Friday, April 13, 2018

Consultants and Preparation (Tradecraft)

"A consultant is someone you ask the time and they take your watch as payment."

I learned this saying as a teenager and found it amusing, but there's a kernel of truth to it. You want to know the time, you have the tools at your disposal, but you don't know how. My free advice, because I'm not a paid consultant, is learn to use the tools. Here's where to start:

Write a business plan. What, you've never written a business plan? What a great education! It's a research project, one where everything you learn will have a direct impact on years of your life. You can't spend too much time writing a business plan. Write it from scratch and get feedback. Find a SCORE member to vet your plan and share it with people who know more than you. It's like your first script in the movie business; try to get it in front of people who can help you make it happen. I talk a lot about the business plan in my book, without actually writing a plan, because that exercise is something you should do yourself.

Also write a marketing plan. Budget money for marketing based on a percentage of your expected gross sales. Nowadays, with social media and online advertising, as little as 1% can make a huge difference. When I started it was recommended you spend 2-3% of your gross on ads, but that included a lot of cable TV, radio ads, print ads, and the dreaded Yellow Pages. My advertising last year was .76%, and I have a hard time justifying spending more. My advertising budget my first year in business, 15 years ago, was 4% of my gross. I actually paid more in marketing my first year in business than I did last year with four times the revenue. Create a plan, try to make it more diverse than just Facebook, which is a boat filling with water, and create a schedule. Spend more money when you think sales will occur.

Network with peers. Facebook is key nowadays, while 15 years ago it was Delphi forums. A good group to start is Opening A Tabletop Game Store. From there you can branch out into many other places, where more than likely the signal to noise ratio won't be as good for you. Find like minded individuals. Compare notes and triangulate when given advice. There is good advice you can use, good advice that doesn't apply to your situation, and bad advice. Two out of three things you hear will be useless. Note the people giving you good advice and pay attention to them. They are your spirit animal.

Read a lot. I have a blog post here with resources. My advice, which almost nobody does, is delve into reading about retail and not just the game trade. Some of the stuff I lecture on at trade shows is right out of retailing books, illuminating rocket science to most people in the game trade. Many older retail books have the details wrong for today, but the strategies are generally solid. I also keep up on retail news by getting Retail Dive in my inbox, which covers retail trends. Get out of the game trade bubble and remember you're now a retailer. Diversify away from distributors early.

Consultants? If you do all of these things, you'll probably be able to tell time. It's unlikely you'll need a consultant. If you're like me, a completist who's never satisfied until they know every angle, you might find peace of mind by budgeting a little money to bring in outside help. I spent a thousand dollars on a feasibility study when I first started, a gut check with the goal of making sure the numbers in my business plan were likely to work in my proposed locations. Since we're making up revenue projections, it's good to have some clarity on whether that's feasible. One of your final questions is: Can I do THIS, HERE. Worst case scenario is your consultant tells you the time you already knew and you're out a grand, which nowadays isn't even a lot for a nice watch.

Thursday, April 12, 2018

Rules of the Game (Tradecraft)

My shifts at the store start at 10am and I'm out before events start. I like my days to be quiet, and most of my customer interactions are the lunch crowd, a group of regulars I've enjoyed for over a decade. There are people who shop at my store who have no idea who I am or remember me fondly from olden days. Events, and the vast majority of sales, occur in the evening so when I started noticing new signs in the store, I knew what that meant. That particular behavior or policy confusion was happening.

While in grad school in Buddhist studies, we briefly touched on the Vinaya, which included the code of conduct for Buddhist monks and nuns. These were not top down, high concept, engraved on stone tablets, but rather hundreds of rules created as needed to tweak behavior. These are rules to allow people to do their spiritual business without being distracted or disrupted by the unruly, which might be other monks or perhaps their own tendencies. It's stuff as granular as not leaving a chair outside after you've used it. This kind of stuff might seem granular, but 2,500 years later, it offers a historical insight into what people were actually doing, since only crazy people create rules for problems that don't exist (a singularly modern American problem).

