BAHR: Let's get right into it. We are both capitalists by trade. I know your perspective on this stuff is a little different than mine. Can you give us an introduction to your outlook on this?
KISTLER: Sure. The thesis is something like "there are more productive goals to capitalism than a business looking at only income minus expenses." The topic of Amazon reselling and taking advantage of scarcity as an opportunity to make a margin play, has been on my mind lately. But it is at the core of a lot of things we resell. People are content to profit in this industry essentially by being a nearly end consumer of rare things, rather putting capital to work in a way that benefits multiple stakeholders.
BAHR: For clarity, you're mainly looking at secondary market items here. Collectible trading cards, comic books, video games.
KISTLER: Right. But also anything that "gets hot" and becomes scarce, which you will see in the board game category too, or even pop culture collectibles.
BAHR: The NES Classic Mini last December.
KISTLER: Absolutely that.
BAHR: So a store will buy these things, giving a ratio off market value, this is fundamental economics for us, we've looked at it here in my pawnshop article. Or if it's new, the store buys it in distribution and marks it up to whatever. And in either case that markup is the central earnings mechanism for us. Isn't it fair for the seller to profit from his or her selection and curation of goods?
KISTLER: The thing is, selection and curation are different from speculation.
KISTLER: Transactions are what fuel the net sum growth of capitalism. Making money doesn't create production or value or purpose. Transactions require money to change hands. Hoarding items to make 10% on a simple flip margin doesn't add anything. It neuters the macroeconomic benefit. You have a full-service business that runs a 50% margin, but maybe only makes 5% profit because the value add costs and is built in to the equation.
BAHR: It seems like there is probably some foundation baked into that.
KISTLER: Okay. Let's assume everyone involved in the trade is a capitalist and believes that Adam Smith got it right, for the most part at least. Gun Land and Butter Nation trade because both sides feel like they are gaining something. (In our trade, I think we'd call it Wood for Sheep.) Transactions generate wealth. All the parties involved agree to the transaction because they feel like it's a good value for themselves, that they're richer afterward, at least on a utilitarian level. If net wealth was lost, the need fulfilled or enjoyment gained from the transaction was worth whatever was given up.
BAHR: Value for value.
KISTLER: And while transactions always involve individuals, those individuals can associate for complicated or longer lasting or more nebulous transactions that can benefit each, but are not as simple as wood-for-sheep.
BAHR: Voluntary cooperation is at the root of business, but you posit something further. Can you expand on that?
KISTLER: Any group is still made up of individuals. The straightforward example is capitalists pooling resources to form e.g. a corporation. This creates opportunities beyond their individual reach.
BAHR: Absolutely. For something concrete that isn't maybe just another business, you would point to what?
KISTLER: I would argue that a good example of a group of individuals working together in a way that generates a more beneficial sum of wealth is a library. Not every individual in a community would buy a copy of every book, but could very much benefit from borrowing books temporarily from one another. A book isn't very perishable, but it is inefficient to own as an individual, generally. It gets shelved and is used little after that.
BAHR: Yes. Extremely infrequent utility. It's how the Toolbank charity framework evolved. A great many books are read zero times or once.
KISTLER: It's also cost prohibitive for individuals to purchase a book at equilibrium price who are further down the demand curve, even if they aren't extremely far down. And it's expensive for a publisher to service all those individuals around that equilibrium point of the demand curve. On the other hand, a buyer at a library and a seller for a publisher can agree on a more expensively licensed version of the book that can be sold at less than the integral of the demand curve it serves, but stretch further down it, capturing an overall larger sum of revenue at a lower cost than would be achieved selling only to the individuals.
BAHR: We are disregarding instances where an individual would keep a book libraried for the purpose of ongoing reference, right?
KISTLER: Yes, owning a book and leaving it on your shelf may be a solid choice for some people. Depending on how much they enjoy the aesthetics of the book or the convenience of having it always on hand, as a consumer of the book, that may be a wise purchase to make. There is some more Economics 101 baked into that, but you get the idea.
BAHR: You raised some questions in our discussion before about the underlying stakeholder-business relationship, and this seems like as good a time as any to delve into that.
KISTLER: In our hobby retail world there are only a few main categories of stakeholders. The obvious is store owners. Other important ones are customers, suppliers, and employees. There are also landlords, various services providers, governments and other communities we rely on and support. So, a question would be, who are hobby stores in business for?
