COGS: The Ratios and The Squeeze

An article has been making the rounds noting that the public believes that businesses clear a 36% profit after taxes, or in other words, net of everything.

That is, of course, an order of magnitude more than businesses actually make.  This comes from people thinking, "Gee, well, I heard they double the price before they put it on the shelf, and I'm sure there's some costs in there so they don't get to pocket the whole 50%, so, I guess... 30%?  Or 40%?  Or..."  And you average out those rectally-sourced guesses and 36% is where you land.

The problem is that "I'm sure there's some costs in there" grossly underestimates the reality.  Back-of-the-napkin math, the real average take-home profit across all of retail is something resembling 5%.  Five percent.  I get a shiny nickel when you buy that dollar can of Coke.  Or, more to the point, I split a nickel with my business partners.  As Zoe Washburne said, "At last we can retire and give up this life of crime."

Different retail scale levels produce that profit differently, however, and are vulnerable to different pressures.  Due to the alignment of ratios, big retail is about equally vulnerable to changes in occupancy costs, labor costs, and the cost of goods sold (COGS).  Small retail is vulnerable to everything, but mostly to COGS, and extremely so.  These days COGS for small retail are increasing at a frightening pace, against an MSRP that's printed right on the product a lot of the time and thus cannot be changed.  Small retailers, especially in our industry, are being squeezed by manufacturers/publishers.  And eventually some of us are going to pop.  (As it happens, Funko POP! products are one of the contributors to this problem.)

Big retail has four primary buckets, each shorthanded to 25% of gross sales but in reality with some variance.  Essentially:

• 25% of gross sales - Occupancy.  A combination of rent/mortgage, utilities, licensing, maintenance, and so on.
• 25% of gross sales - Labor.  Total payroll, not counting capital gains for shareholders.
• 25% of gross sales - Cost of goods sold (COGS).  This means 75% of the price tag is markup at big retail, by the way.
• 25% of gross sales - "Bottom line."  Includes debt service, capitalization, advertising and branding, litigation, taxes, and somewhere in there, around 3% to 8% final profit.

The 25% is good for visualization but in reality occupancy is slightly less, COGS is usually slightly more, and there exists all manner of room for creative accounting in "bottom line."  Labor tends to land right at 25%, though.  I apologize that I'm not citing a source on this, it's something I've learned so repeatedly and since so long ago I couldn't answer for it, and my Google-fu is failing me on locating a primary source.

The restaurant industry, by the way, is so much simpler:

• 33% of gross sales - Food.
• 33% of gross sales - Labor.
• 33% of gross sales - Everything else.

Right away looking at the big retail cost buckets, you know small retail should be sunk because small retail pays so much more for COGS.  We do make up some ground in the other areas, particularly when we rent downmarket or utilize other non-prime commercial space.  Here is how that stuff breaks out for DSG and stores like it:

• 15%-17% of gross sales - Occupancy.  Which is why there is no game store at the Scottsdale Quarter.  Breakpoint (mall) rent is 8%, so your middle-of-the-bell-curve game store is probably paying about that, with the rest of occupancy coming from the other line items.  Renting downmarket (a dump, in other words) definitely lowers the pressure, but introduces other problems.
• 22%-25% of gross sales - Labor.  Try what you want, it's tough to escape this figure without being a one-worker shop.  We sometimes shave a dollar here or there by virtue of attracting people who would rather make $9/hr with us than $10/hr at Wal-Mart.
• 50% of gross sales - COGS.  More on this in a moment.
• 8%-13% of gross sales - "Bottom line."  Which is why if you get into any significant debt as a hobby game or comic store, it's tough to see how you're going to make any money until you overcome that burden.  Between cap, advertising and branding, and taxes, and God help you if you have to sue someone or defend a suit... yeah, you maybe put 3%-4% of gross into your pocket.  You typically need a windfall to grow, expand inventory, or survive adverse finances.

So, COGS is the real ballgame, isn't it?  And this is why it's so difficult when a customer expects us to give a big discount -- after all, we bought it for around half the price, right?  What's so bad about ten percent?  Well, that's all our profit and then some.  That's a loss, actually.  Do that enough times and we won't have to worry about discounting anymore, or showing up to open the door.

