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

Wednesday, November 1, 2017

They Want Too Much

Customers demand everything. They want price, selection, strong customer service and the new thing, experience. They want unique, "third place" experiences that provide them mental stimulation and a sense of community. These are a lot of wants, especially in a commoditized market.

The population also demands high wages. They want $15 an hour minimum wage. They want a Guaranteed Minimum Income (GMI). Conservative and liberal alike will shrug when a small business fails because of these demands. Meanwhile, job seekers languish, underemployed with job mismatches where worker skills are not the correct skill set for the hundreds of thousands of jobs that go unfilled.

Despite the higher wages, there are few workers to be had, what would normally be a sign that the pay is too low, but we've been forced to raise the pay. Where are the workers? For my store, almost every new employee requires significant training, and almost none of them match our job descriptions. The applications are notoriously slim pickings, and it's true for most stores around the country.

So everyone wants everything, nobody wants to do the job of providing it, retail increasingly moves online, and and we complain bitterly about big box retail treating us badly. Sounds like conservative talking points, but it's my experience in the trenches. Is this an impossible situation? Nope, don't despair, here's where the opportunity comes in.

Small business owners fill these gaps, delivering the impossible. The problem I have, as an established store owner, is I can't hire people to make miracles. I can either make miracles myself, or I can throw my hands up and declare miracles are phony. There is no amount of reasonable money that will let me hire a miracle worker. I cannot provide what people want under current market conditions. Can't do it. That right there is an opportunity for small business.

My inability to hire miracle workers is my competitors opportunity to make it rain. If you are delighted, entertained, awed by a local small business, I can almost guarantee you there's a business owner making miracles, because you can't hire saints and prophets, you have to become one.

This is both a competitive advantage and job security for small business, as well as a reminder to us middling businesses that you better bring the mojo. And if you continue to go to Toys R Us and Wal Mart and Target and complain bitterly about your mediocre, bargain basement experience, please remember you're asking the impossible. Maybe a small business will arise to provide that miraculous experience you crave. Maybe the prophet is you.

Thursday, October 26, 2017

The Dream

I had a dream I volunteered to inventory a hardware store. The hardware store was my original metaphor for starting my business, a simpler life with concrete things, bought and sold by people who needed them. A far cry from the IT world where I rarely understood the businesses I helped support.

I borrowed the metaphor from an old boss, who told me over lunch one day his desire to open a hardware store. When I met with him before I opened my game store, he thought I was crazy when I told him my plan. "What about the hardware store?" I asked. He told me some dreams are meant to stay dreams.

The owner of the dream hardware store laughed and handed me a clipboard with nearly infinite sheets of thin, onion paper. Each sheet had lists of weird product categories and random codes. I stared at the top, the department being the only word that made any sense: Paint. The item description had words, but the meaning was lost on me.

I walked around the store, it might have been 100,000 square feet or a million, as I never stopped walking. There were no signs. There was paint here and there, and paint cans on top shelves of other departments, but never did I find the actual "Paint" department, nor the first item on the list. I walked and I walked.

I began to despair. I agreed to do this thing. Clearly this would take a year or longer with one person, and knowing retail, the data would be worthless far sooner than that, probably by the end of the day. It was like inventorying drops of water in a swift moving river. What had I gotten myself into? What was I trying to accomplish?

It was a familiar sense of hubris. Most game store owners have no idea what they're getting into until they actually do it. Also, it's not like you get to a point where you have it all figured out, like the mythical hardware store of simplicity. I can look at every element of that dream and break it down into something I'm grappling with after 13 years in this business.

There are multiple dangers of owning a small business. One danger is you'll fail, which can be a merciful experience if it happens soon, but after the first few volatile years, the chance of failure doesn't ever lower. Ever. If you dream of a failing hardware store, you might insulate yourself with an enormous cash cushion to get through the night undisturbed.

The most dangerous thing in small business is you succeed, just enough to keep going, but not enough to be worthy of your devoted life. You may have been young and not doing anything worthwhile when you opened, but what could have you done? What could you be doing now?

The lucky few will be successful, but their dreams will be haunted by giant hardware stores and infinite inventory sheets. Store owners will say, if you can make it doing this, you can make it anywhere. But where exactly? Also, there is no doubt in my mind there's a hard working hardware store guru, who knows the location of every paint can in the enormous store they work in, who dreams of opening a game store. As my old boss told me, some dreams are meant to stay dreams.


Am I a game store owner dreaming I work in a hardware store
or a hardware store owner dreaming I work in a game store?

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.