Sunday, March 8, 2009

Kobayashi Maru


I think game stores are in the scenario known to Star Trek geeks as Kobayashi Maru. In this scenario, you're given options, none of which lead to success, as a means to test the character of the individual. You will fail, but it gives everyone a glimpse of your thought processes (how I feel about this blog sometimes!).

Game store owners find themselves with an ever decreasing margin, exemplified this week by Wizard of the Coast's decision to reduce the margin of Magic by 1%, in the name of marketing. This little tidbit was at the bottom of an email that mostly talked about how restrictions for selling Magic online were being loosened. Margins are usually reduced, as they were in this case, in the name of additional marketing budgets. It's for our own good. However, the programs eventually fade and the margin remains low, the original intent long forgotten. Margins have been reduced significantly over the last few years. It's the weaselly way manufacturers raise prices, without offending customers; they just offend retailers. I've found that for us, margins have gone down an average of 1% overall each year we've been in business, once I make adjustments. Meanwhile, other costs rise at around 3-4% a year adding to the burden.

"I don't believe in the no-win scenario."
James T. Kirk

So how do you win at Kobyashi Maru? How do you beat the system designed to test your reactions as you fail? You change the programming, as Kirk revealed in Wrath of Khan. There's two ways to do this, either cut your expenses or boost your sales. Cutting expenses is very hard. You've got a bunch of fixed costs like rent, and the variable costs are hard to modify. Will you cut your store hours? Will you adjust the thermostat? Can you reduce your garbage bill or credit card processing fees? These are drops in the bucket compared to fixed costs like margin on product. That's unsatisfactory, as Spock might say.

Better is to increase sales. Duh. Everyone wants to do that, but that's a slow slog unless you turn to the black arts (the Internet). Almost all successful stores sell online or at least dabble with eBay liquidations. There are limits to this, however, and the margin on online sales is often half that of in-store sales, when you make any money at all. I learned I can sell about $6,000 on eBay in a given month, which sounds like a lot until you realized the margin is razor thin and you don't have enough supply to continue. Where do you go? How can you short circuit the programming so you can win? You attack margin.

Increasing margin means you need a supplier that will give you better costs. The obvious thing to do is buy from the cheapest supplier, but even better is to expand the store into used product. Used hobby games is definitely a good way to boost overall store margin, provided it's done efficiently. You generally sell used product for 3-4 times what you paid for it, as opposed to twice your costs from distributors. In exchange, you accept it may sit there for a long time, and you'll eventually have used game "sludge" that will need to be discarded. The store owner is doing the work of finding the buyer for the game, and thus the margin is bigger. Bigger risks, bigger rewards. Still, used product is only about 3% of our sales, and we work hard at obtaining a good supply of the stuff. Even so, it's a small boost at best.

Some stores go a step further with what they call "the entertainment model." We dabbled with this a bit. You buy and sell used entertainment products, like video games, CD's, DVD's, etc., dealing more with the general public than hobbyists. Some see this is a revolutionary way of making money, while I see it as changing my business model to Sanford & Sons. It's a very profitable model in areas of the country where it works, but it's the way towards madness. It's crashing the Enterprise into the Klingon battle cruisers. Game stores usually cease to be game stores both in focus and in the minds of customers. It's great if you love selling games but would be equally happy selling womens' shoes, but if you're in this for the love of the hobby, it's a pyrrhic victory. Yeah, I'm the king of the junk heap!

The final option is to cut out focus on all comoditized games. For example, many game stores have stopped focusing on collectible card games. Sure, they'll sell them, but the game space is for the miniature players or board game players, because that's where their margin is strongest. Ceding CCG's is a good choice if you've got a lot of local competition, but it means taking the reigns as the leader in your replacement games. We make money on Magic and we have a huge turnout for FNM, but if I suddenly found a large crowd of miniature gamers who wanted to run similar events, I would be a fool not to give them the slot. Magic margins are always low.

