Tuesday, December 18, 2018

Completing the Circle

We're basically finished with the second holiday shopping season at Chandler, and the fifth since I took over Desert Sky Games.  During this time period we've had a number of product category shifts, marketing shifts, pricing scheme shifts, a location shift, and various degrees of reliability built into our analytics.

The above is going to make it sound like we've been chaotically swerving hither and yon in terms of business approaches, but the reality is a lot more boring and straightforward than that, in which the core operations remain as unchanged as possible every time we undergo an adjustment batch, so that we can have some isolation on the adjusted aspects and then actually learn useful information from the sales, profitability (or lack thereof), and logistical experiences that follow.

In that respect, this holiday season has been something of a breakthrough for me because some things that I've been iterating out for up to six years now are finally concluding to where I have clarity on where the market is and where my target audience's mindset is.  The feeling of reaching that apex evoked for me the part of Ori and the Blind Forest where she makes it to the top of Sorrow Pass and picks up the final skill, "completing the circle," and setting off the orchestral score's swell of triumph and exultation as Ori realizes that she is finally ready to save the forest and set all things right.  My admiration for Gareth Coker's composition work on this piece is immense.
I am perhaps understating the importance of gaining that understanding of the market's direction.  Every single day we receive an onslaught of signals and have to compare and contrast those with the revealed preferences indicated by behaviors.  Moreover, there are different stakeholders all moving in their own directions according to their own desires for what happens next.  Publishers, retailers, distributors, media, and of course customers, but within that last group there are subgroups including casual gamers, hardcore gamers, collectors, roleplayers, grinders, cosplayers, indie creatives, backpack/garage dealers, and so on.  And what some of those stakeholders want conflicts directly at times with what others of those stakeholders want.

No, I am not suggesting that I have finally "solved it all" or have some godlike understanding of the hobby game industry that transcends all else; it's surely impossible to have that, and I still have to read, listen, learn, and iterate every day.  What I'm saying is that I reached a waypoint, if you will, a crossroads, at which several major plot threads at once all are resolving, and that has given me a clarity about some things that I have spent literally years in exhaustive trial and error on.

And at the risk of having several of you throw your drinks at your computer screens (or even more likely now, your smartphone screens), I can't spill the beans on most of what I concluded.  At least, not here in this blog article, and not in detail.  What I can tell you is that I am going to start making substantial changes in my business in Q1 2019 that I expect to have stick for a while.

Some tantalizing factoids that will surely stoke speculation:

★ The biggest growth channels for DSG in 2018 have been online sales channels, all of which posted substantial year-over-year gains.  TCGPlayer, Amazon, eBay, and the website.  We have been approached by Massdrop, Walmart.com, and Wish, and I'm assessing whether to spend attention and resources exploring those options.  Software integration is a major limiting factor.

★ The publisher responsible for the lion's share of DSG's revenue has just told the public that it is going to pay players $10 million to move to a digital platform.  While I don't think the sky is falling, I do think there will be short-term market consequences from this.

★ Our marketing game is peaking right now in measurable effectiveness through the Square Retail Loyalty program, and that has opened our eyes to some product lines that are working better than we thought, and some that are underperforming the health level we believed they were at.  Data analytics are really undervalued in this industry and one of the biggest unforced errors I have committed in six years in business was sticking with Light Speed Retail as a primary POS from 2012-2016 and then Crystal Commerce from 2016-2018 despite both being deficient for this purpose.

★ Creating or restoring value, separate from pure reselling, has been a windfall for DSG.  From disc resurfacing to system and controller refurbishing, these have been areas where we can field highly competitive prices while realizing comfortable margins, all within masterable processes with knowable logistics.  There is nothing like this in tabletop.

★ We preach the blue ocean of mainstream customers as the massive market to target that has the greatest potential to sustain our businesses.  However, there is still an opportunity to make money catering to the needs of enfranchised customers.  It comes down to how or whether the business structure is compatible with that.

★ It has never been a better time to be a tabletop gamer hosting game nights at home.  From luxury gamer tables to smartphone-integrated board games to helper apps for wargames to meetup webapps (including the granddaddy, Meetup itself) to high content quality at the top of the tidal wave of releases.  Back in 2012 when DSG first opened I wondered whether we'd be seeing basically "iPad game tables" within five years.  That's not how it played out, but a lot of the assumptions baked into that question ended up emerging anyway.

★ I have consistently underestimated the attraction of "treasure hunting," so to speak, as a thing that gets people to visit the brick-and-mortar storefront.  We spent 2018 doing a number of things that poke this nerve and the patient consistently responded.

