Tuesday, August 23, 2016

I am Michael Bahr and This is My Pawn Shop

The economics of DSG took a hard right turn around late last October toward the "pawnshop effect" aspect of the business, and this summer as we approach this week the fourth Magic booster release out of five total in a six-month span, I have seen the secondhand business activity accelerate to the point where I am having a genuinely difficult time processing and clearing merchandise to keep up with the volume of buys walking in.

I am not a real pawnshop, of course.  Honestly, once we've moved to our new location, I am going to explore getting a pawn license.  Not that I want to be in the traditional pawn trade, but because it unlocks some business options that are currently off-limits to those who lack that credential, in particular taking in extremely high-value buys and loaning money against them at margin.  I don't want to get too far off focus as a comic and hobby game business, but there's a reason stores like mine buy almost everything that a customer brings in, if we even remotely deal in it.  And that reason is that we control our cost of goods on those purchases.  Pawnbrokering takes that up a notch or five.
Unlike Rick Harrison, I do have a pretty good idea what is going to come through that door.  Mostly Magic cards and video games, and a smaller but not trivial helping of Pokemon cards and comic books.  One or two percent of buy requests I get are for other game systems or products, such as Dice Masters collections, Fantasy Flight stuff (which we cannot resell used, and thus we do not buy), and miniatures armies/sets.  That's about it.  There's always "miscellaneous."

The sheer volume of buys continues unabated despite competition offering buy ratios in the same range as mine.  At some point I seriously expected the crowded store market locally to overwhelm the pawnshop effect enough for it to peter out so I could get a breather and catch up.  My staff runs ragged just to move cards and video games to where they need to be.

Isn't it bad EV (expected value) for players to sell their cards to stores?  It's bad EV for players to sell their cards at all.  But they do it anyway.  I see a concerning number of players living hand-to-mouth who have no real financial stability or resource base, who spend recklessly on the latest cards and decks (or comics, or video games, etc) and then end up having to dump it all weeks later to pay rent.  Or child support.  Or their cell phone bill.  Or the repair bill for their car, which has been sitting in my parking lot clearly needing attention while its owner ground his way through a weekly Win-a-Box.  And these players do it over and over.

They then make their weekly cash call post on AZMagicPlayers Trading on Facebook.  But there are like thirty people there needing cash at any given time, far more sellers than buyers.  So whatever they aren't able to sell within the community, they turn around and bring to the local stores, including mine.  It causes many collectors to become garage dealers to some degree, which is concerning, because that is the factor that burned out the comic and sports card hobbies years ago and left them a hollow shell of their former glory.  Instead of a consumptive market with people buying what they want to enjoy and then taking it home and enjoying it, you have networks of sharps pushing the same tree corpses back and forth amongst one another ad nauseam.  Only BCW and Ultra-Pro make a healthy profit out of that, like the suppliers who sold pitchforks and shovels to the 1849 gold prospectors.

I could just sit and watch Teddy KGB eat those Oreos all night, and never say a word to the guy selling me cards to suggest that he should maybe slow it down a little.  And indeed that is usually how it goes down because my advice is usually neither solicited nor wanted, and I gain nothing by judging my customers, so I am very libertarian about it.  If I am ever asked, I readily teach that the highest EV they can get is to buy the cards or games or comics they want, and keep them. I strive to find friendly and non-judgmental ways to at least obliquely suggest healthy financial behavior in my customers, to look out for their well-being in the way I have been taught that I am ethically bound to treat clients.  Unfortunately, that aspect of my role very likely can only be a quest for another time and another career. I certainly don't want to hear my waiter's opinion on healthy eating when I'm out for an anniversary dinner at Durant's Steakhouse.  The guy handing me four Archangel Avacyns who needs cash isn't interested in hearing me blather about budgeting.  His finances are none of my business, even if the consequences of his finances are my business, at least for the moment.

There is a negative side to the used merchandise trade, and that comes from many sellers not being rational about what they are doing.  This is understandable if they are in financial distress.  I don't give them a hard time about it because they're already in their situation and they've come to me to help them get out of it, and it's literally my job to do that.  So I use a light touch, and I've been trying to teach the staff the signals that indicate this may be the case.  That's when they are going to be careful what they say and how they frame it, because the seller's state of mind may be a bit wounded and offering a little bit of dignity will go a long way toward making that customer happy with the buy.   We won't go into the full spiel about why we value the merch how we do.  We just give the buy professional attention and treat it like it's no big deal, just a routine sale, here is your total, will that work for you?  And that upset seller usually appreciates that treatment.

