This week's first question came from Anthony in Rome, Georgia, who asked if I could discuss common mistakes owners make when opening a new game store. Great question, sir!
As it happens, I wrote on this topic in 2012 for Ben Drago's excellent GameHead.com website. Since GameHead is dormant/defunct now, I hope Ben won't mind if I grab the five articles I wrote for him and republish them here on The Backstage Pass. A direct link will be provided at the bottom of each, and I'll bring out the others a little later.
The full text of the article is reproduced below, but before we get to that, here is the one huge change I would have made. I would have started with one omnibus mistake that changes the math on several of the article's subject items. That mistake:
0. Spend Resources Building a Type of Store Yours Is Not.
There are, in brief, three types of game stores. My monikers for them are Shoeboxes, Boutiques, and Bowling Alleys. My original article below was mostly correct only for Boutiques. As that is the type of store DSG created, naturally that is where my subject matter matched my current experience. But I should have given fair regard to the other two types. Maybe one day I'll write in depth on each type here on The Backstage Pass.
A Shoebox store is typically small, exists in a nothing-a-month rent suite, and is little more than a garage operation with a commercial storefront (and as rudimentary as possible at that). The Shoebox's lifeblood comes from gaining value on every transaction. They are content to let an item sit for a week, a year, or a decade, as long as they gain money on it. They are open as few hours as practicable and are typically run by a solo owner with at most one or two part-timers in coverage. The strength of a Shoebox is that fixed overhead is very low. The weakness is that there can sometimes be little or no customer traffic, as it does not rate an attractive draw for walk-in business in most cases. A Shoebox typically is forced into internet sales as a backstop.
A Bowling Alley store lives and dies by organized play. Product can be discounted aggressively and exists only to draw in event participants. The Bowling Alley's survival is ensured right at the start when it finds a huge amount of space very cheaply, though such space is usually only available with compromises. The strength of a Bowling Alley is that if you build it, they will come, and attendance brings with it profit (often with strong concessions). The weaknesses include a high labor cost in general to coordinate events hands-on, moderate-to-high fixed overhead, and cash-flow constraints when nobody shows up, whether due to a competing event in your area, bad weather, or holiday closure.
A Boutique is usually medium-sized, pays a little more for a suite in a strong demographic area, and operates in a manner most resembling conventional small business retail. The Boutique can't sit on product like a Shoebox, though, nor can it discount aggressively like a Bowling Alley. The Boutique's lifeblood is its turn rate -- the speed at which inventory sells at normal margin or close to it. A Boutique cannot sit on inventory. It has to move through or the Boutique dies of cash starvation. The Boutique's strengths are having the highest earning ceiling and strong walk-in traffic, along with the lowest vulnerability to competition. The Boutique's weaknesses are high fixed overhead and moderate labor costs.
DSG made this mistake. DSG is a Boutique, but we have spent an embarrassing, indeed grotesque, amount of resources these past two years on infrastructure and promotion that was more suitable for a Shoebox or Bowling Alley. In the second half of 2014, we finally became laser-focused to the exclusion of all else on the Boutique model, and it has paid dividends by providing us the best revenues we've ever had. We're still using those revenues to make up for the ground we lost earlier wasting blood and treasure on Shoeboxness and BowlingAlleyness, but the future looks bright.
All three store models are viable. You have to pick the one you are best situated to build, and then build that and only that, if you want the best chance at success. Are you a one-man band with good salesmanship and negotiating skills, patience, and a sweet small lease? Build a Shoebox. Are you a marketing master with the gift for drawing a crowd and a taste for moving the price point until the deal is struck? Open a Bowling Alley. Are you a logistics and infrastructure engineer with a talent for system optimization and delegation? In that case, a Boutique is probably the store type for you, so read on...
Five Mistakes Owners Make When Opening Game Storesby Michael Bahr
originally published July 24, 2012
Greetings! I am the managing partner of Desert Sky Games LLC, which will open its flagship store this summer in Gilbert, Arizona, a suburb of Phoenix. I have also had an ownership stake in five game stores since 1997 – some successful, others disastrous.
With Magic: The Gathering scoring record sales and board games booming, the conditions for opening a game store have never been better. Hobby gaming is counter-cyclical, so even the national recession is not a deterrent. But a gamer with an entrepreneurial itch can set himself up for financial ruin by making huge mistakes when opening his game store.
1. Fail to Write an Adequate Business Plan
Tommy is a gamer with a $25,000 inheritance from his late Uncle Rich. He sees his local game store's owner perpetually short of cash. He sees an open suite in a retail strip near his house. He sees 50 players every week for Friday Night Magic, seemingly a healthy player base, and can't figure why his store struggles so much. Tommy thinks, “I can do this so much better!”
Ten months later, Tommy is broke and his store has closed. What did he do wrong? Tommy failed to write an adequate business plan. In the process of writing an adequate business plan, Tommy would have discovered that such a small bankroll is nowhere near sufficient; that the reason the nearby retail strip had open space was that the area demographics were high-crime and low-income; that the hardcore players who show up for Friday Night Magic don't spend as much as mainstream casual gamers; and that sustained retail viability requires a real retail buildout. At the planning stage, Tommy could have solved those problems or, failing that, called off the whole debacle and kept his $25,000.
