Tuesday, December 26, 2017

That Tax Basis Ain't Gonna Lower Itself

In small specialty retail, we want to have as much inventory as possible right up until the days before Christmas, and then we want as much of it gone as we can manage, before the last day of the year.  This is because we want the most possible holiday sales, and then we want to avoid being stuck with a bunch of extra inventory because growth on that ledger counts as income at tax time.  I could avoid this pinch if I simply reset my fiscal year to begin and end on some other date, but we're not nearly at the kind of scale where such a logistical upheaval pays off.

In practice, what this requires is good forecasting.  Based on the sales numbers of past Decembers, we're able to project sales for this December, and starting in late November we tailor our ordering so that the inventory asset ledger tapers off right on time and then we can do some modest after-Christmas year-end sales event and shed down to the number we want.

It's rare to hit the mark perfectly or even within a few percent.  If I'm wildly off on the low side, my shelves are barren and I've got that nice low tax basis, but we probably missed a lot of potential sales.  If I'm wildly off on the high side, I've got overloaded shelves that I'm about to have to pay for twice, as it were.  The latter is the situation in 2017, since holiday sales came in well short of projections, even after hedging from spotty results last year.  In fact, if you took DSG's numbers from last week and erased the dates and mixed them up with a bunch of other weeks of the year, I'd have a hard time telling them apart from an average week in April or June.  It was disappointing, likely an ongoing effect from our move, coupled with the fact that holiday shopping is far more volatile against online and big box volume than our day-to-day bread-and-butter business is.

This meant our end-of-year sale for 2017 had to be a little more aggressive than I might prefer, while still protecting products I know I can't restock reliably in the first quarter of 2018 because half the factories on the planet shut down for Chinese New Year.

So I figured this blog post might be a good time to look at the when, how, and why of sales.  It's a topic I've covered before, but always good for a refresher.

The best answer is "almost never."  Sales in small specialty retail should be rare, limited in scope, and unpredictable.  If the public knows what's going to go on sale and when, they'll respond to that incentive by never buying those items any other time.  Black Friday and end-of-year are the biggest danger spots here.  A good way to mitigate this problem is to avoid storewide "everything" sales and be more focused, and that's in the "how."  But in terms of "when," only the mass market with its vast economies of scale and automation is able to benefit from keeping rolling sales underway seemingly every week.  Small specialty is always safe to hit the major sales periods, and shouldn't hold big prominent sales otherwise unless there's a tie-in event like a grand opening, store move, expansion, or what have you.

The best answer is "purposefully."  Either attach a simple rule to an entire product line or category (such as Buy Two, Get One Free), or attach a simple sale scheme to select items.  Those are the two winning plays really.  Blanket percentages off are logistically easy but also tend to result in narrowing the dynamic range of your stock -- don't do that to categories that have big jackpot items or super-rare stuff in them, or that's all that will get bought and you'll lose the most money possible.  I like to take the clearance rack that already exists and get really aggressive there as a sale promotion, because it's stuff we already wanted gone.  Importantly, you have to set up the terms of a sale and set up boundaries so the promotion is contained.  If you don't, you have the same problem as with frequency.  People will start to speculate that you'll go blanket-dump on board games or singles or what have you, and they will stop buying and wait you out.  Conversely, players will happily buy WarDoggies models the week before Thanksgiving if they have no specific reason to believe you're going to knock the floor out from under WarDoggies prices on Black Friday.

The sale should never be just to bring people to the store.  Small specialty retail can't use sales that way; once again, you lack the economies of scale and automation that the mass market uses to do that, and moreover, you don't want to curate a customer base of the most price-sensitive customers you can find, because they won't be back during ordinary time.  Sales need to have purposes that, once achieved, allow the store an unambiguous benefit and a chance to return quietly to normal operation.  My end-of-year sale is driven by tax policy and is among the more obvious "good reasons" to "devalue" my own goods.  Clearance/closeout are probably the most common purpose and as long as you're not expecting to continue turns on that stock, it's pure cash recouped when you sell it, even if it comes with the regret that the BattleDucks Core Set never caught on and did not become evergreen as you had hoped.  Overstock sell-downs are a store correcting partial mistakes; we don't enjoy having to have such sales, but a bad overbuy can put a store in real danger if it ties up enough cash flow, even though you plan to keep the game itself around after that.  There are other niche reasons to put a product on sale, such as ding-and-dent or a new edition announcement, and anything you do in those scenarios is probably safe.

