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Tuesday, July 18, 2017

Hiroshi Yamauchi Was Right

I've written at length on how board games have been something of a trickster category at DSG (both locations).  There is observable demand for the product, but there is sharp downward price pressure, and combined with the glut of product being released (10 new games per day in 2016, over 3,600 new SKUs all told) we see a cycle of release-hype-forgotten-clearance.  Moreover, Amazon Prime Now to your door in two hours is a reality here, there are too many stores in this metro, there are already two deeply established board game stores in the area, only one of which is near one of my two locations, and the Pacific Southwest overall is pretty unfriendly to brick-and-mortar retail in a general sort of way.

I've painted that bleak picture over and over here on The Backstage Pass because board games are at the center of our industry's optics and public impression.  Never mind that most stores have subsisted on the cash flow from trading card games -- and this year's softness in that category has been something of a bloodbath, with more to come.  Moreover, as a player, board games are what I get to spend the most time with, perhaps second to video games now that my children and I have enjoyed playing Ori, Bastion, and Rock Band this summer.

However, I believe Hiroshi Yamauchi's approach holds true.  As chronicled by David Sheff in his excellent book "Game Over," Yamauchi, president of Nintendo of Japan, delegated to his son-in-law Minoru Arakawa the task of launching the Famicom in the United States.  The console would become known to us as the Nintendo Entertainment System.  And Nintendo sought to implement control over manufacturing, to prevent the glut of bad software that had caused the 1983 video game industry crash, and control over security, to prevent what had happened in Asia when cheap Taiwanese knock-offs of Famicom cartridges proliferated and led to margin erosion for everyone.  In essence, ensuring great content and keeping bad actors out of the production and distribution channel would be Nintendo's two-pronged strategy for the NES in North America.  Yamauchi would build the infrastructure for it and Arakawa would manage American distribution and keep client vendors in line.  How did they do?  The NES had a peak market share of 97%.  Seems okay.

Applying Yamauchi's principles to the comic and hobby game industry, we are already seeing that whatever else is going on in a category, if the content is great and there are enough ground rules being enforced in the market to ward off the worst of the worst, good things can happen.

My stores are Magic shops.  There is no denying that.  About 70% of my revenue is Magic or Magic-related, such as sleeves and binders.  And in the face of continued soft performance across other categories, I began a contraction in 2016 that persisted until very recently.  The biggest move was that I took a merciless scythe (heh) to board games, clearancing out anything that did not sell a unit in a 90-day span, or the equivalent of four turns per year.  I generated some cash from the winnowing, and I made some room in my hopelessly undersized Gilbert store.  This move was not without drawbacks.  I definitely saw some customer traffic reduction.  I saw more requests for in-print stuff that I did not have in stock.  But I wrote those issues off as the price of no longer being a forward-positioned player in the category.  Basically, I expected to remain stocked on a few select publishers' current games, brand-protected outfits like Asmodee, Mayfair, WizKids, and like such, and the rest just were not viable for me.

Since that time, we have seen some publisher moves.  AEG implemented a MAP policy.  CMON implemented distribution control.  IELLO set up early releases for brick-and-mortar retailers.  We saw ongoing refinements of existing brand protection policies from the likes of Asmodee and especially Games Workshop.

These changes have mostly had time to go into effect, though the bigger part of the Asmodee consolidation is still a few weeks ahead.  And now?  A surprising amount of board games are selling out off my shelves, even when I start deep on quantity, or reload to quantity.  Former deadwood titles like Star Wars Rebellion, Smash Up, and Mystic Vale are hitting turns at MSRP.  All three are excellent games that had had their vitality undermined by deep discounters and dumpers.  Dark Souls, Dice Forge, and The Godfather: Corelone's Empire have been big hits that sold well right out of the gate, and validated the confidence retailers placed in them.  And I started a used board game program that has been successful well beyond my expectations.

What is happening here?  I think we are seeing that Hiroshi Yamauchi was right.  Control content and keep the deadbeats away from your products, and a publisher can enjoy the rewards when a healthy ecosystem emerges.  Titles last longer at the front of the marketplace and have more opportunity to jump to evergreen or at least deciduous status.  Dumpers generally can't dump, and thus can't yank the floor out from under the brand value.  Distributors don't have to clear floor as aggressively or as severely, and retailers are able to get a little healthier, such as it is for this industry.

Despite everything board games have going against them in my neck of the woods, I now have not one but two stores where board games are in a rapid growth cycle and garnering tremendously positive customer reactions.  The category went from out-of-the-top-10 to currently 7th place in a rolling 30 days before today, which amounts to 5th place if you consolidate the Magic-related categories.  Those top the chart, after which follow miniatures, video games, and comics.  Will they pass comics in July?  I don't know, Marvel Legacy is on the horizon, but maybe.  Will they pass video games?  No.  Video games and miniatures are catching up to Magic rather more quickly than I would have expected at this point a year ago.

Yamauchi's principles can apply to any product really.  It is the nature of commerce that someone will try to find a way to undercut someone else on price.  I have a wife and children to support, so I am surely as rapacious as the next guy when it comes to filling that grocery cart.  But those are commodities.  Entertainment products are a luxury, a discretionary expense.  The price of such a thing is an arbitrary amount.  It has some internal skeleton based on physical production costs for the parts and box and so on, freight, then of course paying the designers and artists who brought the game to life, and the administration that pilots the entire apparatus.  But the price tag can really be whatever the publisher wants, that they think a consumer will find agreeable.  How does a publisher cultivate such a feeling of desire and goodwill in the consumer public?  By means of building a brand and identifying that brand with the quality of products sold under its sigil.

After all that work to build, bolster, and promote brands, it is a delight to see more and more entities across each tier of the industry engaged in the process of defending them.

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