I run my store much like this. Part of Third Place Theory is creating a welcoming place where common activities can be engaged in without it being overly restrictive. There is no promise people will get along and the fact they won't get along with everyone is part of the deal. You will play games with people you don't care for, whose politics you disagree with, whose culture is not your own. Mission accomplished. Civilized society shall continue as we break down tribal barriers.

Our code of conduct is the unwritten and unspoken, "Don't be a dick." This does require staff to occasionally tell people, "Hey, you're being a dick," but it's rare when people show shock there's not a sign banning their dickish behavior. This did require some training of staff early on, and some staff were getting steamrolled back in the day. New staff can occasionally panic a bit and get a little too animated when people break the rules. Assertiveness training is a thing. Calling people out for bad behavior is not something we teach people nowadays. It's a damn shame.

What you will learn from reading the Vinaya or running a game store is people will generally skirt right up to the edge of the rules, and then take a step or two over. A Vinaya example is "Not to purchase another floor carpet as long as the former is not six years old yet." Imagine the conversation: "Joe, we told you when you started with us you could have a floor carpet and replace it when it's worn out, but your desire for fancy stuff is getting in the way of your goals, so now everyone has to give away new carpets if they're less than six years old. Joe, you're literally why we can't have nice things. No Joe, I used literally correctly this time." We have the same issue with policies where we need to finally put up a sign because there are those who will abuse the system otherwise. My guess is Joe the Monk wasn't the only one with new carpets, just as we don't create new rules for that one guy who brings product from the retail space into our Game Center.

Saturday, April 7, 2018

Wages (Tradecraft)

I was messing around in Excel, thinking about how many employees a store could reasonably expect to have at various sizes. My store is in the reasonable range of staffing, but I have mostly part time people I would love to transition into full time. They don't quite fit this model as California minimum wage is 45% higher than the national rate (plus they tend to make over even that). Still, I wanted a model that would fit the nation.

Below is what I came up, a model that's more something you would find in a player's handbook than a business plan. It's not exactly how a business would operate, but it's a baseline. It assumes some things:

12-15% labor costs. As a percentage of gross sales, a range of 12-15% is optimal so I included both 12% and 15%. I tend to skew lower.

Manager salary of $40,000 a year. That is a pretty low number, but this is a low earning trade, so I went with this number at the bottom of the curve. For California, a non exempt employee would make around $44K salary, so it's even higher here.

Note that at $200K-$300K, the manager can't even earn $40K without taking profits, which assumes these stores are always owner-operated buy-a-jobs. This model also assumes a multi million dollar store is still paying managers $40K, which probably won't happen, as we see a stratified management structure.

FTE Compensation. This assumes a full time minimum wage salary of $15,080 a year. Again, not an ideal compensation rate and in California it would be $22,880, but it's a place to start.

1:8 Manager Ratio. Another number from the retail trade which may not track exactly with what we're doing is having one manager for every eight line employees. For the vast majority of stores, this will never be a problem, as it kicks in at well over a million dollars a year in revenue (perhaps 5% of stores).

Profit Margin. Ask the general public what they think a retail store nets and they'll be wildly optimistic. When I made a post showing how my 10% net profit broke down across my business, the response was willful disbelief. Game stores make in the 5-10% net profit range. One year I mentioned in a trade show presentation I had an 11% net the year before and the audience broke out into applause. This number is only useful for imagining total compensation (below).

Total Compensation. Assuming the owner is also the (first) manager, you can figure out what a business owner is likely making by adding that $40K salary to profit. Pew Research says the range for middle class tops out at $125K, which could be a king's ransom in the Midwest but is pinching pennies in a big coastal city. You can play games with this, such as realizing a store owner needs to make $1.25 million dollars a year with an average (7%) net profit rate to break the middle class ceiling. Good luck with that. I think the average store nationwide is probably in the $350K range, which is just barely middle class, which means half of store owners are likely living in poverty.