Anyway, if you're an industry peer, I'm sure you're nodding along and I hope your end-of-year reduction sale, if any, is successful.  If you're a customer reading this, allow me to quote from the late Peter Steele: "Please buy our products."

That about puts the wraps on 2017 here at DSG and the Backstage Pass!  May all of us have a better 2018 than the last twelve Godforsaken months have been!  Cheers!

Tuesday, December 19, 2017

The Excluded and the Excluders

I thought we were seeing the start of the holiday shopping ramp-up over the past couple of weeks.  Nope!  Still idling along at basically average numbers.  Which are good if I've got average invoices to pay, and less good if I have much larger holiday inventory invoices to pay.  Take a guess.

On further sifting of the numbers, the slow build we were seeing after the start-of-month dip was just general transactions, primarily in categories we already dominate and are hobby-based and not mainstream.  Magic cards, Pokemon cards, video games, the middle range of board games.  Not Warhammer.  More on that in a moment; that issue became the second half of this post.

But in terms of the mainstream merch we carry: Comics, POPs and action figures, mainstream-buzzing board games, apparel, and so on?  Black Friday weekend was great for these, and they have been utterly asleep since then.  Like, really asleep.

What we're seeing is this.  People just shop on Amazon now for the holidays.  Gifts, etc.  It's over.  That's just how it works now.  Nothing can be as easy as tapping your phone and the thing appears on your doorstep magically a short time later.  But once it's too late to be sure you'll have shipping in time to give that present, then that's when people will shop local.  Not until then.  I could be proven wrong later this week, I'm sure, but I bet I won't be.  I saw this last year but chalked the malaise up to Trump-based anxiety and depression.  Business as usual until the last minute, then BLAM some huge days and then the calendar gut-punched us with a Saturday Christmas Eve and the entire season amounted to a disappointment.  I saw it to some extent in 2015 but it was less of a dip from the usual pattern of sales because, probably, our usual wasn't as good then as it is now.  Now I realize it wasn't Trump, and it wasn't whatever else.  It was that small business are no longer part of the holiday picture.  The rest of the year we can make hay and our sun shines.  But right now we are, as Neal Morse put it, on the outside looking in.

There will eventually be an inversion due to this where small local businesses will have better pricing on this sort of merch, because Amazon will have something like 70%-80% market reach in entertainment goods, and will be at liberty to price up.  Everyone associates Amazon with low prices so it will take time before that price memory becomes replaced by the discovery that it's not always the best deal.

Even now, Amazon is already awful if you want a game that's sold out in distribution but stores still have.  As of this writing, board games like Fallout, Game of Thrones Catan, Ex Libris, and Photosynthesis are way above MSRP and/or are back-ordered on Amazon, but they are on many store shelves (like ours) at MSRP today, a comparative bargain.  Since much of Amazon fulfillment is done by affiliate retailers, their well will run dry first, and stores like mine will be the ones that Have The Goods (still the gold standard) deeper into the season.  But like I said, it will take a while before people really notice this, and before it pervades across all games.  Right now instead of shopping their FLGS, an awful lot of people are shopping via iDevice while waiting for a bus.  They never come in so they never realize we actually have what they want and at a competitive price.  We're left to preach to the already-converted.  Paradoxically, the procrastinators who are almost the last ones to visit will be rewarded because the hotness will be in stock for them.  Only the latest of the Eleventh Hour Crew will see us truly sold out.

So, Warhammer.  Warhammer is doing so poorly for us since the move that I may have no choice but to discontinue it outright.  We ended our standing discount on Warhammer when we moved, on the rationale that the discount was unsustainable in the first place and we only offered it to make up for the Gilbert facility being so small and cramped for minis gameplay.  With the gigantic, palatial game room we have now, there are no more apologies.  Top stores in town already collect MSRP on Warhammer with smaller spaces.  Knowing we'd see some drop in sales from ending the discount, we ripped the band-aid and were prepared for some impact, and figured we'd grow from there.

