Thursday, March 15, 2018

The Magic Market

Imagine a stock market where companies regularly leaked financial information right before the announcement of quarterly results. Imagine individuals who sell questionable, unconfirmed rumors to investors in attempts to manipulate stock prices, while simultaneously offering to buy that same stock from them. Imagine investors who are told their stocks are just for entertainment purposes while investing in a market that knowingly manipulates stocks to increase or decrease value.

Imagine a market where conflict of interest is the ideal business model. Imagine an industry of brokers who know all this is happening, but also know it's vitally important to maintain the fiction of this model. Pointing out the inconsistencies and what would be obvious fraud in a regulated market, is inherent to the profit margin of this unregulated market. It's also a system where pointing out the fraud to investors only results in rebukes from investors. The Kool-Aid is strong with this crowd.

I'm not talking about Bitcoin, I'm talking about Magic: The Gathering, a game considered an investment by many of its players and the cornerstone of the billion dollar hobby game industry.  Most everyone in the industry relies on this game to keep the system afloat. Even Martin Shkreli. convicted of securities fraud once considered investing in the Magic market.

What eventually got Bitcoin and other crypto currencies on regulators radar was the sheer amount of money involved. It wasn't the rampant embezzlement, corruption, and money laundering, it was that there was beginning to be an awful lot of money being made without government oversight. Before regulation, Bitcoin buyers were called "enthusiasts," rather than investors. Sound familiar?

With venture capital money flowing into Magic related companies, you might think enthusiasts might be on the brink of becoming investors. I doubt tens of millions of dollars is enough to get on the radar, with Bitcoin currently valued at 41 billion dollars. What's more likely, I think, is questioning this whole model as the Magic "market" declines. Nobody wants to kill the golden goose, but when it starts looking like a ragged chicken that poops on your front steps (I may have personal experience here), it might be time for some introspection.

Wednesday, March 7, 2018

Pathfinder: The Jeep of RPGs

Paizo just announced their playtest for version 2.0 of Pathfinder, their role playing game. As a retailer, I can say it's about time. I was against it before I was for it, but eventually I became a big Pathfinder supporter after not only becoming disenchanted with D&D 4 as a player, but I also realized the Pathfinder release cycle was going to blow D&D out of the water.

As a retailer, the Pathfinder formula was undeniably good, provided you could overcome the drag of Paizo direct to consumer subscriptions and the deep discounting all RPGs face online (many couldn't and there's animosity there). Paizo even sponsored me to teach other retailers how to stock Pathfinder. So I like Pathfinder and I'm glad we're finally getting a long awaited 2.0, and I will support the playtest at a deep level. But why is it like the Jeep?

I'm a Jeep fan, and Jeep fans have the same authenticity issues as Pathfinder fans. Pathfinder is essentially a 17 year old role playing game that's been updated a few times. At its core is the D20 system, which went through a 3.0, a 3.5, Pathfinder 1.0 and now Pathfinder 2.0 (it lives on in D&D 5, but that's another story). Fans love their D20 and are loathe to jump ship. If they haven't at this point, they've found their True System. Jeep also goes through versions, with die hard fans as well. Jeep fans are a bit nuts, with their slogan "It's a Jeep thing, you wouldn't understand" as their excuse for the completely irrational decision to own such an impractical, unsafe, uneconomical, and uncomfortable vehicle. But the heart wants what it wants.

With Jeep safety and economy improvements, fans lament the brand has lost its soul and authenticity, often despite it's ever improving off road prowess. Slant the windshield slightly or use aluminum where there was once steel and the sky will surely be falling with callbacks to the previous versions as the Last True Jeep. For Pathfinder, a new edition promises to be faster and more efficient, and of course, there are already those complaining about changes to the new edition. The similarities in fan bases is uncanny.