Feel free to nitpick. It's a model. Remember that level 10 game store owners need to seek out and challenge the Master of the Broken Wind in mortal combat to proceed to level 11.

Thursday, April 5, 2018

Hedonic Goods and Your UVP (Tradecraft)

I'm brainstorming for an upcoming presentation, so here are some thoughts about game stores and the UVP:

Game retailers are in the business of selling "hedonic" goods. That's a fancy way of saying we sell crap you don't need. We're not in the need game, we're in the want game. Hedonic goods are products that provide pleasure, fun and enjoyment. Because we're in the want game, we can't operate a store like we're in the need game, selling utilitarian goods.

We have to provide something special that ties into that pleasure, fun and enjoyment. We are part of the product experience and we need to provide a level of value that enhances that experience through our value proposition. We can't run a traditional store with a traditional value proposition and we're in danger if we simply rely on a Useful Value Proposition. What we need is a Unique Value Proposition.

The traditional value proposition in retail, the one you still see with utilitarian goods, is the three legged stool. You've got reasonably good service, reasonably good selection, at a reasonably good price. When was the last time you chatted about a new brand of potato chips to the cashier at Wal Mart? How many special orders a day do you think they take at the grocery store? How often do you think people say "I'll just buy that cheaper online" at the gas station? The biggest mistake you can make running a hedonic store is to running it like a utilitarian store, although plenty of utilitarian stores attempt to go beyond the traditional model to make shopping with them special.

When I first opened my store 2004, I ran it using this traditional model. I focused on customer service, I stocked every game I thought anyone could possibly want (more than was smart), and although I held the line at MSRP, I would regularly buy liquidated goods to offer the occasional great deal. I had no events, no game space, and although I worked many hours a week, I was home by 6 each night. My traditional value proposition in a hedonic market was an extremely limiting model. I had to master every traditional metric to stay afloat. It worked, but it was not the future of retail and I didn't want it to be my future.

Every game store owner intuitively know the traditional value proposition is not an effective model for them. My traditional value proposition worked because I was running a traditional retail establishment with proper capitalization. Most new game stores tend to be undercapitalized and utilize new tools to squeeze profitability out of nearly nothing. They've got a useful value proposition, and although it's a brittle model, it works with enough sweat.

A useful value proposition offers something important to the hedonic customer beyond the traditional three legged stool of the traditional value proposition that's so easily replicated on the Internet. The most common useful value proposition is in store events and a fairly tight focus of inventory and knowledge in one well understood arena: Magic: The Gathering. Even today, a good percentage of game store owner chatter is about what's happening right now with Magic: The Gathering. Those who aren't completely reliant on this useful value proposition right now likely started with it, so it's deeply ingrained in store owner culture.

There are other areas of the Useful Value Proposition that the average game store engages in. This is stuff I still talk about on my website, since my marketing presence hasn't gone beyond this level:

  • Engaging displays
  • Multimedia wonders
  • Clean-Well Lit-Friendly
  • Demo game library
  • That guy/gal
Developing a Useful Value Proposition is why game stores exist, but it's also a baseline for retail survival in this age. Stores like Sears and Toys R Us failed to be useful. They barely managed to maintain a traditional value proposition, yet alone providing a useful service, and unique was beyond their wildest dreams. With enough money and momentum, such as with giant corporate retailers, a traditional model is still sustainable for a while longer. For the rest of us, developing at least a Useful Value Proposition is basic survival. But is it enough?

As giant retailers struggle to define UVP as Useful Value Proposition, top game trade retailers are struggling to find their Unique Value Proposition. As we lack money and momentum, we need to find safety in a rapidly changing retail landscape. We not only fight against Internet retailers, who sell things, our core business, as a loss leader, but the Useful Value Proposition store is constantly fighting against new game trade competitors. The barrier to entry for new stores is incredibly low and it doesn't take more than some folding chairs and a magic binder for them to suddenly become useful.  Some retail markets see a steady stream of pop ups, in a tug of war with their customer community. Useful simply doesn't cut it any more. 