The above, of course, puts forth an assumption that the retailer is keystoning, or marking up the item to double what they paid.  In an industry like hobby games and comics, where there is often an MSRP printed right on the box or book cover, the store owner cannot always do that.  When prices in distribution go up, all of a sudden profit goes down, because usually the store can't just mark the item up however much is needed.  Your local coffee shop can do this, Jim's Comics can't.

But what about buying Magic cards on the cheap?  Yes, that does happen.  So, let's explore COGS a bit further with that in mind.  With the real COGS having gone up to ~54%-56% for SKU merchandise, the store has to make that up somewhere.  For TCG singles and used comic books, there exists a curve: COGS may be as much as 75%-80% for fast-turn, red-hot Standard staples, as little as under 1% for long-tail slow-turn commons.  The mean is around 44%-46%, offsetting the SKU markup in the aggregate.  In other words, the store only paid $3 for your $10 Commander single because: (a) It will sell slowly; (b) Its value might drop; (c) It offsets higher costs elsewhere; and (d) They probably already had several in stock, so your one card has a lower probability of enabling an otherwise missed sale.

It would take another post entirely to get into the price manipulation in the cesspool that is "MTG Finance," but suffice it to say there is a great deal of abuse going on and it's enough for me to recommend stores that don't have expertise on the payroll stay out of singles entirely for now.

There is a certain equilibrium in these ratios: given a normal healthy velocity of movement of goods, you don't build up too much deadwood, you don't lose too much to the clock or calendar in overhead, and at the end of a $60,000 month, the owner gets to pocket about three grand, give or take.  Probably the owner leaves at least half of that in operating capital and gets an extra thou in savings and/or that year's Christmas fund.  But all it takes is a price hike on a major product line, with no corresponding increase in MSRP, to wipe out those gains.

[Edit: Removed obsolete information about publisher wholesale ratios.]

Thirty-six percent.  Human beings walking around on this earth, and voting no less, think businesses pack in profit on the level of 36% take-home.  It's such ignorance I am amazed they can successfully put on their pants every morning, and yet here we are.  And that is why the jackwagon playing X-Wing keeps telling people they can get the StarViper on Amazon for six bucks less if they want to.

International Tabletop Day 2015 Post-Mortem Review

It seems like I'm doing a lot of post-mortems these days, despite not being in the funerary industry.  Nonetheless, I've had feedback that these are helpful articles and less uninteresting than my usual fare, so here we go!

Tabletop is a web video series hosted by Wil Wheaton and Felicia Day and published by Geek & Sundry (G&S).  The hosts join guest stars every few weeks or so and play through a board game or miniatures game on camera, using fun graphics to teach viewers how the game works.

The Tabletop episodes, then, are essentially the best demos the games can ever have, short of being taught in person, so as soon as a game has appeared on Tabletop, it usually flies off the shelves and runs to immediate backorder with distributors.  While this state of affairs is no doubt a positive one for publishers, it creates difficulty for store owners, who are left with empty shelves and a customer public that is disappointed and figures if they're going to have to wait, might as well just buy the thing on Amazon.

Tabletop has kindly released their game roster ahead of time for the past two seasons, giving retailers ample warning to stock up on those titles.  For the current third season, this has worked well for me.  I have been able to move excellent quantities of Tokaido, Love Letter, Forbidden Desert, Sheriff of Nottingham, Dead of Winter, and Catan Junior.  I continue to see great velocity from titles featured in seasons 1 and 2 of Tabletop, among them Carcassonne, X-Wing, Once Upon a Time, King of Tokyo, The Resistance, Fluxx, Pandemic, and so on.  Among all those titles, the hardest to keep stocked recently has been Dead of Winter, with Plaid Hat Games's fulfillment through PSI being abysmal.  It's a hot game, released in late 2014, and most gamers don't have it already, meaning quite a few of them want it.  Yeah, Catan and Small World and Ticket to Ride always sell, but most gamers already own those, so demand is a more steady drip.

So, imagine my happiness when I learned that a special edition of Dead of Winter was included with the ITD 2015 exclusive promo box!  G&S offered a promo kit and a promo box, the latter of which, as it turns out, included the kit.  I bought four of each, two each from my primary distributor GTS and my secondary distributor Alliance.  Had I known then what I know now, I might simply have bought the boxes, perhaps three boxes per distributor and no kits.  The main value was in that Dead of Winter game.