Of course, the reason why Jeep builds a new model are similar to why Paizo needs a Pathfinder 2.0. Everyone already has the old product. No matter how much you love it, use it every day, and swear you'll never change, a company can't continue making a product after ten years and hope to survive.  Paizo is in year 10 of Pathfinder 1.0 and likewise, Jeep is just now phasing out their JK Wrangler model introduced in 2007. Both were wildly successful, despite naysayers, and their new versions should remain so. Of course Paizo doesn't have government safety and economy standards to deal with, but they do have competitive forces that require they develop a faster, more streamlined system with modern design sensibilities (you know, like D&D 5).

So there you have it, an odd comparison nobody asked for, but one that's on my mind. You can expect a Pathfinder 2.0 to be very much like the new Jeep Wrangler JL. It should be evolutionary, not revolutionary. It should change where it needs to and not where it doesn't. It should be true to the spirit of the original, D20 to its core, and better where it can be. If you want a revolution, the door is on your right. It's a Pathfinder thing, you wouldn't understand.

Sunday, March 4, 2018

The Most Boring Blog Post In The World (Tradecraft)

Laziness? Fear? Arrogance? The fact this was a pain in the ass to make? Your pick of why I haven't posted the formulas for Open to Buy before now. There's an example in my book without formulas too, so I thought, what the heck, how hard could this be? Do the thing. I'll even name it The Most Boring Blog Post In The World so people can easily find it when they ask.

I once talked about Open to Buy at a trade show and a guy came up afterwards with a bunch of people surrounding me, and told me my example numbers were off. He was roundly criticized for bothering me with minor discrepancies from an example, but hey, examples should be correct. But that also meant I've been reluctant to start throwing around C2s-E2s because they would inevitably be wrong somewhere. If you do find a discrepancy, please let me know.

This example assumes you're starting with no money in your purchasing budget. On day one you have only your cost of goods to start with and your purchases to subtract from. Then we just add that balance going forward and voila, you've got a spreadsheet you'll live with for the rest of your professional life. Create a shortcut. Back that puppy up.

Here's a link to this example file.

You can copy and insert lines like this forever, especially once I discovered that +1 trick with the date. Mine is nearly 5,000 lines long and has a ton of columns, along with many financial charts that use this data (which I prefer to Quickbooks).

Wednesday, February 28, 2018

Business Ethics

I used to believe the purpose of a corporation, my corporation, was to maximize shareholder value. It sounded good when I read it first in Neal Stephenson and when you're dealing with a single digit net profit in a typical retail store with hundreds of thousands of dollars in sales, it's important to keep your eye on the ball. Maximizing shareholder value was a survival tactic. Later it became a way to avoid buying unnecessary stuff, what my investors referred to as "pimp value." I could justify a pinball machine or a van with a dragon on it through various logical gymnastics, but they eventually went away as they did not maximize shareholder value.

I don't believe my job is to maximize shareholder value now. Things have changed. This maximization was a tactic to obtain profitability, and with profitability, you discover strategy. My strategy, when I'm profitable, is when I have the chance, to make things better. It's amazing what happens when I'm not refreshing the checking account balance twice a day. There is time to think about long term goals.

Making things better might mean supporting a veterans group or giving vast amounts of games to Toys for Tots. It means having a zero tolerance stance on bullying and socially unacceptable behavior, even if it means banning long term customers. It means we have a succession plan in place to keep the community alive if I get hit by a truck. I can think of a dozen things I should be doing, but I'm not due to our just alright financial position. This is not to say I'm some great leader in the community, as I've spent most of my time hurtling towards the ground and just barely missing.  If I can do more, I will, and the reasoning is if I don't, who will?

We've got a federal government captured by crony capitalism who wishes to pretend the system isn't rigged, while rigging the system. We've got state government that wishes to legislate prosperity, even though they have no idea how prosperity occurs. They're happy to let the chips fall where they may, because they'll still be there, along with their high value donors. In other words, I've lost faith in our leaders, and the last leadership pillar left, the last ones not captured and corrupted entirely in this country, are small business leaders, who have their finger on the pulse of the community. I've essentially lost faith in humanity, lost the ability to believe that collectively, through government, we will act in our own best interests. Those who can make positive change, should make positive change.