It should also be noted that a true Unique Value Proposition is built on shifting sands. What's unique today may be only useful tomorrow. My first business was running a BBS system with hundreds of subscribers. This was before the Internet. We had a captive audience. We were unique. When the Internet began opening up to the public, we spent thousands of dollars becoming a hybrid BBS, with Internet access, our own domain with email and for a time it worked and we maintained our UVP. 

The next change was customer direct access to the Internet and many BBS systems became Internet service providers. However, we were still paying off debt from our last investment in our UVP. The shifting sands buried us and we weren't able to adapt fast enough. Most of those ISPs are gone now, as their entire business model became a commodity offered by the telephone and cable providers. The value of a Unique Value Proposition is only as difficult as it is to replicate by competitors. However, investing in a Unique Value Proposition is treacherous, but worthwhile, as you are at least miles ahead of the Useful Value Proposition businesses. While you're trying desperately to adapt and grow to new trends, the Useful retailers will be left in the dust (which is what I believe will happen).

So what's a Unique Value Proposition for hobby game stores? It's something a pop up store can't replicate without resources or money. It lives in the philosophy of Third Place Theory, providing a social outlet in a cold world. It's embracing "experiential retail" as their unique model. Examples of a UVP:
  • The coffee shop, bar, restaurant
  • The mega event center
  • The vertically integrated store
  • The liquidation king
  • The taste maker (supercharged demos)
Some of these examples are self explanatory and many are uniquely positioned, but the one I want to mention, because it doesn't require a bunch of capital or connections, is the taste maker. This is an area pioneered and talked about by game retailers Steve Ellis and Travis Severance and it basically requires a strong emphasis on demoing games at a very high level. 

Imagine what would happen if you had 3-10 demo tables and every month you taught customers the games on those tables, rotating them every 30 days to keep them fresh. Several things occur: 

First, you've created a unique experience in your store and the ripple effect of your sales efforts creates demand in your community. Rather than sitting back and waiting for customers to come in, you are creating the demand by showing off a pleasurable, fun and enjoyable product. 

Second, you have turbocharged employee knowledge, which puts you well beyond the traditional value proposition in retail. If you have three tables of demo games a month, it means every staff member has learned 36 new games that year. Increase the number of tables and you increase the power of this model.

Third, and the biggest reason to give this a chance if you're on the fence or dubious, is the massive increase in sales. Sales skyrocket upwards of 400%. You start focusing on finding new product for the hopper. You take larger stakes in games you know from experience you can sell. You stop dabbling with product and focusing on a system, rather than a stream of board games, ten a day at the current rate. You have created a Unique Value Proposition in your hedonic arena.

The taste maker model requires a staffing level and management expertise most stores will struggle to obtain, and thus it's unique and not simply useful. A general rule of thumb is if it's easy and cheap, it's simply useful. If it's hard or expensive, it's likely unique. The key is to not find yourself tapped out of resources with your unique value proposition when the next shift occurs, or you could find yourself running a BBS in the age of the Internet. 

Saturday, March 31, 2018

What's a Game Store Worth - Follow-up (Tradecraft)

I wanted to write this follow up to document the discussions we had on social media about the previous post. There were a variety of responses. Several store owners reported the example sale matched their experience pretty closely when selling their store. Several retailers thought such a store was vastly underpriced and a bargain all day long. Some would never buy a successful store because the barrier to entry and low costs made ramping up a new store to such income levels fairly easy - which I would concur if you have the experience. The exception was a "buy a job" to park a child in need of something to do, and I'm watching a store owners perform that painful hand off right now.  For the most part, there was gnashing of teeth about the low value of the business.

I mentioned in the previous article it comes down to a kind of classification for the business. Game stores deal with this all the time with insurance. When we get business insurance, there is no "game store" classification, so we fight agents in how they classify us, usually a book store or a toy store. One classification is usually more expensive than the other, so we argue for the better one, because why not. If you didn't know this, you should go out right now and re-shop for insurance. In the case of business valuations, a game store has this same classification problem.