There has been great disagreement on the various Facebook game and comic retailer private groups over whether or not the ITD promos should be sold.  These are items stores had to buy; they were not given to us for promotion.  Stores like DSG readily give out promos that we are furnished at no cost.  The archetypical example of this is Wizards of the Coast's Friday Night Magic program, which has set a very high standard for efficient and effective promo trading card disbursement.  For ITD, store offerings ran the gamut.  Some stores held raffles, scavenger hunts, tournaments, and such, where participation earned a customer some promo or another from the ITD kit/box.  Some sold all the promos online.

However, I took a different approach.  Since earlier in the week, we had been getting calls from people who wanted to know if they could just buy the promos and be done with it.  They didn't want to jump through hoops, they just wanted to get the promo, go home, and play.  Since a lot of DSG's demographic is made up of families and working adults, where time is as much a resource as money, I opted to cater to this demand.  Some of the promos were free, virtually all of them were free-with-purchase (such as getting the Wil/Felicia Fluxx pack free with the purchase of any edition of Fluxx), and those where I still had enough remaining to sell, I sold at nominal prices well below the going eBay rates.

Customer traffic on ITD was less than I expected, but more than nothing.  I think a fair number of people stayed home and watched the YouTube live stream from Wil and Felicia, rather than playing games at their Friendly Local Game Store.  Our events all fired, but not by a wide margin.  About halfway through the day I saw that we had some solid sales of the promo materials, but we were not on pace to run out of them, so I yanked a bunch of them off the sales floor and quickposted them on eBay.  We sold several hundred items from Saturday through Tuesday.  When the early posts had promo items like the Fluxx packs and Dixit cards at ten bucks or so, I came in at $4.99 and cleaned up.  By the time my supplies ran low, everyone else had saturated the resale market and they were all competing for the scraps.  The Felicia Day Dead of Winter promos sold for an average of $45.00 each.  Wow.  I had a few customers turn their noses up at the bare promo for $29.99 in-store.  We quickly sold three of our four ITD Editions of Dead of Winter in-store with the promo included for $100.  The fourth went for $150 on eBay.

So, was International Tabletop Day 2015 a success?  I would have to call it a push.  I think a beautiful spring Saturday when we might have seen depressed traffic and sales anyway was lifted up into an average, perhaps slightly-better-than-average day.  I think the kits and boxes were far overpriced for what we got, and I will be much more skeptical about buying heavily into them in 2016 if they are offered.  However, on some level and to some degree of involvement, I think DSG will participate again in the future.

Tales of My First Game Store, Conclusion

Wizard's Tower Gaming Center in Mesa, Arizona opened in August 1998 and closed in December of that same year.  That was my first ever experience in owning a business with an open-daily public facing and facility.  I learned a great deal, though a significant share of what I learned did not sink in until years later on reflection.  These past few weeks, I have regaled you all with war stories of the Tower's brief tenure, and here I draw all those things to a close.

December 1st, 1998.  Wizards of the Coast banned the key components of the Tolarian Academy deck, crushing my nascent career as a Magic: the Gathering grinder.  More immediately of concern, rent was due and I did not have the money.  I trudged upstairs to my landlord, hat in hand, and asked for mercy.

Paradise Palms Plaza granted mercy.  One week.  I had a week to round up the necessary funds, cashier's check.

Okay, so in the meanwhile, I got into some other trouble.  My own fault.  It's not related to the biz, so I won't get into it, but that occupied me for a couple of days and my ex-wife managed to open the doors and scratch together a few dollars from whichever visitors I got.  I emerged from this difficulty with two years of probation, subsequently completed without incident.  I spent a day at the store re-orienting and figuring out the next step.  We had orders placed and we were probably 75% of the way to that rent payment.  I had one more day to make good.

The next morning, I showed up to find a padlock on the door and an envelope taped to the glass in which the landlord described, for anyone who cared to open it and pry, that we were being closed down for non-payment of rent.