On the full converse and flip side of that we have the poseur who flips storage lockers (or who read a bunch of Gawker articles about the tricks of that trade) and thinks he is going to trick us into paying top ratio with an "Is that the best you can do?" on product he knows less about than my greenest rookie staffer.  My guys know how to identify these types and how to take them down.

A lot of sellers are in between, they ran into a financial pinch and need some quick cash, but don't really want to sell the goods.  As such, they find it hard to reconcile the buy value with what they paid for the merch new or what they think it should be worth.  This is when our technique is best when we just lay out the spread right in front of the customer for them to buy.  Yes, sir, I appreciate that you paid $300 for that 240GB Xbox 360-S brand new.  However, the newer 500GB 360-E console sells for under $200 new now, and the market rate on used is around $140.  Our cash offer really can't be any more than $70.  You may be able to pick up a few bucks more if you sell it yourself on eBay or Craigslist.  I don't think you're going to get the $225 you're looking for, realistically.  But if you want to check around and you don't find an offer you're happy with, you're welcome to bring it back to us."  (We examine it again, of course, and recheck market pricing.)

Fortunately, many sellers are highly rational.  They put the merch on the counter, they wait for the total, and they either take it or not.  Likely they've done it before.  A lot of those same Magic players who keep selling and reselling at least get pretty acclimated to the process; they know how we're pricing the stuff, they know the market values from TCGPlayer, and they understand how the ratios work.  There's not a lot of emotional baggage there.  For all that I worry about the sustainability of the constant churn of buys, sells, re-buys, and re-sells from these players, I can at least appreciate that they're matter-of-fact about it.

The foregoing is a very condensed look at the skill processes of secondhand buying, but it should be evident that this business component has a lot more going on under the hood than it may appear to a casual observer, and it absolutely does pay off and makes it possible for the store to do more and offer more for customers, even for those customers who never resell anything.  They still benefit from every upgrade, every amenity, all those resources that the buy-and-sell cycle enables.  If I were still stuck in the situation Arizona Gamer had in late 1998, with only one product category, Games Workshop miniatures, and only one locked gross margin, I think it would be a tremendous struggle for the business to advance and improve.

The main people I can look out for proactively and openly are the ones who work for me, and that means getting after the store's bottom line so that the business grows and they have plenty of opportunities to get hours.  Ever since the Pinch of November 2015, when our cash reserves were hard-pressed to keep up with the desperate dumping of players needing to pay that Visa bill for their Zendikar Expedition quests, I have put tremendous resources and attention into maintaining as large a cash war chest as possible for buys.  It's still not big enough; I had to turn down a five-figure buy last week and refer it to another vendor.  I would loved to have gotten those cards because they were really strong stock.  I never want to turn down a buy out of lack of funds, and most of the time I don't.  If I am paying the right amount for merchandise coming in secondhand, it will only ever produce healthy sales for the company, even if I have to push it out the door on eBay or something due to the exigencies of time and expenses.

Will this rampant pawnshoppery within the comic and hobby game trade continue to accelerate?  I think the machine has been redlining its transmission industry-wide for a while now, but if I am wrong, this is the new normal.  In either case, I will make hay while the sun shines.  And maybe I can talk Greg into letting me call him "Big Hoss" and have him work the counter when he gets a little older.

Tuesday, August 9, 2016

Four Years Facilitating Fun

Though the Desert Sky Games LLC filed its Articles of Organization in March 2012 and engaged in eBay operations in the interim, the retail store in Gilbert opened to the public on August 10th, making tomorrow our fourth anniversary, and the start of our fifth year!
There is a popular canard that 90% of businesses fail within five years, though longitudinal studies suggest the odds may be somewhat less unfavorable, roughly a coin flip at that duration.  If August 2017 dawns new, clear, and free, and DSG isn't there, well, I guess some jerk called "tails."

Last year I wrote prophesying a fourth year in business that would bring us to a new location and permanent home.  As you may observe, that event has not yet come to pass.  Not for any lack of willingness, I can tell you.

It would be easy enough to ink up a lease somewhere and just go -- our landlord has been extremely accommodating and has put renewal and in-plaza suite swaps on the table, for example -- but thus far none of the key factors have come together like we need.  If DSG is going to go big, it needs a permanent home.