I also can't handle the reality that if corporations are deemed to be people, with their own voice, and their purpose is to maximize shareholder value, then all corporations are essentially rapacious assholes. I suppose the key for a larger corporation is to express values and make sure leadership, including boards of directors, are on board with not being rapacious assholes. If you're just starting out, perhaps have this conversation. Thankfully, we know pursuing a strategy of ethical behavior, both in investing and business management, pays off quite well. It's just hard to put that strategy in place when you've spent years contorting yourself, trying not to hit the ground.

Sunday, February 25, 2018

Your Financial Success (Tradecraft)

I've got a good friend whose an author and wealth manager and we were talking about my new book. He said, "You've done a great job creating a successful store, but you've completely failed to plan for your financial future. We should do a writing project about that." Ouch! As most of what I've learned from small business comes from failing, before succeeding, it sounded like a good idea. In the short term, I wanted to write something that might be helpful to new and existing store owners. If the book were still in progress (it's at the printers), this might be a final chapter.

As a small business owner, there is no "best time" to save for your financial future. I'm referring to retirement. Investopedia gives the advice of how much you should have saved as a multiple of your salary. At 40, you should have saved two times your annual salary, at 50 four times, and it goes on. The reality of starting a small business is something is always taking your financial attention away from the critical job of saving for the future.

When I started out, I was on a basic survival, shoestring budget for quite a long time. I nearly halved my income to start the store, going as far as placing my house on an interest only mortgage, just to make it work. My salary was still well above market. I had the luxury of a house and a small retirement fund already because I had a good paying career before. Because I re-invested after three years, building out a larger store, this survival salary lasted me five full years. During that time we adopted a child and my wife left her job on disability. This put great strain on our finances. Then the housing crisis hit and finances went into a tailspin for a few years and I nearly lost the house (but came out well ahead, which I talk about in the book).

When my fortunes improved, I spent money on the store once again, buying a pinball machine and a van and basically all the things I had put off. My notes from our annual Board of Directors meeting had a directive written on the top: "NO MORE PIMP VALUE." Personally, I had also engaged in adding pimp value. I had an indulgent spending period after a fasting period. I bought a new car. I indulged heavily in hobbies. I went a little nuts. In the future, I've got not only construction loans for another three years sucking all my spare money, but a white board with about $20,000 worth of projects. I've also got a dream of doubling my inventory. There is no good time to save and there won't ever be one, if I wait for it.

The best time to save for retirement, as a store owner, is right now. Besides life's financial demands, the store will never stop requiring your money and attention. A small business has often been described as a mistress (manstress?), with strong demands of time and money that never cease. If I were starting over, I would have taken my subsistence salary, and built in retirement savings. My meager salary would have been maybe 10% higher. Perhaps I would have to save 10% more money before I started. I advise new store owners to build their store around the salary they need, but I never discussed the meaning of need. You will give up years of strong earning potential to start a store, as my father warned me. You'll be voluntarily putting yourself in a hole. If you can come out at the other end with some retirement savings, that hole won't have been nearly so deep.

My book won't be making a lot of money, but I'm thinking of dedicating all the proceeds to the retirement savings I've missed out on. Pro tip: try to find multiple income streams. Strangely, I've saved for years for my son's college fund, but as I've told my wealth management friend, that's because I'm more afraid of being a bad father than living in a cardboard box. If you're reading this and have a store, start saving now. If you're creating your business plan, bump up your salary requirements to include retirement savings so you can avoid the mistakes I've made.

Finally, realize the business will always demand every spare penny you have. Always. It's up to you to manage your Return on Investment (ROI), which means taking money out as part of the process of putting money in. I've made ROI a critical part of the planning process in my book. Anyone can make an amazing store and overspend on the build out. A good retailer understands the value of capital and sees a long ROI as wasteful and failure of sorts.

