Friday, December 15, 2017

Head and the Heart (Tradecraft)

Most of what I do running my business can be divided into head and heart activities, including managing inventory. I mention inventory because I'm thinking about my GAMA Trade Show presentation in March and it basically comes down to these two factors.

Head is running numbers, turn rate analysis, sales per square foot analysis and the like. If this hammer is the only tool in your toolbox, you can optimize your store out of existence. You can't run a store in your head, and if you could there would be one chain of stores in existence, all of commerce reduced to a mathematical formula. That's because there's heart.

When I say heart, it's not quite accurate, but it sounds good. Heart is really human psychology. Understanding human psychology is the second half of inventory management. And when I say "understanding," I mean vaguely having a feel. Your store has a perception in the mind of customers. That perception can be only vaguely influenced by marketing, because the heart can't be fooled that easily.

When a customer visits your store, their heart, their psychological view of your business, is imprinted upon them. Small things, like whether their butt was brushed in the aisles by a passing customer or whether the aroma was pleasing, can have a massive effect on their perception. Your store could be too small, so you make it bigger, but then it becomes too big and they wish it were smaller. It's so difficult that Americans don't even appreciate the winners of this game. They like underdogs and you are seriously screwed if you're perceived as being the bully, so everyone looks for someone they can punch at upwards. I can badmouth Amazon all day long, but I risk everything if I talk smack about that small shop across town.

When it comes to the heart and managing inventory, we work with concepts like "top of mind," as in when people think of their game, what business is at the top? This top of mind often has little to do with the head job of running numbers. For example, we have the product pyramid, in which 20% of dice make up 80% of sales, but if you drop the bottom 80%, sales plummet to insignificant numbers. You've lost top of mind. So you carry all the dice. But there is no product pyramid in board games or card sleeves, mostly, sometimes, often. I mean is there? Obtaining "top of mind" is not something you can quantify, so your mind topping may vary. You'll have to adjust constantly, and there is your job security.

So which product lines are about top of mind and which are about running the numbers? There is no right answer and I could come up with a philosophy in my store that doesn't work with another store I own across town. My guess is a master retailer sees with both their head and their heart all the time. They see through the eyes of the customer and grock what's important and what's not, what numbers can be crunched and when to let out slack for the sake of perception, an attempt to speak to the heart.

Monday, December 11, 2017

Nobody (Tradecraft)

Nobody will run my business as well as me.

This is a true statement for every business owner, but how relevant is it? Are you willing to spend your life behind the counter to provide the best experience possible when a very good experience is attainable by someone else?

I think it comes down to two possibilities. You either want to work in the business, on the front lines, on a day to day basis, or you don't know how to get good results from other people. The first option is a perfectly valid choice. I know several veteran retailers who I greatly respect who want to be on the front lines daily. I personally spent nine years doing this before I just had to step away. If I had nobody capable to take my place, my best option would have been to close my business.

The other choice, that you're personally unable to get good results from other people, can be fixed. It requires trust. It requires allowing people to make mistakes in your temple of perfection. People will let you down. They will not only fail at their job, but they will betray you. You will inevitably befriend them and you'll get a knife in the back or best case scenario, they'll walk away one day.

This is not cynicism, this is what it means to be an employer in a small business. You have to tolerate the inevitable back stab and you have to train your people for their next job as you train them for their current job. You have to be a mentor, because the other option is being a bad employer.

As I write in my upcoming book, I feel like The Doctor from Doctor Who, with a steady stream of young companions to remind me of my humanity, which after 900 years (or 13 years in retail), is a receding memory. The companion eventually leaves, to be replaced by another young companion, while I grow older and more distant. Sometimes the companion has the better solution or reminds the wise doctor of his original intent and purpose. It's good to have a young companion, even if they break your heart when they leave.

Speaking of growing older and older, how you run your business, every process and procedure, is determined by whether you believe other people can run it as well as you. If it's all about you, there's little work to be done here. When you're gone, things just don't get done. But you're never gone. How many stores can only buy Magic singles when the owner is around? My managers can all buy singles. I'm not allowed.

If you want to retire one day or start a second business or even a second store, (or you know, die) you have to build your business with the intention others will run it. This is another area where not everyone is willing or able to do that work. There is something lost in the pudding when a gourmet chef franchises his restaurant. But how important is it that the pudding be perfect? Can it be pretty good? Is it possible that if you work on your recipe for other to follow and hire the best people, the pudding might actually be better? I mean, have you had coleslaw from Kentucky Fried Chicken? That stuff is awesome. If Chef Gary has lost the spark to make the pudding, my guess is the next chef might actually do it better than him.