Thus far, of the three primary criteria, the best locations we've examined are pick-two: Affordable rent, good plaza/building, favorable location.  The great spaces that are affordable are tough for customers to get to.  The great spaces that are easy to get to are too expensive.  And the affordable spaces that are easy to get to are not in the greatest plazas/buildings.  We are still under lease for another year, and I will continue to chase that triple crown until the clock runs out.

And then?  I'm curious about that myself.  The lease will go month-to-month; that part is not a mystery, but at that stage I will have tremendous leverage to make a business move.  Let us hope I select a good one.  Let us hope, more to the point, that I find our new location long before that.

Disposing of that issue for the time being, then, how is it that we are still here after 48 months paying commercial rent and payroll, and have managed not to go under despite a turbulent market, logistics challenges, and buyout after buyout reducing our partnership count from 11 people on opening day down to only three today?  Survival is not a given: we just about cleared our orbit in the past year, with three nearby stores shutting down and a fourth sold off to a distant investor.  Feels pretty good to be standing here intact right now.

Inc. Magazine fell into the high-failure-percentage trap with their clickbait headline, but in this article made an excellent point about how businesses fail: "Profit is theory; cash is fact."

This is something I knew from previous business experience, and if anything I think Inc. has understated how hazardous cash flow management is for a growing enterprise.  For example, there have been months when our books reflected profits upward of $20,000, and yet we were down to a payroll worth of cash reserves in the bank, sometimes less!  That's because a Profit & Loss (P&L) statement is not a balance sheet, but many businesses treat it like one.  A P&L is a tool for assessing the operating performance of a business.  A balance sheet answers, "What do we have?"  A P&L answers, "How are we doing?"

That $20k+ net month led to great later months, because most of that gain on the books was inventory accumulation.  In other words, to "profit" that much and not run out of cash, it meant we probably bought some valuable Magic: the Gathering collections that month and paid a good price for them, and had not yet churned through the cards.  Our operational cash came from regular day-to-day sales and was just enough to hold par.  Over time, those valuable cards sold through and produced ongoing revenue.

There have been other months in which we gained cash but showed a loss on paper.  In all likelihood those were months of deep inventory depletion.  Possibly we were liquidating a large product line that wasn't meeting turn-rate metrics.  We got some money but the value of the business decreased due to the negative delta on that holding.  In a real-life sense, that value was already gone if the product line was performing that badly, but the changed increment is realized on the ledger at the monthly COGS calculation.  A P&L does not reflect capital expenditures, sales tax, or like such, so it was clearly an operational loss.  Yet we had cash to operate because we monetized those assets in the manner we thought most advantageous at the time.  As long as you have the money, you can open those doors and anything is possible.

Every small business has to learn to manage cash, and much of the mental adjustment from the work-for-someone-else world to the work-for-yourself world is to recognize that if you are trending behind your upcoming bills, you don't get to take any time off.  You have to go to work.  Perform, fundraise, capitalize, monetize.  You have to put your foot on the gas.

Gary Ray, owner of Black Diamond Games in Concord, California, speaks in terms of the number of operational days left until the business runs out of money.  When he built up months worth of cushion, he finally felt like he could take a breather.  Any time I take time off, I want to be as far ahead of the bills schedule as possible.  In fact, one of the biggest reliefs in the fourth year has been how less often I have had to worry about this.  There were a few pinches since last summer, but it was nothing like the chronic cash shortages of years one through three, especially year two.  Year two was difficult.  This summer I managed two brief vacations.  For that matter, last week I threw out my back and was largely ineffective for about five days, so I durdled along in the office, catching up on finances and computer maintenance, and my crew picked up the operational football and just ran with it.  Seeing that organizational culture emerge has been extremely encouraging.

Looking into year five, I already know I have to answer the location question.  That's a given.  But I think what I want most is to become less and less essential to the day-to-day public work of the business.  My crew are already the stars of the show -- they know the regulars better than I do and they let their personalities do the heavy lifting in terms of cultivating our player and collector community.  Virtually my entire contribution is backstage, the way I prefer it, except that I handle the marketing.  But I'm still working in the business, not on it.  And that is holding DSG back from what it ought to become.

I may spend the next 12 months learning how to get out of my own way.  First-world problems, without a doubt.  Let's see what happens!