There is such thing in small business as enough. There is modest business growth without constant reinvestment. You most definitely need to grow or die, but it doesn't always mean reinvestment. Part of your dreams for your store should include a strong financial future for yourself. Planning to ride into retirement with a retail store earning income in an unknown retail environment 20 years from now is a very dangerous plan. Think about how retail has changed in the last 20 years: malls were hot, ecommerce and Amazon were in their infancy, Magic was just a card game and no the economic driver for just about every hobby game store. As small business owners, we are constantly changing and evolving to meet new demands. When you're 85 years old in a retirement home, you will not be in a good position to pivot your store to meet such demands. Start saving now.

Tuesday, February 20, 2018

Board Game Soup (Tradecraft)

You've heard me and my peers talk about diversification and you want to enter the competitive board game market. Perhaps you do other things well or perhaps you're starting a brand new store. Here are some things to keep in mind:

Market Leader. In each local board game market there is generally a market leader, a brick and mortar store already serving local customers. Unlike a game like Magic, it is difficult to gain traction if there's already a market leader. Customers tend to be loyal to the leader, and since just about every type of customer is more loyal than a typical Magic customer, there's a stickiness you might not be familiar with. Mercenary board game customers tend to shop online almost exclusively, so you'll rarely see them unless they're low on card sleeves. I struggled as the second fiddle board game store for four years before the market leader retired. Now I wear the mantle and bear the responsibility.

What is In The Past. Buying new board game stock based on online rankings is like trying to buy financial stocks based on their past performance. Most games, even great games, become irrelevant to you once the market is saturated, which can happen in days rather than years now. Old games are old. Focus your energy on upcoming games, especially ones on wish lists.

Boardgamegeek rankings contain interesting data, a lot of it irrelevant to your needs, but the most important element to a BGG listing is how many people want it. A great ranked game that nobody wants is irrelevant. A poorly ranked game that a lot of people want is a curiosity. A great ranked game that everybody wants is a pretty sure thing.

Soup Stock. A good soup needs a base, a savory stock to build around. There are also psychological sales elements you need to crack, such as how many games you need before it's perceived in the mind of the consumer that you're a legitimate board game resource. That number of these stock, evergreen titles is probably in the 20-30 range, which would form your initial base. Rotate them out if they stop selling.

So although I just told you not to focus on what has come before, there are evergreen titles that you simply can't help but sell well. Make a well informed list, pick 20-30 and stop there. Talk to retailers and distributors. The worst thing you could do is attempt to mimic some Hotness list or the top ranked BGG games. That way lies madness. I should know, I once stocked the top 100 on BGG and I'm a nut. What a disaster.

Also, ignore customers who aren't intent on buying right now. They either wish you to carry things they love (but already own) or want other theoretical people to buy a game so they can play. Board game enthusiast customers will give you bad advice. Finally, an inch deep and a mile wide is your mantra. Do not stock deeply until you have long term sales patterns. No matter how well regarded the new thing is or how many people want it, don't assume you can move a ton of product.

Front List Driven. You're only as good as your next board game. Once you have your base figured out, you'll be adding delightful new ingredients to your board game soup from across the game trade. Pay attention to pre order requests and focus your money on hot new games. From now on, this is what you want to focus on, so avoid backfilling with evergreen titles. It's tempting, but don't do it. For every new game, check out rankings online, see how many people want it, and still be cautious when ordering in quantities. It's far better to run out of games that have too many. We just got back from a convention this weekend where half a dozen games from The Hotness went unsold at a 40% discount. We over ordered great games and they are now dead to me. Plan to run out.

Expertise. I think you can run a game store having never played Magic, having never rolled up a D&D character, or having built a 40K army. It would be dumb to not do these things, but you could sell Magic, D&D and 40K without knowing a damn thing about them. You'll sell them better with knowledge, but you could do it. Board games are not like this. Somebody better know their board games or you'll have a heck of a time with them. The reason is board games sell best to new customers who need guidance on gateway games. The more experienced customers already know what they want and they tend not to buy from you.

