at hand. Hopefully you have a line you won't cross where you won't borrow or hemorrhage cash any further. We're not losing money, we're just staying afloat. We're at the line, which can be characterized by turning down people who still want to loan us money, because the problem is not cash, it's cash flow.

I can write this on October 1st, because we've survived the first year after construction. We're still here! We're in the fourth quarter, where the money resides. We will work hard this quarter and pay off chunks of debt. We'll emerge in January like a colorful butterfly from a disgusting, debt ridden cocoon. Well, that's a bit overstated. We'll come out of this year slightly stronger, growing stronger each year for the next four years.

All of my personal financial hopes and dreams reside within the business as it stands right now. It's  underneath construction debt. For now I work the float. As we move forward, it's like removing the dust from a mirror, uncovering hidden potential.



Friday, September 15, 2017

The Magic (Tradecraft)

Back in my day... we bought booster packs or a starter deck. There was one deck, and you didn't need another one once you had your one. You had started. We had no idea what a booster "box" contained, how many packs or what it cost. Heck, boosters could have came in bags for all we knew. Booster bags.

There was also no World Wide Web, no Ebay and no "net decking" to tell you what to build. There were no well known Magic tournaments either. You played with your friends around a kitchen table, although tables were beginning to show up in game stores too. We lived in caves, subsisting on melted snow, dreaming of a time when we could spend hours a day arguing about nothing on the Internet (in a more pleasing graphic rich format). My lawn was just starting to bloom, so no need to ask folks to get off it. The year was 1994.

I mention this because I sell a ridiculous amount of Magic: The Gathering at my store and I had no idea how I was selling it until I recently ran the numbers. Sure, we sell singles. Even back in my day we would buy some out of the case. I was especially fond of French versions and I recall building a really cool French vampire deck so I could beat up my friends. We had been playing games like Dungeons & Dragons for years, but as young adults, we didn't have the huge blocks of time to devote to that game any longer. Magic filled that gap and kept us together as a group.

 At the store, we've only recently started getting more serious about singles, even selling them online , but I never expected them to be our best seller. My number one selling product in the store is used cards. I'm still trying to wrap my head around that.

Magic boxes are close behind, and if you ignore the few points of online sales of singles, boxes are the actual best seller. Our store strategy has always been to appeal to casual players. But what does it say when singles and box sales outstrip packs and casual products? I'm not sure if it means we've lost our casualness or if casual players are now more inclined to dip into the singles collection or gamble on boxes.

Many, if not most game stores focus on single sales. I reluctantly followed suit, getting nervous every time my staff made a big buy. Then I ran the numbers. A solid turn rate, how many times a year I sell through inventory, is perhaps 4-5 for things like board games and RPGs. I ran the numbers for our singles collection. Then I ran the numbers again. That can't be right. 50. 50 turns a year. That's like taking our entire Magic singles library, and selling them to a dude (or dudette) nearly once a week. In reality there are cards that fly through our collection, selling as soon as they're received, while other cards have never sold at all. Our recent foray into online sales saw those leave us, with a nice sales bump.  But 50 turns... It's why we have backpack dealers and stores buying point of sale machines that handle Magic singles first and everything else second.

If I sound kind of ignorant as a store owner, that's because I've resisted the pull of Magic and especially singles. We are strongly diversified, enough so that Magic could fall off the planet and we would still be here (the game trade might implode though). The mercenary nature of a lot of players has made me reluctant to engage 100% with this subculture, and that's what it is, a full fledged subculture. It's an independent subculture where judges report to the mother ship, not me, and players see Magic product as a commodity, available instantly from the lowest bidder. It's a pretty sandy foundation on which to build a business.

Magic singles are the Bitcoin of the game trade. My landlord will take neither in payment for the rent, yet I'm supposed to believe a surplus of either makes me wealthy. As of a few years ago, I've handed Magic over to my expert employees to manage, following the money rather than my 1994 concept of how things should be. I've been happy with the results as they've doubled our Magic sales from just a few years ago. It's nothing like Magic-centric stores, but it's a wonder to watch.

I've also been happy to see the Magic community come together and support the store. Our expansion project, at least the money to get it started, was done with Magic money. When it was finally built, I approached the community with arms open. This is yours. You built this. As many events as you can maintain, we'll run those events. And they've managed it four nights a week. It has come a long way from those days around the kitchen table with my friends.


Thursday, September 14, 2017

Faith in Humanity

Before owning a store, there was such a thing as having "faith in humanity." Most people were generally good and kind and well meaning. Owning a store showed how easy it it was for supposedly good people to become so-called "bad people," to steal and lie when the opportunity presented itself. The line is perilously thin between honest and dishonest. It's not some colossal battle of wills between an angel and devil on each shoulder. It's just opportunity.

If you haven't owned a store, there's no way I'll convince you this is true. There's no way I'll budge your faith. I accept that. If you do own a store, you know what I'm talking about. The familiar knife in the back. The smiling regular who spends a fortune in your store who you still discover steals on the side. The employee you took into your home who robbed you blind. The guy, now this story is totally true, who you catch walking out of your store with two hundred dollar army boxes under each arm, who blames you because his in-store D&D group is now down a player because you banned him.

When owning a store, there is no longer faith in humanity. Faith is belief and you now have demonstrable proof. The vast majority of people will make the wrong choice if given the opportunity. It's about 90%, 10% who will always steal and 80% when given the opportunity. How you engage with this fact determines how you'll view people going forward and whether you'll be happy or not. You will give up your Faith for a philosophy of trust, but verify. It's easy to become bitter when coming to grips with daily betrayal. If you want to own a store, know this loss of faith, this change in philosophy, will be a psychological price far higher than your initial investment.