★ There ain't no such thing as a free lunch.  We all knew this already, I'm just mentioning it again because it's highly relevant to a lot of what I am about to be doing.

Hopefully the foregoing will give everyone a sense of where my mind is at as I get ready for 2019 to be the year where business transitions align us to a much closer degree with the combination of our resources, our sourcing partners' offerings, and our clientele's revealed preferences.

Tuesday, December 11, 2018

DSG What If? Conclusion and Round-Up

For the past three weeks, I engaged in wild speculation about how business might have unfolded if some of the broader decisions had gone the other way.  I included a happily-ever-after version of the outcome and a not-so-great version, though in some respects the difference was minimal.

But in all seriousness, part of business and really part of succeeding in life is making careful decisions based on the best information you have at the time, and trusting that process and judgment even when the result is an adverse outcome.  Most -- not all, but most -- decisions made that way that turn out to be sub-optimal, can be overcome by due diligence.  Everything is fine.  Nothing is ruined.
It is not lost on me that out of six possible alternate outcomes, I posited that four of them would have me out of the industry, and two of them would leave me dead.  (And there is overlap.)  I don't actually see that as a morbid turn of mind, but more of an acknowledgment that life is short and before you know it, ten years have got behind you, so you have to play to win.

The exercise also gives me a chance to examine how the idea of exiting the industry registers in my state of mind right now.  The past year and a half, thanks to the tremendously difficult store move and its aftermath, have me in a mental state that's different than I've ever experienced before, and that's counting law school.  It's a weird combination of burnout, frustration, and pessimism, tempered with confidence in my systems and my people, and recognition that I can continue to lean on the asset base I've built and use the calendar to my long-term advantage.  In essence, I know I've got sufficient fuel and oil to reach any destination, but the interstate keeps throwing detours.

My mental state is definitely better now than during my grayest years in state government, which at one point had me dreading even waking up for work in the morning.  I worked with good people at the state, but the work itself was godawful.  Today, however much I need a vacation -- and I really do -- I don't dread going into the store at all.  I am eager, even excited at times, to see how I might advance the business today in particular.  Even the grindy dredge work accrues to a purpose.  It's night-and-day different than being a professional bureaucrat.

That's a healthy mental expression.  I am excited about some of the upcoming category moves I plan to make.  I am excited to present Hybrid Theory: Video Games at GAMA 2019 in Reno in March.  I am excited to experience the rest of the 2018 holiday shopping season, which kicked off, more or less, over the weekend.  I am excited at some of the structural refinements I'm lining up for the main storefront over the next 60 days or so.  I'm excited to see more of the store's debt burn away as we wind up the year.  I have some big moves on deck that I don't know yet if I will get to make, but I'm ready if the shot opens up.

I am not that excited, or confident, about where the tabletop industry is today, and I think the What If exercise really brought that into focus for me and helped me recognize how much of my pessimism is rooted in that side of my business.  It's not just a case of the grass being greener elsewhere.  There are always hazards in the video game, pop culture, and comics worlds.  For comics, those hazards were so substantial that I didn't believe DSG had a long-term value play compared to the focused stores, and I exited the category.  But all three of those businesses address a far larger mainstream audience than tabletop does, which is critical.  Tabletop is narrow.  In the end, to paraphrase from either Gary Ray or Paul Simer, I forget which: Being focused in the world of tabletop for your business is kind of like depending on the only person who knows where you live to keep bringing you food.

For the sake of context, here's everything that's happening in my major business categories, in relevant part where DSG is concerned:

Magic: the Gathering - Late last week Wizards as much as announced (for anyone who cares to follow the $10 million in money) that Magic Arena, the digital app version of MTG that's still in open beta, is the horse they are betting the entire company on all of a sudden for some reason.  Quick backpedaling assured all of us that paper Magic and Magic Online the Least Worst Option Available are both still going to be supported... for the next few hours, surely.  Paper Magic has weathered greater threats.  Don't know don't care where Magic Online is concerned.  Players are wondering out loud whether to dump their collections, but most seem to be hanging on.  This is smart as the possibility of the Arena move actually working would result in card values increasing in all channels.

Video Games - The Nintendo Switch and Classic Minis are no longer unobtainium at mass retail, and that's letting them mature nicely into a healthy used market.  The Playstation 4 is still winning this generation on exclusives, but the Xbox One X has been the best-selling system of 2018 and hosts the best version of anything multiplatform, much as the 360 did last go-round.  GameStop just reported a half-a-billion-dollar quarterly loss, mainly owing to a slowdown of their used software business and meaningless increases in every other category.  The digital sunset for new content is still a decade or more away, as players continue to like having guaranteed access to their games on a physical slab.  Right now only platforms that are exclusively digital, such as iOS, are irrelevant to my purview.