Unfortunately that's not what happened.  Instead of being painful but bearable, the reduction in Warhammer sales was ridiculous.  Warhammer had consistently been our 2nd through 4th place category all year long at DSG Gilbert.  Some combination of Magic categories always led, and once or twice a big month for some other category poked into the top tier.  But month in and month out, Warhammer got the job done.  We moved on September 29th.  In October, Warhammer was in 11th place for sales.  In November, Warhammer was in 10th place, but if you back out the sales from our Black Friday deep liquidation of Age of Sigmar, it was in 15th place, barely outpacing apparel and the Dragon Ball Super TCG.  So far in December, Warhammer is out of the top 15 and in an area where the data can be too grainy to draw reasonable conclusions.  That, my friends, is what you call sales falling off a cliff.

We did not think our Warhammer player base was that price-sensitive.  I'm still not positive it is.  A lot of the guys who hang around and use the game room and haven't been spending, have armies that do not yet have 8th edition new releases.  Some others are enjoying our game room but buying from other sources, either online discounters like Frontline or whichever other store(s) in town still discount their minis, which I'm not going to waste time investigating because it doesn't actually matter which one(s) it is.

"So nurp nurp put the discount back!", some may retort.  No.  At less than full margin, which is a short margin already because Games Workshop does not grant us keystone, Warhammer is not worth carrying.  I've had years to suss this out, it's pretty conclusory at this point.  Warhammer takes up an inordinate amount of space and labor in logistics and support, relative to the revenue it generates.  We are better off putting those resources into something else.  Compared to TCGs it's an absolute joke, I can seat 8 to 12 players in the space that one Warhammer table takes up, and I can fit cards worth the value of our entire Warhammer aisle into a single white cardboard storage bin and have room left over.  And that's not even counting that a card player doesn't splay their duffels and totes across a bunch of nearby regular tables or the aisle floor while they play.

And again, it's possible we're just seeing a sales gap from only a few armies getting meaningful product releases during the last three months.  Warhammer holds value well, and the miniatures hobby is a healthy pursuit, and Games Workshop is mostly great at supporting its retail partners, and these things help the balance so that if we're at MSRP, Warhammer is fairly safe to carry.  At the very least, the risk becomes negligible on a basic-stock-plus-special-orders basis, and bringing in the new releases on an open-to-buy budget basis can be maintained indefinitely.  We have sought to do better: to carry the line in depth and provide luxurious amenities.

I'm not fully decided on what to do about this.  Blowing it all up and starting over, including disallowing Warhammer play in the game room until that happens, seems like overkill.  But shedding the line down to minimum has to happen.  Right now Warhammer isn't pulling its weight.  For whatever combination of reasons.  And it needs to get fixed.  The economics of Warhammer are different enough from TCGs and video games that a one-size-fits-all venue monetization model isn't quite feasible for us yet, so the pay-to-play game space is also not yet a starter.  We'll see what happens.

I don't want to have my last article before Christmas be nothing but a bunch of Debbie Downer content, so I'll say this: Our crew is running strong, our video game category continues to improve by leaps and bounds, we're in a gigantically favorable tax position going into the end of the year,  and event attendance is through the roof.  I don't know whether every store in earshot is also seeing high player counts or whether it's just us.  But I'll take it.  Butts in seats does not equal net revenue, but stores like ours that can offer the goods players want and develop that community are seeing the right metrics follow.  That's up to us, to welcome those arrivals and find them a reason to become part of our player community.  The doors are open.

Tuesday, December 12, 2017

Glasses By Any Other Name

It's that time of year again when I look back and absorb it all.

Long ago he set the ship aright
Then he sailed away into the night
And I don't believe I wear rose-colored glasses
But I believe we have the greatest hope
And I know that we are more than dust and ashes
And one day we will know what we have known.