I can't even really complain because it's not like I had paid on time.  I thought I had another day, turns out by his reckoning I didn't.  I went to talk to the man, and he was unmoved.  I borrowed money from, who else, my parents, and got the store open again.  However, I did not intend to finish out the month.  At this point it was a question of asset reclamation.  I was determined to put the screws to that guy.  How dare he accommodate me so graciously and then impose consequences when I failed to deliver?  I would paint his wagon, yes sir!

As it turns out, the early December swoon that plagues me even now in this industry was a thing back then as well.  Sales were abysmal, though I had given no public indication that I intended to close the Tower.  I promoted up one final weekend of tournaments, following which on Saturday night I would auction off all my remaining inventory to the highest bidder.  Anything that did not sell would be returned to Zocchi for credit against the few thousand we somehow managed to owe them, and remaining Magic singles would stay with me as my personal collection.

We went out with a flourish.  Saturday in mid-December came the auction, and the scene was utter mayhem, with yours truly parsing binders rare by rare, taking bids, going going gone, taking cash, and moving along.  Once some of the players were out of money, they turned to playing my consoles (which were all free that night due to lack of inclination for me to monitor them) or just lounging about.  When I had finally gotten through a pass of the goods, I decided that was enough, and I kicked everyone out.  On Sunday, I backed a moving truck up to the suite and emptied it, except of trash and debris.  I did not depart in a considerate manner.

Right then, my condo lease in east Mesa also ended mid-month.  I was able to move into my parents' garage, part of which had been fashioned into some modicum of bedroom, along with my ex-wife.  My parents were on the verge of retirement, though, so I knew this was a temporary stop-over.  All of the material from the store went right to there, and I spent cold nights burning with anger over my failure.

I received a certified letter from Paradise Palms Plaza, berating me for closing down and leaving the suite a mess, and reminding me that rent was due on the first and would remain due for another thirteen months.  Such a short lease!  And yet it seemed so far out of reach to my limited perspective at the time.  Ending in January 2000?  Two thousand?  We would be Eloi and Morlocks by then!

I added up all my assets and debts and chose to file for Chapter 7 bankruptcy, a full flush.  The total discharge was only about $35,000.  This decision was terrible, by the way.  There was no way on the planet that I benefited from taking a seven-year Mark of Cain on my credit and a launch toward ruin over a matter of thirty-five grand.  I owe ten times that amount now in various debts, between my student loans, mortgage, and revolving credit, and I'm not worried in the slightest about my ability to repay.  Okay, maybe in the slightest.  But no more than that.  I wouldn't begin to consider bankruptcy today even if misfortune strikes, so for me to have done it then over such a small figure... it has me shaking my head.  Part of why I went to law school years later was that I didn't like the fact that nobody I knew was conversant about this stuff, and I couldn't afford a real attorney, so in the absence of good advice I failed to salvage the situation.  I didn't know at the time that I was "independent" for the purpose of student aid, so I could finally have afforded to finish college (which I did a few years later) and then surely secured a quality job and repaid it all.  Late is better than never, I'm sure my creditors would have agreed.

My creditors, anyway: Once we had filed, that was the end of contact from Paradise Palms Plaza and our various note holders.  The law doesn't allow them to continue collection efforts, including mere contact.  Seems like that kind of screws over creditors, but the truth is that the cost of an occasional bankrupt debtor is baked into the price of all borrowing.  So I've been paying for mine and many other individuals' bankruptcies and write-offs all along, and will continue to do so.  And so will you.

The process of bankruptcy was less painful than expected.  There was a hearing, at which a kindly judge asked me to swear that I had returned to creditors all the merchandise and supplies indicated on the filing ledgers.  The court assigned a trustee to monitor our finances, all our accounts were frozen, we lived on cash hand-to-mouth for a while, but aside from that we went about our days.  My ex continued to work for Southern Directory.  I got a temporary job at Office Depot helping rescue people from their computer ineptitude.  The trustee never visited us, never inspected anything, and I couldn't tell you what all the trustee ever did for the most part, but whatever he did, the court was obviously satisfied with it, because it granted us a final discharge in April 1999.  By the time our tax refund showed up, the trustee even released it to us.