An example of a healthy retail store with healthy valuations is the hardware store. Hardware stores play an important role in communities, with its competitors usually being other hardware stores more than the Internet, unlike the game trade, where we compete against not only other stores, but Internet retailers, distributors and publishers! It's an appalling situation that horrifies other retailers. It should scare away anyone interested in the game trade.

The hardware store, lacking such horrors, has a strong valuation of 3-4x net (seller's discretionary earnings) plus inventory. If our example game store were valued as a hardware store, it might go for over $300,000 rather than the fire sale price of $62,000. When I asked other store owners what they thought the example store was worth, it was in this hardware store range.

Some thought the game store valuation overlooked inventory, but that wasn't the case. The game store valuation intentionally ignored inventory values, much like valuations of the most endangered business species on Earth, the lowly book store. Independent book stores have been thriving lately, as have game stores, but I doubt that has increased their valuation. Book stores are valued in the 1-2x net range with no consideration of inventory. Another valuation method is a percent of net, 15-20% plus inventory. Without comps available for game stores, it's not unreasonable to assume one should be sold like the book store.

The problem is we all know on the surface the game store is undervalued because we all know, as store owners, we could liquidate the example game store for more than this valuation. It likely has $75K-100K in inventory.  However, because we have no records of sales, and no prospects for one, that's exactly what happens in most situations, a liquidation sale. If you've got experience in a liquidation sale, let me know what you would expect to gross from a well run, graduated sale of this level of inventory.

We are again back to the problem of selling the first house to a bunch of cave dwellers. Without comps we are simply shut out of the sellers market for our businesses in a chicken and egg scenario. It will take some sort of tectonic shift in the retail tier of the game trade before we see professionally run game stores sold for worthwhile valuations. You go first.

Wednesday, March 28, 2018

What's a Game Store Worth? (Tradecraft)

I just got back from meeting with our business broker. We were curious how much the store was worth, considering we have people interested in buying shares from our investors. Our broker asked questions about our operation, making sure we had strong policies and procedures and I wasn't integral to the success of the business. If it can't function without me, it has no value. Someone has to have their hand on the wheel, but it doesn't need to be me. They looked over three years of financials, and went back to the office to do some research.

So what is a game store worth? Depends on what you can get for it, and unfortunately, there were no  records of game store sales, at least in California. I was told what I already knew, store owners tend to start a game store for fun, out of passion, without much concern for a return. Finding an owner is likely going to be finding a gamer with a dream.

Game stores tend to fold rather than sell or they quietly pass on to existing managers. It's an industry in which it sucks to sell a business because traditionally game stores don't sell. When you sell your house, you need comparable sales in your area, but trying to sell a game store is like selling the first house to people accustomed to living in caves. Therefore, creating a business valuation for a profitable game store required some guesswork.

It starts with a highly subjective weighted average, a multiple of net income over three years. The most recent year is obviously more valuable than the first year in that calculation. I would tell you those multiples, but again, it's highly subjective, PFA (Pulled From Ass) numbers.

This average is then multiplied by a magic number. That number is where research comes in. If you can find sales of similar businesses, it doesn't take much to divide their sale price by their net income. Like a turn rate, it's a subjective number that reflects what's normal in the marketplace.

An undesirable segment might have a multiple of one, as you attempt to sell your buggy whip retail operation. A desirable segment with high energy customer engagement might have a multiple of two. A crazy desirable business with a well known name (usually restaurants) could go as high as five. For a retail business with no data of comparable sales? The multiple they went with was 1.5.

When you look at net, we're assuming the owners salary is included, and if not, it's added back in, which is likely to kill your illusion of profitability. Pay yourself from day one is the advice everyone will give you. Any sort of bonus achieved through negotiation, guile, or witchcraft is also added back (like free rent for whatever reason).

All debt incurred by a business is on the original owner and plays no role in the calculations. So my construction debt is mine to keep after the sale, which means selling is something I would be loathe to do until it's gone. My accounts payable, which for my business is as high as $50K at any given time is also mine. Gift certificates are an exception as they are a debt that stays with the business, so that reduces the final value of the business. You could argue some of that ancient gift certificate money is not real, so maybe you negotiate a third of that isn't included.