BAHR: At heart, the owner(s). Others will benefit but those who risked money did so on an expectation of return.
KISTLER: Indeed, the common answer is the owners/investors. Somewhere around here is where the meat and potatoes of the discussion happens. Follow the money and ask yourself again who the store exists for. Investors put in capital. Let's say year one they invest $100k to get everything started. A year later the new store has done $200k in sales. Using the flow of cash as a metric, as a group who has had a larger impact on how and why the store operates, investors or consumers?
BAHR: Given this is a first-year store that is going to promise the moon to customers and have to walk most of that back, I'm going to say consumers, since the operating investors are going to be learning their chops and gaining their sea legs and will be overeager to please and will not fully understand which requests are feasible and which are not. Or what even makes sense for the business. Our industry is so scattershot compared to something like running a cafe, where the objective is so much cleaner: Serve delicious food and drinks in a welcoming atmosphere. But I'm not sure that's the context you meant.
KISTLER: Not exactly, but assuming keystone margins, how relevant of a stakeholder are the suppliers of goods, compared to investors?
BAHR: A good or bad distributor can make or break a new store. They definitely matter.
KISTLER: Absolutely, choosing distributors and manufacturers who are good partners to support definitely matters. So there's another premise, I guess. I just implied a handwave argument that the cash flow of transactions is the blood of a capitalistic venture, and the parties involved are the vital organs. The flow of cash is a transaction, guns and butter, building our collective wealth, evident because in every instance, all parties involved must perceive an increase in value to agree to complete the transaction.
BAHR: The perpetual question in commerce. How do you deliver value all the way up the chain. Intermediation adds cost but doesn't usually change the product (but would surely change a service, which is why services are so elastic at the point of delivery). If there isn't a value gain perception every step of the way, the product stops moving forward and money stops flowing the other way.
KISTLER: Pretty soon you can see where this trail leads. A couple years later, the store does $500k in sales, revenue from customer spending. The store spends $250k with suppliers for the merchandise. They spent $125k for rent, utlities, repairs, marketing, and other service providers. About $100k goes to employee payroll. After that $25k is return to investors. The investors own the business, but how much control and power do they really have, and how much must they be mindful of other stakeholders like customers, suppliers, service providers, and employees?
BAHR: If you're asking me whether the other stakeholders are important, I would say yes. The investors still have a lot of control, evidenced by how many stores fail for each one that remains open and profitable, while they interact with a vast pool of consumers and largely a similar pool of suppliers and landlords and so on. But even as I say I think the investors have the most control, I would say the consumers are the most important stakeholders. They literally decide the final outcome. Setting aside atypical stores that have side income from publishing, accessory printing, Patreon for their social media work, or what have you, every single dollar of revenue at most stores (mine included) comes from a sale to a consumer. I cannot pay the overhead, cannot pay my people, cannot pay myself or the ownership group any money whatsoever that did not arrive by means of exchanging merchandise for a consumer's money. So ultimately, in some way, I need to furnish that consumer with something he or she wants more than the green spending rectangles being offered in exchange.
KISTLER: Which ties in exactly to our original point about whether we are adding value, or are just speculating on consumables.
BAHR: What difference do you believe it makes?
KISTLER: I said before that hoarding items to make 10% on a flip doesn't create value and is bad. By bad I am saying it is not very capitalistic. It's OK for consumers. Necessary sometimes.
BAHR: For example, when the economy takes a sharp turn, everyone's ornaments or entertainment playthings are the first things to get dropped/sold or not collected anymore.
KISTLER: Goods consumed end the capital chain. On the consumer end of the transaction, that value is accrued indefinitely. "Hoarded" maybe, but rightfully theirs to keep. Once we eat the food we bought, we stayed alive, bought that time and some pleasure, used up those resources pretty quickly, and cannot put them back to use. That value has left a remnant in a pretty much unusable state, from a purely capitalistic point of view. Ideally the money we traded for that food will continue to pump through the veins of capitalism, but by wanting to stay alive in that instance we created demand for a perishable one-time-use resource, and this ended a capital progression.
BAHR: Makes sense.