- Transatlantic, "The Whirlwind VI: Rose-Colored Glasses" (main) (alternate)

Looking back across posts from this weblog these past few years, it's easy for me to tell whether business was great or lacking at the time I wrote each article, whether my personal outlook on the business was positive or pessimistic.  Even in the best times there were setbacks, just as even in the most difficult times (some of which accompanied our move this summer) there were home runs.  More than that, I carried my business worries home, and that's something I would dearly like to learn one day how not to do.

I'm sure some of that confidence or worry, that excitement or disappointment, or perhaps all of it, bled through clear as day to the reader's side.  I am autistic so I can't really tell.  I find it close to impossible to discern what someone else is thinking or feeling, unless they give off the most obvious cues, and not always even then.  This deficiency can be something of an advantage on the logistical side, where I can examine hard numbers without being swayed by personality effects or emotion.

In any event, here is the answer key to 2017.  Here is what really happened.  You may have intuited much of it already, but now the signals should match the inputs for you.

January - The big news of the early year for DSG, of course, was the merger and acquisition of Tempe Comics and the organization gaining Michael Griffin and his crew.  We would end up closing that location at the end of October, but it served as a failsafe in case we couldn't find an acceptable lease.  We could have continued as a merged store there, though that would have meant a substantial business adjustment as the Apache Blvd location was truly awful and had bad parking, bad freeway access, and minimal shopping footfall.  The strengths of the physical plant were a dirt-cheap lease and a decent amount of space.  It could be a lot worse.

February - By this time we got to the end of our possibilities to stay at the Gilbert location, and had to start scouting out in earnest.  I was deliberately obscure about specific times and dates in certain blog articles so as not to tip off the competition to where we were looking, but once we had our spot, I had no qualms about making it public and only had to wait until the landlord gave the all-clear that no other tenants would be impacted by our announcement.  In Magic, Aether Revolt disappointed somewhat; it would take until much later in the year for players to want cards other than Fatal Push. Now the set is a trendy spec pick.

March - I had a splendid time at the GAMA Trade Show in Las Vegas, and I look forward to attending in 2018 in Reno.  In Magic, Modern Masters 2017 underperformed out of the gate thanks to the player base assuming it would have no value because Rudy and the other unregulated "investors" told them to be bearish on it.  After Iconic Masters landed in November with its second-tier roster, all of a sudden everyone loved Modern Masters and it was the best.  Yeah, I said it was the best when it was first spoiled and it had so many great cards in it.  Maybe try thinking for yourselves and not taking buying advice uncritically from YouTube personalities?  Back to that in a moment.

April - Our Tempe location was burglarized, and even though we got an insurance reimbursement, it was still an expensive and harmful event that netted us significant losses.  This event served as essentially our final determinant that the only way Tempe was staying open was if we could not find an acceptable lease elsewhere.  In Magic, Amonkhet landed and the player base mostly didn't like it.  The overload of product had begun and Magic product performance in its totality became worse from here on out.  Without singles, we'd have been in a really clenchy position.

May - We landed our Chandler location, though it would take weeks to finalize the lease and far too many months of construction before we could move in.

June - Lots of waiting.  Small optimizations.  Knowing the storm was imminent, I took the family to Disneyland.

July-August - My memory of this time period is mostly dark and angry.  And hot.  Dealing both with construction in Chandler and normal store operations back in Gilbert had me at the limits of exhaustion and frustration.  In Magic, Hour of Devastation flopped.  The warning alarms were blaring.  I was standing on the brake pedal, reducing my orders, but I didn't do so fast enough, and I felt the pinch.  The set was good, but wallet fatigue was metastasizing into authentic player disengagement.  I used the blog as a welcome diversion by starting the Arizona Gamer Story.  It has plenty of installments still to go.

September-October - We exulted in opening our new location, but it was still half-finished and we had none of the advantages of size or comfort, and all the disadvantages of a store move and the attendant loss of business.  And half of everything was put away or inaccessible or some damn crap reason we couldn't do it right.  (We're down to 25% of everything being screwed up, as of this writing.  Maybe 20%.)  The impact of the move was less than I projected; many of our customers followed us to Chandler.  But October was the worst month of sales all year and it wasn't close, and that's counting Tempe still being open.  Griffin and I were stretched to our limits, doing far too much in far too little time.  We won't think back on these months with fondness.  But we got through and made it to the promised land.