More than any other category, board game customers tend to "graduate" away from you, but you get them during their formative education, so you have to make the best of it. If you don't know board games, engage in a crash course. Start a board game night in your store and attend every session. I did this for the first few years of being in business and it helped tremendously. Even better, keep going, become an expert, play games at trade shows and have first hand knowledge of games before they come out. When they do come out, have demo tables to show off these games and make sure staff are trained to do so.

Marketing. One of the most valuable assets my store possesses are Facebook Groups dedicated to various game types. My board game group is gold. I can tell my customers about upcoming releases, post photos of new games, and field questions. Because it's private and focused just on board games, I can be candid. I can give my opinion. I can confess my ignorance and ask for their help when I need it. They have my full attention and I thankfully have theirs. So when a new game shows up, my marketing efforts result in sales the same day, not the once a month when the average customer shows up. This means I can stock smarter, lighter, and turn games faster so everyone benefits.

Kickstarter. Should you back Kickstarter games as a retailer? As a new store, I think the answer is probably no, mostly because you'll have a difficult time moving the quantities necessary to participate. As an established retailer, we've had very good success backing projects, especially ones where we order and pay after the project is complete. I think it's recognized that retailers lose every time when they tie up capital at the beginning of a project. So some projects can work, but if you're just getting into selling board games, you don't need to dabble in Kickstarter. Wait until you have demand and your marketing apparatus functional. Then try to get customer pre orders before you delve into a project. Our most successful backed projects sell out quickly upon release to customers who pre ordered months before.

That's about it! Just some thoughts on how I do it.

Monday, February 19, 2018

Report to Stakeholders 2017

This is our third public report to stakeholders of Black Diamond Games, Ltd. It provides insight into how we do business at our one store. Being in a suburb of a metro area surrounded by hundreds of thousands of people, in the prosperous San Francisco Bay Area, our way is just one way. Unlike many smaller markets, it's possible for us to see strong growth for decades, without resorting to opening multiple stores. It's a relatively prosperous area with customers far less price conscious compared to other areas of the country.

A stakeholder includes employees, event coordinators, shareholders, distributors, publishers, private lenders and our customers. Private lenders funded our Game Center expansion in 2016.

We are a single, brick and mortar store with the vast majority of our sales made to local customers. 2017 saw us enter the Magic online singles market through the new TCGPlayer Pro. Although we're late to the online singles party, Magic online singles now accounts for 1% of our sales over the last 12 months. That's not very much, but it served the important purpose of allowing us to better serve our in-store customer by having a larger selection and a method to sell off locally unpopular cards. Our best selling game in the store is Magic and the best selling "item" in the store is Magic singles. That's probably true of many stores. 

2017 Summary

Sales in 2017 were up 14%, as we capitalized on our expanded space. While the large Magic events this space was designed for never materialized, we instead saw a doubling of our nightly events, with a wider variety of events and the same events held on multiple nights. We were hoping for a 5% sales increase through this expansion, so 14% is pretty phenomenal. That's good, because as usually happens, our expenses were higher than forecast.

Sales were well over a million dollars for the first time and lagging profit margins throughout the year finally hit a respectable overall level in December. Despite our high level of profitability, we also had high levels of construction loan payments that left us little operational wiggle room. Paying supplier bills on time in 2017 was a challenge, but I'm told our tardy payments are still way better than most stores (which is kind of sad).

That's a minor complaint though. As I told one investor today, our cash crunch means I pay expenses and high loan payments AND still go on vacation, BUT we have little money for future projects. It's  frustrating but it's also an enviable position for most store owners. We will make our loan payments and bide our time until we have capital for the Next Big Thing.

With our 30% bigger space, we also saw bigger expenses: Insurance doubled, interest payments doubled, and labor increased around 15% as we added staff to handle the influx of customers. Wages also suffer from the steep increase in minimum wage, which will continue to rise every year indefinitely. Outpacing wage increases is going to be a challenge for all California small businesses for the foreseeable future. Our high tech lighting and HVAC meant we only saw a 5% increase in utilities.