Our store bank accounts remained closed forever, of course, along with our credit cards and our joint personal accounts as well, so my ex opened herself a new separate account and I went back to using my personal checking from Bank of America that has been open since 1989.  Which, by the way, helped a lot in recovering my credit.  Tenure, length of accounts, is part of the scoring formula.  That account is now 26 years old, still active, and it's practically a Konami code for the Fair Isaac algorithm.  Anyhow, whatever else I might say about my ex, I can tell you that our money arguments basically ended once we had separate accounts.  That's one of the rare false-positive indicators that a marriage is maybe not destined to last: seeing conditions improve as separation begins.  We divorced in early 2001.

I lasted three or four weeks at Office Depot.  I don't recall much about it.  I showed up every day, wore my name tag, tried to explain to people why their RAM didn't have a virus, you get the picture.  One day I got through a tough customer interaction where they had me digging around the racks and shelves for compatible parts for most of an hour.  I leaned back for a breather, knowing the store was quiet at that moment, but the next fetch quest could be mere minutes away.  A shift manager chucked a dirty rag into my chest and admonished me, "If there's time to lean, there's time to clean!"  I don't know if she maybe wasn't used to working with the tech support guys; we were never asked to clean the store.  Our job was to sell computer parts.  But somehow that was the spark that ignited months worth of anger and frustration in me.  I swallowed the rage -- I wasn't a moron, after all, and I was on probation -- I forced myself into a smile, and replied, "Well, there's always time to quit!"  I hurled that rag across the store like Joe Montana to Jerry Rice, ripped my name tag right off my shirt, and stormed out to my car.  The car that I didn't have.  And I walked the mile and a half to my parents' house, fuming the entire way.

And that is why I never use the phrase "if there's time to lean, there's time to clean," even when I've got a quiet store and I fully expect my staff to get on with the cleaning.  I find that I prefer treating them like adults and simply instructing them on what needs attention, in those instances where they don't just take the initiative to do it themselves.  Which, usually, they do.  I absolutely hate that phrase, and any other euphemistic "Let's make drudgery fun!" folderol.  I don't need my staff to be delighted to mop the floor or scour the toilet.  I'm sure it's not especially fun, that's why I furnish them with dollars of money in exchange for doing it.  To their immense credit, they don't complain.

Of course, quitting a job is a lot like wetting your pants.  At first, there's just warmth and release, but then cold, uncomfortable reality sets in.  I was living hand-to-mouth and had just cut off half my incoming cash supply.  I had to scramble up a job somewhere and quick.  The ex had a dependable paycheck, but it wasn't enough.  I went to sign up at the Adecco temp agency in Tempe, and after finishing the paperwork, I remembered that I was standing in the same plaza as that game store Jason Barnes had opened, the Arizona Gamer.  In fact, there it was, three doors down!  I paid a visit, and just like that, my fortunes changed....

Whew!  That's it!  That is the story of Wizard's Tower Gaming Center... pretty much in full!

I feel like I gave somewhat short shrift to some of the excellent people that populated the Tower, hidebound as my articles were to the progression of events.  I don't mean to overlook my bros (nor the ladies).  Some of the Tower denizens have become longtime friends of mine, and I am in touch with many of them even today.  Virtually all of them followed me to Arizona Gamer, so their stories and my story continued together a while longer.  I'm also apprehensive about giving shout-outs because I know I'm going to forget people.  But at the very minimum, and setting aside game-hobby folks who were there at the time but whom I already knew, such as Matt Stenger, Ray Powers, Jeff van der Zweep, Ray Ybarra, and Dan Gray, I would like to give Wizard's Tower Props to: John Lind, Jay Webb, Steve Ward, Dan Voigt, Brock Burr, Jon Rapisarda, Drew Durbin, Steve Rice, Ed Kenney, Wayne Paden, Robin Reid, Brandon Helding, Jason "Silky Smooth" Ludwig, Ryan Chapman, Chris Shaner, Mike Girard, Brian Garrison, Jared Arthur, Matt Mortensen, the late Scott Dove, Matt Cass, Chris Sadler, Mike Clement, David Ray, Mitch Ledford, Greg Smith, and damn it all, I know I'm going to remember more but right now that's it.

Join me here on the Backstage Pass next week for a post-mortem of DSG's experience with Magic: the Gathering - Dragons of Tarkir!