November - I haven't closed the books yet for the month but it looks like it might have been the best performance of the year, even up against ten previous months with two open locations.  The November swoon was real, but at the end of October we got the rest of the main room open and as a result, event attendance exploded and drove revenue.  Every single Friday and Saturday in November was better than every single day in October except for Friday October 6th, which had the combination of Ixalan still being new, Commander 2017 being back in stock, our PPTQ registration opening, and the Legend of the Five Rings LCG releasing.  We did still have some dud days in November, especially mid-month, and too many new releases.  But Black Friday was great, it set a new record, and the ensuing week has been decent and has let us make up some ground.  The crew is finally unified in one place with one goal, one mission, one flash of light, one vision.

December - Around the community, there is unrest and uncertainty.  Remember those YouTube personalities?  Yeah.  Back on the homefront, expenses are still staggering -- we'll be paying for construction until the end of 2018 or even later.  We are fortunate to have so many understanding creditors.  But the holiday sales tornado has already been kicking up some swirling winds.  The mainstream customer visits have been an utter delight to witness, especially with us having a chance to start all over and erase mistakes from our original Gilbert opening.  I have literally years of work ahead to make DSG's Chandler hub the store it ought to be.  But for at least this glorious winter into spring, that's our entire focus.  Be awesome.  Here.  Doing this.  And the people will arrive.  And DSG will reach back out into other locations in due time.

I may be too busy to keep the blogging schedule for the rest of the month.  At least, I certainly hope I am.  If I don't return in time, stay safe out there, and I'll see you again in 2018!

Tuesday, December 5, 2017

Once You Pop, That's Great!

The pace of new releases right now across tabletop categories is such an overloaded blast that it can only be properly depicted by the Whaaargarbl Sprinkler Dog:
We can't keep up with this.  There are not enough gamer dollars out there to ingest all this content.  There is so much that the top gamers in my player community, the guys who jump onto each new game system with top enthusiasm, are tapping out and abandoning ongoing games, and largely shrugging at new ones.  The top fervor I get for new titles on the rack is when the reseller scrappers show up because that title has already sold out online and they know they can flip it at a profit.

I talked about this a few months ago and concluded that despite the content quality being very high right now, we were headed for an analogue of the 1983 video game industry crash.  This bubble was bound to pop.  Well, it's happening.  Maybe people should heed my warnings instead of brushing them off.

The mass market, which pushed so hard to bring about this torrid pace of releases, is learning something the game trade knew all along: by mass market standards, these things don't turn worth a damn.  They're fine for small specialty retail, which can survive and even thrive on a turn figure between 3.2 and 3.8 per annum.  But mass sets a base standard of 12.  If it doesn't turn over monthly, clear the rack.  And the bloodbath has ensued.  Among others:

Barnes and Noble is tapping out.

Gamestop is tapping out.  Maybe.

Walgreens is tapping out.

Target kind of tapped out after their "all these exclusives" plan last year, with Oregon Trail and Dirty Codenames and Machi Koro Nights and so on.  They'll retain Cards Against Humanity (or Prongles or whatever it is now, see also title of this article) and Hasbro mainstream stuff, and a few sacrificial lambs to be able to say they have hobby games.  But they won't really.

Pardon the use of Reddit for links on those; much of the circulating news about those clearances was via social media that is not readily linkable.

The DSG plan to ride all this out?  Lean on our pawnshop business, of course.  Ain't no such thing as a new release when all the merch is used.

I wonder what will happen once the bubble has popped and things contract back to reality.  Will some of these amazing games finally have room to breathe?  Will I get to enjoy like three years of data packs from Android: Netrunner?  Will HeroClix v2.0 with its streamlined rule set finally start gathering momentum again?  And wow, what about Magic: the Gathering, which has had enough content to hold player interest for ten years released in roughly the space of two years?

You know what?  It's going to be miserable and lose a lot of people money, but maybe this is for the best.  Content is eternal and good content will still be around for us to partake of it later.  The mass market is Leviathan, and perhaps that tortuous serpent will finally starve out and seek waters better suited to its gluttony.