Friday, Wizards of the Coast announced that they would be selling Magic: the Gathering factory direct on Amazon and in other channels. The result was predictable:
This is an upheaval for sure. It's substantial enough that I'm still assessing it, now, days later. There is much to unpack.
First things first. The second listing in that screenshot is Amazon's direct-from-publisher inventory, for $94.85 per unit, shipped free with Prime. In other words, Wizards is undercutting their own MSRP, which I've mentioned before in this space is a serious problem.
When you parse that image please understand that at $3.99 per pack and 36 packs to the display box, the MSRP of a box of Magic is $143.64. Boxes haven't sold for that much in the general market for some time now, but the MSRP is how wholesale pricing is determined. Wholesale, which used to be right around $76 in most cases per box (or 52% cost-of-goods), increased to $79-$92 depending on distributor and account status when Wizards ceased selling directly to stores on August 31st.
Thus, Wizards themselves is selling the product at a price as low as $2.85 above wholesale. That's not counting Amazon's cut, shipping, or any of that. Amazon takes 15% off the top from marketplace sellers like us, more for Prime fulfillment; even if we assume Hasbro gets a better deal, I doubt it's zero percent. And now that becomes the price to beat for online sales. Effectively Magic: the Gathering now has the worst margin in the entire entertainment industry. I get better cost-of-goods on brand-new video game consoles, the previous reigning champions of the short margin, where mass-market stores make up the difference with rebates and merchandising programs and small independents get the shaft.
I hope I don't have to explain that a publisher selling directly to end consumers is not necessarily a bad thing. For example, Nintendo, Microsoft, Games Workshop, and Fantasy Flight all sell direct and do it brilliantly. They hold to full MSRP, offer superb service that sets a sterling example for independent stores, and aggressively police the marketplace for bad actors. Microsoft and Games Workshop even have physical retail stores that hold to the same policy and are excellent neighbors for independents, promoting the brand while not undercutting us. In the end the result is that these companies do sell direct, and the consumer gets what they want in a no-compromises manner, while possibly not paying the absolute lowest price. That's part of what makes the Wizards dumping price on Amazon so puzzling; we know they know better. Hasbro themselves sells Magic booster boxes from their online store at the full $143.64 MSRP! I doubt they move many of them at that price, but it reinforces the brand.
That last bit has me wondering. There may be yet another shoe still to drop. Fantasy Flight, Games Workshop, Nintendo, Microsoft... those examples I gave above, their product began selling even through Amazon and eBay and everywhere else at prices much closer to MSRP, or to an applicable MAP (Minimum Advertised Price), once the company began channel management and enforced vertical distribution agreements. Retailers were already informed privately that at least two (and possibly more) of the national Magic distributors are being dropped after Guilds of Ravnica; I won't post which just yet because I want to honor confidentiality commitments and wait for their official public announcements. Amazon wants to make as much money as possible on every sale, but they won't be undersold, and their pricing bots always undercut the lowest congruent offer, often by as little as a penny. Is Wizards or Hasbro about to impose channel management and pricing? The idea of Magic behaving like Star Wars Destiny, where we get a little bit of room to discount but mostly we all make reasonable margins, is very appealing.
Or else it's not that at all, it's the simpler explanation that Hasbro knows now that it does not need independent game stores, and is shouldering us out of the action. Or more to the point, they have recognized that any time an independent game store fails, two new ones replace it, so why should they disburse resources toward us at all? I should caveat that I know people working at Wizards of the Coast, past and present, who care about independent game stores very much, and at the same time I know Hasbro's top executives are answerable to the shareholders and it is their fiduciary duty to care about independent game stores as little as possible.
Others are already weighing in on this. I think the best take I've heard so far has been from The Mana Source, whose evaluation cuts right to the chase and asks what stores will do if there's no money to be made carrying Magic. I like that question because it keeps the focus on the issue that game store owners should care about the most: What do we do from here? What are the implications on us? I've said before as recently as earlier this month that the positive outcomes we want will not fall out of the sky. We have to work toward them deliberately and with our eyes open.
So what am I going to do about it?
In the immediate term, no changes. Excitement is peaking for Guilds of Ravnica. I am about to host hundreds of players this coming weekend at Arizona's largest game store, and they're going to have an absolute blast. We have about 500 player packs, and based on our attendance forecast, we expect to be able to give everyone the guild of their choice whether they pre-register or simply walk in for the event. Other area stores are promising this and that on such-and-such a condition, but we find that our everyday promise of the best experience is sufficient to fill the room.
How long will we be Arizona's, or even the Valley's, biggest game store, though?
Let me unpack that, because it's a question that you would not have heard me ask, even rhetorically, before last week's Wizards announcements. And setting aside that someone else is bound to come along and open bigger eventually. Capitalism, after all.
I am paying rent for thousands of square feet of play space, seating for well over a hundred players at the same time as miniatures and RPG tables host dozens more. City code will let us host far more players still, a number beyond what we'd ever actually attempt to seat. That enormous play space has to be monetized by a robust business in Magic card sales. Singles are spectacular for us, but sealed product remains essential and our price is not ninety-five bucks a box all-in. However, it seems likely that being competitive in the sealed product space will, before too much longer, require a store to price boxes in that range. (Unless yet another shoe drops, as I posit several paragraphs above this one.)