Comics - I do continue to follow the industry.  I don't think anything has changed since last month when I posted my wrap-up (link a few paragraphs above) but 2019 looks like another banner year for mass-market comic properties, so for the stores that have fully tied their fortunes to that wagon, I think you're gonna be okay at this time next year.

Pokemon TCG - Booster packs are still hot, but the rest of Pokemon TCG product has collapsed utterly.  Even singles mean little, because deckbuilding at the competitive level has stratified to a few solved strategies and the players who need cards for those either rip off kids, buy the singles outright, or enjoy an eBay full of booster boxes at a nickel over wholesale.  If it weren't for the good work being done by our league coordinator, Brian, at keeping things fun and inclusive, I'd cut bait.

Miniatures That Are Not Warhammer - It has never been a better time to refrain from carrying these.  There is so much Kickstarter trash out there these days, and so many games that are hype hot out of the gate and then never garner a following, that I'm not sure there's a margin you could promise me that would get me to buy into more of them.  In 2018 alone I sunk blood and treasure into Star Wars Legion, A Song of Ice and Fire, X-Wing v2.0, and Guild Ball.  The only one still sustaining activity, Guild Ball, is disastrously difficult to stock reliably.  I can't even lay the entire blame at the publisher's feet, as a major production run of theirs was destroyed by a typhoon on its way out of China.

Warhammer - This game is in a mixed place right now.  Age of Sigmar has a real following this year, which it didn't before.  Kill Team was a success this year, which it wasn't before.  Shadespire Knight Boat or whatever they keep renaming it, has proven reasonably popular and benefits a lot from being playable on smaller surfaces.  And 40K is 40K.  On the flip side, the back catalog may as well not exist, and a depressingly small number of kits being released these days actually provide much in the way of new models.  There continues to be the perpetual mercantile roadblock with Warhammer that once someone owns their army, they don't have to keep buying booster packs to add to it, usually.  I have been studying the Games Workshop company stores and learning useful things about their logistics.  At the start of this year, Warhammer wasn't working well for me, but depending on some of those moves I vagueblogged about above, there may be opportunity here in 2019.

Board Games - Obviously this one is the news of the season.  In 2016 there were 3600 board game titles released, an average of ten new ones every day (though actually clumped around the Essen, Gen Con, and Origins conventions).  In 2017, industry figures suggest we repeated that number.  I am reliably informed that as 2018 draws to a close, that number has jumped to a staggering five thousand new titles.  Over a dozen a day.  Folks, this transcends mere saturation and amounts to utter supersaturation.  There is no way board gamers, even devoted and fanatical "alphas," can ingest that much content.  And verily, finally, they are not.  The popping of the bubble is underway.  The best board game retailers I know are reporting a noticeable plateauing and regression this holiday season.  If a new board game doesn't sell meaningful numbers on release weekend, the prudent retail move is to dump it, unless you know for a fact it has enough money behind it to grow legs, however briefly, such as an Asmodee Group release.  Otherwise, it's never going to get going, it's already yesterday's news.  Or else it's Kickstarter trash and it was effectively dead before it ever shipped.  This is not a healthy place for a category to be.  It's nice that the few hits we are seeing are astoundingly good -- they have to be to move the needle now.  It's less nice that games that would have been the best thing on the racks in 2011 or 2014 are completely lost in the static today and we can't help but miss out on them.  (And I say that as a player, moreso than as a retailer.)

That brings us up to the present, and we're in what amounts to the matinĂ©e of the shopping season and we'll get into the bulk of it sometime next week.  This is the perfect time to have max selection from stores as most FLGSes are loaded for bear.  Unlike last year, this year DSG is ready, at least as ready as I reasonably expect to be, and I'm excited to see what happens.

Tuesday, December 4, 2018

DSG What If? Part 3: Never Partner

A third installment approaches!  The DSG What If hypothetical series continues as I examine what would have happened if I had gone into this business without the earlier business partners who have since left the company anyway, and how things might have played out.

My purpose here isn't to revisit dirty laundry, but our differences in business approaches.  Sometimes personalities can clash but business goes on anyway and perhaps even thrives due to the heightened tension; other times a personality mismatch is enough to sink even a glorious ship.

Part 3: Never Partner, or "What if DSG had never included the earlier business partners?"

I would not have started this thing solo, so I can dispose of that question up front.