KISTLER: Whereas speculating and hoarding is like this but the store is being more of a consumer than a capitalist. Look, anyone can get joy out of owning something collectible. If someone does it for reasons like that, it's fine. It's like buying a piece of art that hangs on the wall until the owner tires of it or is bored seeing it and it loses value for them, or it outlives them and the estate sale rolls around. But they're a consumer, and don't need to be bothered convincing themselves that they're an investor, a driving component of the machine of capitalism.
BAHR: Everybody's a dealer these days.
KISTLER: Right, and it's all arbitrage at the household level. Not arbitrage in the sense of, I find a direct conveyance of two overlapping value sets. But in the sense of, I'm not creating anything other than availability of a transaction for a consumable and then just squatting on it, hoarding it if you will, until that executes.
BAHR: Right. Craigslist. Amazon Seller Central. eBay. Garage sales have been around since the postwar suburban boom, but not like today. They were rummages then. Now it's a hunting ground to see who has undervalued a flippable item by ten percent after shipping and PayPal fees.
KISTLER: If they find joy in that as a hobby, or are doing that well enough to provide a service to stores or collectors, sure, that's OK with me. If they want to speculate on something as a capitalist, in a capitalistic manner, it should be something that operates, not something that sits on a shelf and they hope maybe they can just sell right back someday. If they buy stock, put capital into a business, that creates value rather than locking wealth in a closet.
BAHR: I know a lot of people who would consider locking the collectible away a preservative move. But I suspect the primary motivation is pecuniary. They aren't just brave stewards of historical artifacts. They intend that this SuperDude Returns #1 Variant is going to be sought by collectors and will ultimately flip for $400 rather than the $100 they spent on it. Otherwise they wouldn't waste their time with it, they would just read the base cover edition. So is this being a bad capitalist?
KISTLER: I suggest that it does. Recall the other stakeholders involved. In the years our imaginary company grew to $500k in sales, suppose it retained earnings until there was $250k of inventory and capital expenditures on the books. In theory those investors could liquidate for that $250k. But they're currently getting $25k of that $500k after COGS and expenses to reinvest or pocket. Essentially they're getting a 10% ROI.
BAHR: Unless they need the money back, tough to argue they should shut off the music. They let the wager ride.
KISTLER: And to do that they want to try diversifying. But maybe staying with something familiar. They plan to speculate on collectibles they sell in their store. They see an opportunity where they could spend their $25k product selling for $50k today, but they project they could sell it for $60k in a year. That's in line with their current ROI, they're familiar with the product and comfortable with their projection so don't fuss about risk, everything seems great. Why not be in both retail and speculating?
BAHR: We're assuming this is turn-rate neutral somehow, otherwise, as I like to remark, "I ain't running a museum here."
KISTLER: Putting something on a shelf means you set it and forget it. Keeps expenses down. Great, right? Except it doesn't lower fixed expenses. It needs to pay its fair share of those too. OK, so assuming $50k of fixed expenses -- rent, utilities, whatever else. This investment needs to pay its tenth of that. Its eleventh of that, if you think of us as technically now a $275k venture with this new investment. Maybe instead we're pretty sure the $50k MSRP product will actually fetch $65k in a year. Now is speculating a good idea? From the perspective of just the investors, at a decent increase in price, yeah, it looks like a good idea. But it looks good to the investors because during that year that capital doesn't create a lot of expenses. From the "income minus expenses" point of view, it's a fine decision.
BAHR: I talk about this a lot as the "labor load" of a product or category.
KISTLER: But from a stakeholder point of view, capital is no longer flowing through other stakeholders. Low expenses means there's no employable work generated. Capital isn't being spent to improve the store or promote the joy of gaming to potential customers who yet realize how hollow and meaningless their lives are without the fun we provide. It sounds counter-intuitive to embrace expenses, but I say learn to love that labor load. (Within reason, of course.)
BAHR: We may disagree in part here as I don't fundamentally condemn buy-it-and-stow-it as such. One of many business models in our trade, different from the "boutique" and the "bowling alley," is one I call the "shoebox," a typically small deployment that runs on pure efficiency and is only concerned with gaining value on every transaction, and is content to sit on merch indefinitely until it gets its price. It's tough to succeed as a shoebox because you're literally vulnerable to every disruption in a retail sense. Everyone else's value-add scores against you; everyone else's sale price that beats yours is dispositive; everyone else's more convenient location serves to position them in front of you. If anyone can get the item in another way, they are maximally incentivized to do so, aside from some very tangential benefits of being able to examine the merch in person, knowing the store owner can be trusted to authenticate it, not having to wait for or risk damage in shipping. But for an owner who wants to keep that labor load minimal and likely keep occupancy costs down as well, the shoebox model can work.