Winners and Losers
2017 was a rebound year for sales. As much as I discounted 2016's sales numbers due to construction, 2017 sales likewise saw huge increases for the same reason. 2017 was a year where diversification played an important role. Half our sales are CCGs and board games and both those categories were flat or down.

We saw enormous sales in other departments, with notable ones being RPGs and miniature games up 50%, and our fast growing geek apparel department growing over 300%. It grew 168% last year and it's becoming a larger part of what we do. We're in year 15 of this business when you would be expecting low single digit growth, so these are pretty extraordinary numbers.

This year saw a lot of retrenching of existing games. Warhammer 40K dominated miniature games with solid 8th edition releases. Dungeons & Dragons and other RPGs have shown great strength and interest, and our sales are accompanied by four nights a week of role playing in our Game Center. Most of the CCG decline was Pokemon missing a beat and missteps by Wizards of the Coast with Magic. Magic was down slightly for WOTC in 2017. Our expansion into online Magic singles didn't help in this area either, as sales of singles were down 3%, despite greatly increasing our singles catalog.

Board games remain a chaotic category. Kickstarter continues to see increases, and although it's only about 10% of the US market, it saw a 30% increase in funding for hobby games in 2017. That said, it would be wrong to think game stores are shut out of this market, as many of our top sellers in 2017 came from backing Kickstarter games as a retailer, notably: Gloomhaven, Massive Darkness, Dark Souls and The Grimm Forest.

From this article.

There seems to be an attempt by the larger board game players to flood the channel in defense of their position. A good example is Asmodee sending us a huge influx of new and reprint games on a weekly basis. Games Workshop and Wizards of the Coast also seem to be stepping up releases in a crowded marketplace. I'm told some customers are not only burning out on the release cycle, but are seeking the lowest prices to keep up with the fast release cycle, not a positive development for brick and mortar retailers.

The huge influx of board game releases averaged around ten new board games a day. The end result is great games unable to gain traction in a crowded marketplace and overwhelmed retailers dumping great games, often before they even hit the shelves.

There are simply too many good games and not enough customers to buy them. It's not uncommon to stare at our new release table with six unsold games, half a dozen copies deep, with stellar reviews. It's no longer enough to just have great product all the time, we need new ways to engage customers and show off the best of the best. We are of course in a board game bubble, but it's a resilient bubble with enough flexibility, enough channels to find customers and continue for quite some time.

2018 Plans
I'm expecting 2018 to stabilize, which might not sound exciting, but it's what we need right now. My Magic experts believe the next release of Magic could break the downward spiral. Brand value protection is becoming the norm with board games and if we could develop a demo program in 2018, I think we could see some great results.

Miniatures in 2018 will be about Star Wars Legion by Fantasy Flight Games. We're going deep into this game, with enough copies to score an early demo game with my assistant manager dedicated to getting it on the table to teach and show off. Whether Fantasy Flight can handle stocking a game as broad as legion while managing organized play remains to be seen (I only have to look at X-Wing to have my answer). I went deep with Legion because Fantasy Flight gave us the opportunity to work to make this game great in our store while also protecting brand value online. Games Workshop does the same, which often leads to great successes with that brand.

Role playing in 2018 will see more early releases by Wizards of the Coast, with Mordenkainen's Tome of Foes likely to be similar in popularity to Volo's Guide. We're attempting to run a Dungeons & Dragon summer camp in June. The camp has been well received by the online community, although it hasn't resulted in sign ups. We'll continue to market that.

At our current sales and profitability level, even modest growth would appear to be a win. However, with all of our costs rising well above inflation, especially labor, we need better than 4% growth every year. This is true for every small retailer in this state, whether they know it yet or not.

My 2017 plans included transitioning to full time employees and the like, but that will have to wait. Our debt levels mean we'll need to run lean for a couple more years at least. We really didn't have a solid idea of what our finances looked like until we had our tax forms in hand for 2017. On the plus side, regardless of your political views, 2018 should be a better year tax-wise, and that will result in more opportunity for the business.