My point is if you want to declare nobody will run my business better than me, know that you're either making a perfectly valid personal choice to do it all yourself, or you need to admit you don't know any other way, a position of ignorance that can be remedied. You're not all that important. None of us are. Your business will never be perfect.

The problem with the low barrier to entry with game stores is we fetishise a well run operation as something more than a business. Good stores are not magical, they just have good policies and procedures implemented by skilled owners. When we reject the game store fetish and accept this technical explanation, we can proceed to build more of them.

Wednesday, November 29, 2017

The Long Play (Tradecraft)

Although quite a few game stores are struggling for survival right now, the successful ones are planning for the future. I commented online recently that the ironic thing about game retailers and the future, is planning for that next "Unique Value Proposition" often has little to do with games. This should worry publishers.

The usual play for an established store wishing to expand is to grow inventory. Right now, I could easily justify spending $40,000 on new inventory as a long term strategy. My turn rates tell me I'm missing sales with my lean inventory. It used to be a given that inventory was your economic engine. Build up that engine and you've got far increased earning potential.

Well off stores nowadays see stratospheric turn rates, meaning engines at the rev line, working harder than ever before. My subjective feel for this is a store ten years ago was doing very well with three turns a year. A store doing well nowadays can easily expect six. That's very subjective, but I think it's about right. 

This increase in turns, a massive improvement in inventory performance, is an open invitation to mass market, who need high turns with their business model. You can see hobby games now in Target, Wal-Mart, Barnes & Noble, GameStop and even Best Buy, because they make sense. Mass market doesn't respect games, they turn and burn, selling until it doesn't make sense and dumping product on the market. They don't run organized play or hold events, they sell games like commodities, so that's what they've become. Dumping, both by mass market retailers, online retailers and struggling game stores has left retailers with the impression inventory is not a safe harbor. Inventory, the economic engine of a game store, has no value.

If I look around my store, here's what I see: Magic, a third of my sales, being pumped and dumped by Wizards of the Coast and sold online at cost and discounted in the mass market. Board games, another third of my sales, devalued and dumped online as fast as they can come out. Role playing is another twenty percent or so and I've got Wizards selling direct to Amazon and them selling D&D under cost and Paizo with their long term subscription model and online discount store undercutting me, those two games compromising 80% of RPG sales. Finally, I see the only safe harbor, miniature games.  We're down to just selling Games Workshop, since Privateer Press and others took us down the devaluation path years ago. We could learn a lot from that miniatures game strategy in chasing brand value and dumping product without it.

So actual games, inventory, the product my business is centered around, is not a safe investment. Sure, I'm getting six turns on inventory, but if you were to ask me what's hot right now? Where are my amazing sales coming from? What are my predictions for the holidays? I have no idea. Good things languish. Mediocre things run up the sales charts. There are more great games than great customers. Sometimes devaluation murders a product in infancy and sometimes it has no effect at all. The acceleration of customer demand feels as if it is temporarily overcoming the mass devaluation of product. That can't end well. The music will stop and there will be quite a few in this industry looking unsuccessfully for a chair.

So I spent $133,000 building a game center, because a solid game store experience is something I can count on, even while the game trade accelerates off a cliff. If I had the skills or the desire, I might consider a coffee shop or cafe model. I read five books on this topic before I decided it wasn't for me. I've thought hard about diversification, both areas that work well within the game trade, like toys, comics, books and the like, but there are certainly no safe harbors there. I've even thought about how to diversify into other areas, like a side business selling off road parts or emergency survival equipment. I might take a lot of money and develop a community outreach program with new staff that goes out into the community to evangelize. A traditional play is also to find a building to buy, assuming that real estate in my local market is stable and affordable. What I am not planning to do anytime soon, but was my plan for many years, is dump a lot of money into inventory, the games that my store exists to sell. I'm not alone in this thinking and that should worry industry professionals.