I also won't spend any time on the earlier minor partners in this article because they were basically purely supportive of the business, and just wanted us to move forward prudently.  They each cashed out in their own time and for their own reasons.  I am grateful that I was able to work with each of them and  I am glad we had them in the fold during that tentative early time period.
The major partners who left DSG were Mike Girard and Patrick Hug.  And their business objectives could scarcely have been more different.  I had my own business prerogatives but also tried within my role to synthesize our operations with what they wanted.  As managing partner, after all, part of my job is political, building consensus.  This is not as much of a challenge anymore as the remaining partners are the ones who are almost entirely in sync on objectives.

Girard's vision for DSG was almost entirely that of a TCG store, and later a hybridization into comics.  He had some prior employment connections with publishers of deckbuilding games, and there was considerable overlap between those types of games and Magic players.  But beyond that, he was indifferent to the rest of tabletop, and indifferent to video games entirely.  Before you read that as purely critical, observe that I've discussed on this very blog that for all the best practice preaching of diversity, if we had committed to Magic and only Magic from the moment we imagined DSG, due to the way the industry played out, we probably would have been better off.  Board games are a category I loved that largely did not love me back until we got to Chandler, and still to this day are not the meat and potatoes of our revenue mix.

Hug's vision for DSG had broader take on tabletop, and a broader take on pop culture overall, and in fact I'm not even sure where his limit really is, because later on down the line he dove into art prints, cosplay workshops, and on and on.  You know I like me some perpendicular thinking but in the end I don't think we had the shared infrastructure to push into some of those areas.  What I mean is, to use a contrasting example, if we wanted to sell sports cards, a bunch of work is already done.  We already source through the biggest sports card distributor, and we already carry card supplies and storage merch.  Knowing the sports card market is a bridge much farther, but given some discretionary capital to seed things up, we could do it.  Until the day I liquidated the old art prints from DSG, I don't think we ever really had a professional presentation and solution for the product, nor were we anywhere near a sustainable volume.

Hug and Girard shared an affinity for convention booth vending, which I wanted nothing to do with, and of course I was more than happy to just leave that to them.  You would think our Comicon booth in 2013 would have been outta sight.  For reasons I can't even remember, neither of them ran it.  They had DC, our assistant manager at the time, run it.  From 2014 to 2016, Hug ran the booth, crossing over two years with the 2015 to 2017 that I had Dustin, my comic manager, available also to do so.  DSG no longer vends conventions or festivals, and won't do so in the future for as long as I am required to do anything to make it happen.

We held an Investor Dinner in March 2012.  A great assortment of our friends and loved ones showed up and listened to Girard and I pitch the business.  The two of us brought cash, materials, and open credit card balances, but that wasn't going to be enough.  We needed additional cash positions to be able to launch with some real momentum.  That was what we sought at the dinner.

(Cue the wormhole, approach in the runabout, don't cause any paradoxes!)

At the Investor Dinner, Patrick Hug listened with interest, but ultimately said, "Thanks, but no thanks."  Game store retail is a high-risk investment, and he figured that was risk he didn't need.  He never bought in.

We did enroll a few other cash-only investors, but with a substantially smaller resource base, DSG started in a suite around the corner from its original Gilbert location.  Same plaza, but 1500 square feet instead of 2400, and cheaper rent.  Not nearly as visible from the street.

Given the framework, Girard got a lot of what he wanted, for the simple reason that we didn't have the resources to do it any other way.  The vintage arcade never occurred, but the console game approach was reasonably easy to get underway, despite Girard's lack of interest in it.  By the time he became conversant with the pricing tools out there, though, it was just wheeling and dealing another thing for him, which he liked.

Security was rote; there was no product that customers could touch.  Everything was displayed behind the counter or under it, and the singles inventory started off in gem cases with the innovation we brought from our traveling survey of stores, and eventually moved to a fully electronic filing.  It was trivially easy to run the store with a single staff member on most days.

A small space with room for about 50 tournament players... sound familiar?  In fact, that suite happened to have a second restroom in it, so our fire capacity was higher, more than we could physically seat.  We made Advanced in a weekend, same as with the store's original opening, and when Advanced Plus came around, we already qualified.  And this was during the years when it really meant something in terms of product access.  Magic, Pokemon, and even Yugioh tournaments happened on the regular.  I'm not a fan of the latter, but handling those players was Girard's problem.

Initially, the store was not open Sundays, in recognition of the preferences of the Latter-Day Saint community of Gilbert.  Back in the original timeline, we ended that in year two as business demanded all seven days.  But in this timeline?  Sundays just weren't important.  And with the crucial dark day and the small footprint, we were able to keep payroll costs at a bare minimum for years without burning out ownership.  Year in and year out, there isn't that much Magic business that a store can get on Sundays that it can't get on other days, prerelease weekends excepted.