Any discretionary spending is pulled out which increases your income, which for me was a key person insurance policy, half my cell phone bill (on a family plan) and travel, which I consider essential and is tax deductible, but is it really necessary? No. I know some business owners that have over 100 personal items reducing their taxable income included on their balance sheet. It's not something you can pull off with investors, but it's a positive when it comes time to sell.

The number I ended up with was not significantly higher than what I could have gotten with a well run liquidation sale. So could I sell my store? Yes. Would it take a long time to sell my store? Yes. Would it eventually be worth it? Well, I also need to reduce my sales number by a 12% broker fees, so probably not.

Finally, there were some ways to increase my valuation with stronger sales, better cost of goods management, and labor that would need to stop growing while these higher sales occured. At best it would increase my valuation by 20%, which would probably make it worthwhile.

In the future, if the retail tier steps up its professionalism and retailers run their stores like actual businesses, valuations could increase, but again, not by a lot.

To give you an idea of sales numbers (not my numbers):

Saturday, March 24, 2018

The Mature Business Plan (Tradecraft)

"So if you don't have an updated business plan, do you just look at the previous year and try to do better?"

"Well, ahh, yeah."

I had a business plan when I first started and it saved my life. My mantra was stick to the plan. As the business continued to prosper and evolve, the plan was always in the back of my mind, but eventually it became an artifact of our history, rather than a living document. It's so old, at the time I didn't even have the name of the store sorted out:

This is not to say I don't do businessy plan things. Every year I write an annual report for stockholders that does an industry analysis, looks at threats and opportunities, and includes those wonky financial reports that I've grown to love and hate. I handed those to a business broker this week who encouraged me to write a new plan.

Note they didn't say update my plan, because if it hasn't been updated in 14 years, I essentially don't have a plan. I don't intend to sell the business, but having a plan is integral to any sort of hand off, including if something were to happen to me along this journey. I also know no experienced retailer will ever believe their business is marketable, so they're all reading this with skepticism right now. I would have to actually sell before they believed it was possible.

When I first realized I needed a plan, there was quite a bit of pride and a tinge of resentment. I just wrote a damn book about the trade, and keeping my ego in check was never a strong suit. I fantasized my first paragraph would start:

Look here bitches....

A new business plan for a new store is a lot of research, industry analysis, a mission statement and financials that are more wishful thinking than likely outcomes. It's an endearing attempt to show you did your homework, and might be useful to convince a friend or close relative to invest. But an established business plan?

That challenges every aspect of my knowledge of the industry and my business. Where do I think the industry is going? What's likely to happen in the next five years with our current location? How do I truly feel about my management team? Or our ability (or inability) to manage? How do I handle marketing when social media, our primary method, is in turmoil? And those financials... How optimistic should I be and should I base it on past performance even though we're in new waters? Most importantly, and this has certainly changed along the way: What is my mission? I think all the anxiety surrounds that last question, because I'm certain I'm off course when it comes to my mission.

When I was in high school I spent half a semester in "bonehead english" due to a scheduling conflict. We had ridiculous writing assignments like: Describe the changes you would make if you were king of the world. I would go to town and draw on my D&D fantasies and write an elaborate treatise about how things would be if I were king. The other kids would kick back and pace themselves on this joke of an assignment. The meta of this, the point of the exercise, was to keep us busy while the wrestling coach read his magazines.* Who was the bonehead here?

An established business plan needs to keep the meta in mind, the point of the exercise. You have a business that's profitable, so no need to posture. Just describe how you'll make it better and more successful for the foreseeable future, for anyone who decides to become a stakeholder. Who knows, maybe the plan will become a guide. Maybe the mission will present itself, if you choose to accept it.

* Eventually I got moved to a regular english class and the teacher would publicly praise me for my adequate work, much to the irritation of my friends who knew I wasn't a (complete) bonehead.