KISTLER: Well, there's another option for investing, and this reaches to what you asked me about how capital can be used to benefit multiple stakeholders. How it can be capital at work, capital that is fueling some sort of wealth increase within a time period. The time part is obviously important because everything should be viewed as something like an annual ROI. The stakeholders part is also important because how the capital is used for a group can create options that can be more beneficial for the sum of the group than only considering options from the point of view of one individual and the individuals they directly trade with.
BAHR: By which you mean an investment other than in products intended to appreciate in value?
KISTLER: Right, like diversifying working inventory to increase sales. If the investors are familiar with products related to their store, picking exciting new things to increase the books from $250k to $275k will ideally increase by a turn rate resembling the current one. If all goes well, next year there are $550k in sales on $275k book value. Even if variable costs increase, such as more staff hours in register coverage, more advertising and marketing for new product and events, and so on, fixed costs shouldn't move much. At certain thresholds, yes, fixed costs stairstep up with growth. But in general, pure product throughput doesn't change a lease or debt service. In the end, the investor hopefully now has 5% of the new larger sales to pocket or reinvest.
BAHR: We're in the boutique model here, product is expected to turn, to come in and then be gone. In most of retail, inventory "rots on the shelves." In our trade, not always.
KISTLER: You could do it either way, and from the vantage point of the investors, the two options are a wash. But from the point of view of the other stakeholders there is a tremendous difference. Rather than tying up $25k in capital, the investment in diversifying working inventory generates $25k increased revenue for suppliers, $50k of increased sales to a broader base of customers, and $22k-ish worth of money going to employee payroll, advertising, and so on, and investors still get their 10% compounded ROI.
BAHR: Safe to say you favor this configuration, then.
KISTLER: Yes, because it's more efficient as a mechanism for wealth generation. Instead of focusing solely on themselves, if the investors are willing to incur expenses that generate returns through the layers of other stakeholders, and increase the economic activity in aggregate through such circulation, it creates more of a rising tide. There are long-term benefits to this. Some intangible, some perfectly tangible in terms of what you can build and how much of it. And you're not depending on some niche market to continue holding onto an artificial value signature that may be predicated heavily on hearsay and hype.
BAHR: You don't need the Beanie Babies fad to persist.
KISTLER: You only need engagement in the overall product or service type you offer. That's it. Publishers are able to be publishers and their great content is your great content. Also, distributors are able to curate and deploy, and their storefront is your storefront. Rather than the way it is today with some of them backdooring product to liquidation channels, your bigger-picture decisions make you their valuable business partner whom they should also in turn want to serve with mutually-beneficial bigger-picture decisions. Thirdly, consumers are able to partake of the entertainment without being concerned that they're missing out on a stock market move.
BAHR: You already know I favor that. The corner bowling alley doesn't have to be worried about whether the five-pin appeared in more pro tour decklists this year. They just have to provide a clean, welcoming, fun place to bowl. So, in the wider view for the business, when your takeaway from an investment is the same whether it's win-lose or win-win, it is compelling to argue that you should work toward the mutual win. I'll give you the last word.
KISTLER: It shouldn't be too far of a jump to say at this point that, all else seeming to be equal from the individual's point of view, a collection of stakeholders who are trading more often should be generating more opportunities for each other and have a higher potential to increase their total combined wealth. I think it's the better way to go. I think it's better capitalism and better business, and you are setting up relationships and connections that will reward you later.
Well, that's all the time we have for today here on The Backstage Pass. Thank you so much, Mike Kistler from Epic Loot and the GRD, for giving so generously of your time and perspective for this article! For my readers, wherever you invest, now you have something to think about, whether it makes more sense to blackhole product on an expectation of appreciation, or whether the aggregate benefit of throughput activity presents a more compelling option. What do you think? Leave a comment on our web zone and I'll send pizza rolls.