I should also state outright that I don't expect players to pay more for no reason. I respect the appeal of a low price. Typically what we've seen up until now has been that players like instant gratification, and are willing to pay slightly more on the spot for packs and boxes, but obviously not full MSRP, as that's just unrealistic. DSG has focused on selling packs and using a 3-for-$10-tax-included-every-day model. Players love it because they get a reasonable price even if they only have ten or twenty bucks to spend. It's a question of degree. If the box price gets too low straight from the source, it starts to crowd out other purchasing, including three-for-tens. It could also crowd out purchasing of singles, which would be a serious problem. Especially if we tried to "juice" singles sales by means of deeper pack and box discounting, as other stores in various markets (including ours) have done. I'd hate to pay the incentive and then not recoup the benefit.
Crucially, it's a comparative thing. Opportunity cost. I can make most of the money I make now on things that aren't Magic without having a very large store, or paying the overhead for one. Heck, I could do tremendous business in video games with nothing more than a 1000-square-foot shoebox. That's all that's needed, and those cost next to nothing to occupy, even if I kept my current staff roster. Most of tabletop is played at peoples' homes, not at an FLGS, so boxed games can serve the audience wonderfully from a cozy ultraboutique. There are variables involved there of course. Volume scales with size, and so do expenses. Thus far we're still new enough to the Chandler location that it's earning more than the Gilbert store did, but not as much more proportionally as the size increase and the overhead increase. There is a much higher ceiling for growth, and our clientele continues to grow... but now we've been told a primary growth factor has been Nerfed, if you'll allow me to disparage another Hasbro brand with the metaphor.
For that matter, the comparative math wasn't that great in the first place. Being in the comic and hobby game trade was already less lucrative than many other businesses, from carpeting to mattresses to pool supplies to automotive to HVAC and so on and so forth. So there wasn't a lot of slack in this line left to give. The net earnings potential of the entire business threatens to drop below the range of durable financial instruments. In other words, it becomes a better idea not to invest in a game store at all, and instead to just throw the money on an (interest-bearing) pile and go do something else to earn my daily bread.
It comes down to this. If I had known about Wizards' policy change of September 2018 at the time when I signed the lease for DSG Chandler in early summer 2017, would I have signed it? No, I don't think so. I believe I would have explored other options.
A commercial lease is a gargantuan financial commitment, and it's secured by a personal guaranty, meaning my credit and savings are on the line, as are those of the other LLC partners. Before signing a commercial lease, we engaged in extensive research and business planning to make sure we could keep up with that unceasing calendar ratchet. Based on the best information we had at the time, an underlying assumption for leasing 3875 West Ray Road Suite 7 was that the Magic: the Gathering card market would continue to operate mostly the same as it has been. I bought space specifically to dominate the local event scene, leveraging that into sustained growth in product turn. And we do dominate the local event scene, and we have seen growth in sales. As a secondary factor, extra space made it easier to scale up online operations, which has also occurred.
Had I not found this lease, I don't think I would have shut down as Gilbert's lease ended, just as I'm not considering shutting down now. But running small(er) and focusing on other product lines? Oh yeah. I would have done that. I will always love Magic, but I play board games as my primary tabletop outlet (when I play games at all, which is rare) and video games will always be my first and foremost, as they have been since I was a child, years before Magic was even a happy accident of Garfield's and Adkison's collaboration.
Singles are a huge question mark. I have been pouring resources into singles, working to build them up to the competitive standard set by other major stores in the region. By and large this effort has borne fruit. Do I keep at it, not knowing what's ahead for Magic? I think I do. Even if Magic goes topsy-turvy for a while, any loss of value from singles holdings will be temporary. Think of the early Modern years before the 2009 Zendikar boom. Wouldn't you love to have laid hands on some of that cheddar at the prices of the time? And this is why in the article I already linked once, and will link again before the end, I mention that I'm planning on hedging against uncertain box sales with a huge singles opening for Guilds. I'm going to have a room full of people who want them, every day for the next several weeks. I would kind of like to earn their money.
So. Like I said, I'm not going to do anything immediately. What about further ahead than that? What about 2019 and beyond?
I always want to be crystallizing. I act toward the positive outcome I want. Most of what I am going to do at this point is behind the scenes. I'll meet with the landlord, with whom we have a good relationship. I need another store move like I need a hole in my head, but if a serious change is warranted, I will need to know what kind of options exist and how far in the future they would become available. I'll be in regular touch with distribution. I'll look for other merch that might fill my floor if Magic takes a sudden nosedive. Our local Hobbytown USA just closed, maybe I can branch from wargame miniatures into models and hobbycrafts. I'll watch the Guilds of Ravnica prerelease and release very closely and decide whether any pricing adjustments make sense, and then I'll test that against the Ravnica Allegiance release cycle this winter. I already adjusted store hours based on analytics and that is shaping up to be a very correct decision; we're seeing virtually no lost sales at all. And in the meantime I'll iterate in the store itself and seek to improve the customer experience every way I can devise.
Honestly, I would be delighted beyond measure to be completely wrong about all this and see Magic launch into an immediate and sustained boom cycle. It's not impossible. I have to give some benefit of the doubt that people whose job is literally to think this stuff through before moving ahead with it, have in fact thought this stuff through before moving ahead with it. I just hope those thoughts weren't the likes of, "Let's see what we can do to remove independent game stores from the equation." Provided they are interested in everybody making more money, and that's a dicier assumption today than it was years ago, we may hope that they are following a roadmap that takes us all a little closer to the promised land.
The ride is about to get quite a bit bumpier. Hope everyone is buckled in.
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