The tide is turning though, and 2017 has been about that story. So although inventory is no safe harbor, game publishers are beginning to see where this is leading. The larger ones are implementing brand value protection, legally creating price floors to prop up an industry that will suck them down the drain as well, if they don't do something to prevent it. These publishers are increasingly safe harbors. There are fits and starts, as we saw from Black Friday, publishers like Iello throwing up their hands and saying, alright, this weekend our brand value isn't important, but starting on Monday, we will be valuable once again. As if you can turn value off and on like a spigot. My advice for 2018 is find these safe harbor publishers and begin shifting inventory dollars to them from the "a buck is a buck" crowd, no matter how big that company may be or how many butts in seats it provides.

Saturday, November 18, 2017

Bad Decisions (Tradecraft)

Game store owners, like regular people, can get into bad situations and make what look like bad decisions. If as an individual, you simply run out of cash and run out of options to feed your family this week, a payday loan is not a terrible idea. You do what you can to survive and hopefully learn how to avoid the mistake in the future. If you're getting a payday loan every pay day, something is terribly wrong, and the sting hasn't taught you anything. The same is true with store owners.

As someone who has had to survive hard times in the game trade, followed by adopting strong policies during good times, and then seeing lean times once again, there are short term strategies that only make sense when I have no other option. I may blow out product because the bill is simply due and I don't have a cash cushion to sit on it long term, which is the better play. I know I need a cushion, so I see my actions are not optimal for the long term. I endeavor to improve.

The problem in the game trade is there are too many store owners who are grossly undercapitalized, forced to make short term decisions that hurt not only their prospects, but the long term prospects of the trade. They don't just use their online sales as an exhaust port for unsold product, they need to blow out product and collect revenue, any revenue, upon product release. Anything that generates cash for their 7 day terms or even COD terms, is a win if it gets them to their next FNM, which they also treat like a cash cow. These are the payday loan customers who are there every pay day, unable to feed their store and without other options. Most will never have the capital to do otherwise.

Of course I'm talking about Magic, the cash cow of the game trade, as there's nothing else quite as liquid as cases of Magic cards. For the vast majority of the country, it's unlikely the bar will be raised to limit the number of undercapitalized stores. Here in the SF Bay Area, obtaining a commercial lease in even a reasonable area, requires a multi year commitment and demonstrated capital. But in most of the country, there's plenty of commercial, month to month real estate that can be leased with a handshake. So anybody can start a game store with ease, usually with some folding tables and Magic boxes. If you want to raise the bar, you have to regulate livestock.

That cash cow needs to have its value protected. How that's done is none of my business, and it's not legal or helpful for me to suggest how. I just think it should be noted that her udders are sore and inflamed from being milked at an increasing rate of speed. Her legs are wobbly from not getting enough rest between milkings. Worst of all, the kids have lost a taste for her milk. There's no longer anticipation, no longer curiosity as they guzzle down glass after glass, while being handed another glass before the first is even finished. Treat the cow with some respect and most of these problems go away.

As Much Rope As You Need (Tradecraft)

I could have called this post, "Boned," as a description for retailers sitting on a stockpile of Iconic Masters. Boned assumes their predicament was something that happened "to" them as opposed to poor judgment and bad circumstances. Perhaps there is a mix, but in general, I think Wizards of the Coast offered them as much rope as they needed to hang themselves, and they chose to swing at a length above the ground of their own choosing.

The problem with Iconic Masters is about timing, mostly. Mid November is not a traditional time for a significant Magic release. It's a dead season before the rush of the holidays. Generally things released during this season languish, either to be sold during December or never sold at all. It's a risky release time. So it's not surprising many retailers are reporting terrible sales during this slow lead up.

The second problem is the cost in relation to the season. My initial order of Iconic Masters was $20,000 of product on one invoice. I wrangled that down to about $12K. The problem is the end of the year is six weeks away. For a hot set or a set with a predictable sales cycle during a predictable time of the year, I'm likely to take 3-4 weeks to sell through an order and pay back that invoice. If I'm a little late on my predictions, and I've got some overstock, that's fine. However, with six weeks left in the year, what I don't sell is likely to become inventory overage, taxable as income on December 31st. There is strong incentive to dump this product for this reason alone.

Strong incentive may be an understatement, as this product is being dumpster fired (using this as a verb now) like no set I've ever seen. There are the usual suspects, but everyday stores also see the writing on the wall. At any other time of the year, the wise retailer would settle in and ride out a 3-6 month cycle of what's admittedly a very good product. But six weeks before end of the year? The risk is too high. Shove it out the airlock.