A good back-of-the-envelope rule is that you need in liquid cash at least fifty times the square footage figure of the location you plan to rent. Desert Sky Games is opening in a 2500-square-foot suite in a three-year-old building, and raised $110,000 in capital.
Where does all this money go? About a quarter to a third to initial inventory, some to provide a few months' operating expenses, and the rest to development of the store – and that is where most owners miss the boat. Most owners allocate adequate cash to trading card game inventory, and the fast turn rate of those products helps the store's bottom line look good in the early going. Often this means they won't see how they undercapitalized elsewhere until it's too late.
For example, many stores never buy a point-of-sale system because of the $4,000-$7,000 cost for computers, equipment, and licenses. Instead, the owner buys a “dumb” cash register for $150-$300 and manages inventory by hand. This allows a fast and easy start, but shrinkage and employee embezzlement become difficult to detect or control. The profit level of a game store is 7%-9%; what happens when the store is losing 10%-15% off the top?
Permit fees, contractor deposits, utility deposits, and business licensing can add thousands of dollars each in costs. Even in Arizona, where regulatory burdens on businesses are relatively light by national standards, these costs added up into five figures for Desert Sky Games – how expensive will it be for your store in Missouri, New Jersey, or worse, California?
3. Forgo Buildout and Open Quickly
Many stores never perform a proper retail buildout. Instead, the owner buys a few showcases, a dozen banquet tables, a hundred folding chairs, and a used refrigerator. This allows the LGS to open quickly and start bringing in cash, but in the form of a dumpy, pedestrian shop that looks more like a social club than a retail store. In time, hardcore gamers stick around and treat it like a social club, spending little on location and making their large purchases online, while mainstream casual customers who spend the most money, especially women, and most especially moms, never return. In short, the store fails to establish itself as a spending destination. The early cash flow sputters out.
A proper buildout for a small-scale retail store costs $20,000 to $60,000. A game store can be successful without performing a proper retail buildout, but one that does has a much greater chance of success because it establishes the store from the outset as a spending destination. Look at some of the game stores nationally that spent for a proper retail buildout, and a common attribute is that those stores are performing well: Card Kingdom, Epic Games, Black Diamond Games, and Dragon's Lair-Austin, to name a few without playing any favorites.
4. Locate Where the Rent is Cheap
Most game stores position “cheap rent” as their most important metric when scouting a retail location, and it is true that keeping recurring costs low is important to success. But in the world of commercial leasing, the cost of a retail suite is not an accident. The cheapest spaces available usually have some combination of being in old, run-down buildings or being in high-crime or low-income demographic areas. In retail, paying a little more often means gaining a substantially better local clientele. Which of the following within your 1-3-5 mile demographic radii is better for your store: flophouses full of penniless undergrads who will leave town in a few years, or tract homes full of suburban families who have put down roots for the next two decades? Desert Sky Games picked the latter.
This mistake overlaps with undercapitalization as well. Many stores rent somewhere cheap so they can use a “light box” marquee sign at a cost of around $1,000. However, no location worth opening a game store in will allow light boxes. A retail suite in a good demographic area will require a channel-lit marquee sign, which is likely to cost anywhere from $5,000 to $10,000, depending on the required size. If the commercial space you found allows light boxes, consider seeking another location.
Finally, an upscale community is more likely to have commercial landlords willing to offer a tenant improvement allowance, which helps defray the $20,000-$60,000 cost of performing a proper buildout.
5. Expect Landlord Assistance
In commercial leasing, the renter has all the power until they sign on the dotted line, after which the landlord has all the power. Make sure if there is anything you want the landlord to do, such as patching a leaky roof or providing a tenant improvement allowance, that you have it specified in the lease document. Once you take delivery of a commercial suite, the landlord will never do anything whatsoever that they are not contractually obligated to do. Inevitably you will discover something that got overlooked, and you just hope that your business planning was sufficiently thorough that whatever you overlooked turns out to be relatively minor.
When I opened my first store in 1997, we failed to have a plumbing inspection done, and sewage pipe replacement cost us over $5,000. We consulted an attorney and learned that our lease left us responsible for the entire cost. For Desert Sky Games, you had better believe we made sure our lease assigned those costs to the landlord. But sure enough, we overlooked some damage on the marquee fascia, so that will be visible until we spend $600 or so to have it fixed. Clearly, it isn't as bad as the sewage issue, but it's still $600 that we can't use for anything better – like extra new inventory!
Those five mistakes aren't the only mistakes owners make, of course. But they are serious mistakes that, by themselves, can be enough to spell failure for a game store and the loss of an owner's investment. Don't let that loss be yours. Finally, make sure you consult a licensed attorney before moving forward with your business plan, and then again any time you are about to sign a document that incurs an obligation for the business. Good luck!