With Magic as the primary focus and no board game boutique aspirations, we never signed on with Light Speed Retail, instead starting with Crystal Commerce and staying with it.  It would be four years before Red October of 2016, and though it's hard to imagine now, up until then the system mostly worked pretty well.  With TCGPlayer, Amazon, and eBay integration functioning about the way they were supposed to, the singles business dependably brought in money.  There was a lot of moving sand from one pile to another, and Girard had his hands full with semi-reliable part-timers sorting and grading, but it got done well enough to make rent, and a little better than that.

We added comics in late 2013, just like in the main timeline.  For lack of any other sources of comics in the area, it paid for itself well enough, and used up a bunch of wall opposite the counter nearer the front entryway.  Girard pressed to have comics replace video games because it was something that interested him more.  By this time I was showing up one or two days a week to do the admin, and barely working on any other projects, so I didn't put up much of a fight.

Unfortunately, that was the exception and not the norm.  Just like in the real timeline, there are differences of approach and philosophy and business purpose that cause conflicts.  Mike Girard is good with people and has a proven willingness to grind long hours when necessary.  That goes a long way.  However, he has near-zero tolerance for administration and finance.  There was perpetually a doubt in his mind every time I reported on some cost we encountered, especially if he was sure we could duck that cost for a while and never pay it.  Any time I took a hard line on some regulatory matter, he brushed it off.  It went on that way.  He preferred to ask forgiveness, whereas I insisted upon asking permission.  I began to worry that my investment could be lost by means of enforcement from some entity.  But I also knew Girard didn't have the scratch to buy me out.

When I said Girard was good with people, I perhaps understated the matter.  He was really good with people.  Girard reached into his long history of game design friends and contacts with the likes of Decipher, Upper Deck, and Cryptozoic, and before I knew it he had a cash offer from some inbound investors to buy my stake in DSG and divide it amongst themselves, as well as the stakes of a few of our silent partners who had only bought in to support my side of the business.  I would have to paper the deal and make one final filing for the existing LLC, and they'd replace it with their own LLC and I could walk away.  They offered me $70k, which I knew was less than the value of my DSG equity.  We had Alpha power in the safe worth a chunk of that number by themselves.  But I also knew this represented a substantial "profit" on my initial investment, and I had been paid my part-time modicum for working up to that point.  It was a clear +EV exit.

I took the money, conveyed my share, and that was the end of my ownership of DSG.  I had been bought out.

I didn't have the same itch for the tabletop business after that, but I did enjoy me some video game collecting, for good and sure.  After killing off a bunch of debt and leaving state employment for unrelated reasons, I decided it was time to try something I could hang my hat on.  I opened my own 1200-square-foot video game store in a suite only a few doors down from DSG.  With no product crossover, both business enjoyed the overlap of customer traffic.

I brought in some vintage arcade games for flavor and a local coin-op collector named Mike found my video game store and liked what he saw so much that he bought into my company.

The DSG lease ended in August 2017, and they left.  Girard said they had found a place in Tempe on Apache Boulevard that was more than double the space for almost the same rent.  I wished them well and saw them on their way, but I wasn't going anywhere, with three years still left of my lease in Gilbert... and various lengths remaining on my leases in Ahwatukee, south Chandler, north Mesa, and Queen Creek.

After DSG departed I let a local player named Mike Griffin talk me into adding Magic to our product offerings.  Just as an experiment, of course.  Griffin offered to bankroll the Magic stock as his buy-in as a business partner, and so it was done.

(♫ Let's do the ♫ time warp ♫ again! )

After the Investor Dinner, we met as principals and were stunned to learn that one of our founders was already jumping ship.  "This isn't what I wanted," Girard said, addressing me and Hug.  "You two aren't talking about a focus on cards.  You're not talking about a focus on the secondary market.  You've got this vision of a high-end board game lounge, and I don't think it's going to happen."  Thus, Mike Girard withdrew from the DSG formation and Patrick Hug stayed the course.

Of course, the big difference in this timeline is that we didn't have an owner to run the store.  The early days ran as a patchwork of owners and hired staff.  For lack of anyone other than me knowing the slightest thing about video games, and me being present only intermittently, the category never sustained.  Without emerging as competitors with a Magic focus in the area, we never had the traction to fend off Manawerx East in Tempe.  Nope, if DSG was going to succeed, it was going to be as a board game lounge, sticking with the original plan and putting all our focus behind it.

Well, Girard was right, it didn't work, and we closed the store in February 2015, executing the kick-out clause in our lease.  And that was that.  The investment ended in loss.