Did I mention Wal Mart has a Masters set for the first time? Oh yes. They have Iconic Masters as well as future product with the usual street date violations. The market is flooded with this product. Rather than banging the gong on Iconic Masters, Wizards has moved on, hyping the next Magic release, and making it easier for customers to just skip this one and jump on the next bandwagon.

Retailers can smell the blood in the water. They've made ground pronouncements of how they've had enough, which really just means they're reducing their upcoming orders of Magic downwards, something they should have already been doing, if demand indicates it. Distributors are going to be in a world of hurt when bills for this set are due and those retailers looking for the holidays to save them from a tough year will find their grandma money savior will go to pay the Iconic Masters.

The market has hit rock bottom folks. This is what bottom looks like. It's a shame too, because this is a very good product, despite the YouTube low lifes attempting to bad mouth it for personal gain. This is not enough to put anyone big out of business or topple a distributor, but it's a tipping point, a move from a bull Magic market to a bear market. For stores, diversification is the answer, but it was the solution to a problem that's too far gone for most.

Wednesday, November 15, 2017

Measurement and Reward (Tradecraft)

The game trade retail tier is a perfect expression of measurement and reward. When you begin to measure something and reward behavior,  you skew behavior in that direction. For example, if I give a bonus to employees for upselling product, they will absolutely upsell to every customer, whether they need it or not. My goal is to sell more things, but the reality is customers are driven away by the hard sales tactic. Upsells work in some situations, but not this one. So how are retailers measured and rewarded?

Wizards of the Coast measures butts in seats and rewards stores with status and limited product. If you look at game stores failing right now, the number two reason I've seen is the lamentations that players have done this or that. Players have moved to the store across town. Players don't like Standard right now. Players don't like the new tournament format. Oh dear, players have abandoned us!

Rewarding butts in seats has turned retailers into tournament organizers. They are not graded on their sales performance. They are not held to account for dumping $145 booster boxes for a dollar over cost. It's butts in seats, so butts in seats is how many game store owners measure success. Most don't know how to retail. Most would be offended, calling me a sell out, if I told them what they needed to do to effectively retail.

Distributors measure gross. The more you buy from a game distributor, the better the discount on games. It doesn't matter what you do with that product, just so long as you bulk up to the next discount tier. This leads to dumping, of course. If I'm $1,000 from hitting my next discount tier, why not buy that $1,000 of product and flip it online at cost? Distributors measure throughput and what we get in the game trade is tremendous throughput. Then we wonder why we have rampant product devaluation. It also ties into the number one reason stores close, undercapitalization.

Why invest in inventory that's worth ten cents on the dollar if you close tomorrow? You don't need dump trucks full of soy beans in your office to be a commodity trader, you just need to know they exist out there. I see store owners trying to sell their stores with acres full of tables and a few shelves of mostly card boxes. Pass.

Being a well diversified store, one which is a proper steward of game trade products, one that introduces and demos games to new customers, that protects brand value, that invests in inventory as a long term strategy, is not rewarded by the current game trade model. You measure throughput and butts in seats and you get throughput and butts in seats. Then retailers fail in droves, confused as to why their business model failed to perform when that's what they were being incentivized to do.

Thursday, November 9, 2017

The Stinky Gamer (Tradecraft)

Welcome to my high horse, where I survey the land around me so that I may pronounce my judgment.

Game stores have an odor problem. They smell and the problem is often blamed on gamers themselves and their poor hygiene. While there are such olfactory offending characters in our stores, the real problem is the game store itself.

Game stores are not meant to be assembly areas and most are not zoned or built for a large number of individuals with their body heat and natural odors. I'm on my high horse because I just spent six figures and six months bringing our store up to code, an unreasonable expectation to be sure, since I don't even own my own building.

So game store owners spend time masking odors, purifying air and otherwise embracing toxic chemicals to hide the stench, rather than doing the work to fix the problem. Now, if I were consulting for a prospective game store owner, would I be budgeting in a $10,000 HVAC upgrade and a bathroom remodel for typical assembly requirements? Heck no. At least not at first. However, those whose business model includes tables for hundreds of people, not dozens, would be wise to include such upgrades on their wish list.

This of course just adds to the impossible requirements of running a small business like this, the fact that nobody at the bottom could possibly afford such upgrades while everyone in the middle will have such expectations forced upon them. It's another example where it's good to be small and good to be big, but the middle has the expectations without the resources.

Our project board, so we know what to buy during the rare times we have money