More than likely, a successful store will try a variety of these strategies to see what works best. They may even diversify into other product lines that are less comoditized, although I can't recommend the dismal toy industry as an option. The idea of a game store that just sells stuff has been dead for years, as is the card shop model. The only question I have is what the future will look like as game store owners try to beat the system that is currently evolved into a failed model.

12 comments:

  1. Gary, I had an epiphany as I was thinking about this blogpost.

    Marcus' store isn't an entertainment store, it's a pawn shop, pure and simple.

    One thing you didn't mention was trying to really intensely leverage your game space to generate much larger sales.

    Example:
    I bet your game space is little utilized during the daytime hours, from when you open until around 3pm, right? Why not reach out to a game club for a game that appeals a lot to seniors. I'm thinking Bridge; Chess; or Checkers. Bring them in. They may not spend much in store on a regular basis; but come Christmas time, where are they going to come to get something "cool" for their little grandchildren?

    Another idea - try to connect with a homeschooling network, and have an educational games day, with in-store play. I know one thing homeschool families have trouble with is getting their kids to have a social circle, that for kids who go to school have it automatically. Not all homeschoolers are going to be psyched about D&D or MAgic, but many will have no problem with it.

    Finally, one step that I don't hear stores doing is going 100% entertainment model, ala ChuckE Cheese, with a restaurant and lots of game events and stuff going on, with a very large game space, and a much smaller retail space. I've posted an idea like it on the GIN. Most retailers weren't prepared to take on the Restaraunt side of things. Fair enough. But it can be very lucrative...

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  2. Good ideas about better game center utilization. The hard part is always connecting with those people.

    The longer I do this the more I think the answer is to be intensely focused on the One Thing, being the best game store possible, whatever that means based on local conditions. Diversification just makes you piss poor at the two or more things you do. That was the common wisdom when I started this, and I'm just now realizing it after trial and error.

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  3. Is there any serious competition to Magic or other WoTC Card games? I realize I am speaking from complete ignorance of the gaming industry as a whole but I know quite a bit about business. And my thought is if you cannot afford to ride a market, you need to try and drive a new one. The Living Card Game’s seem to be attacking MTG at its weakest point, cost. I know that there is some debate about the LCG philosophy, and whether it really is designed to be cheaper but on the face of it, it seems to stand up to scrutiny. Trying to move more into that market and target the MTG players to try something new might be a strategy worth considering. You seem to have plenty of MTG players in the store, and you have spoken before about sales being somewhat mute due to the competitive prices offered online. Perhaps jumping on the marketing strategy of the LCG’s is worth a try, maybe a loss leading introductory price on the starter packs, regular tournaments in the gaming space, a commitment to supply the new decks on release day. You might not have control over the product margins but from I have seen you do have a captive audience to leverage who might just be susceptible to the right marketing strategy. Maybe one of the LCG makers will loan you a cool POS position and perhaps a discount if you outline a marketing drive to the MTG players?
    Just some random thoughts – but there might be something in it.

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  4. The short answer is no.

    Magic dominates hugely. It's the Coke of the CCG world. Everyone else eats the crumbs they drop. The margin is admittedly weak (35% last year), and getting weaker, but it's made up in volume. That I don't have to work much at it and our local judges are fantastic, is a huge benefit, thanks partly to WOTC.

    The LCG model is great for players, and we do alright with it in store, but it's rather insignificant as a revenue stream. A hardcore Game of Thrones player may buy 4 of each of the two $10 packs that come out each month. That's $80 in sales for us at a good margin (48%). That's great for them, but it's not even a box of Magic.

    Our Magic crowd is twice as large as our Game of Thrones crowd, but sales for Magic are 30 times higher. I think that's why the LCG model isn't exactly sweeping the industry. Even a mediocre CCG is likely going to be more profitable for the publisher. Anyway, LCGs are great second games, but I would have much sadness if I lost a regular Magic player to a LCG.

    As for commitments to LCGs, there are two I know of: Game of Thrones (vibrant in our store) and Call of Cthulhu, which has little interest. We hold weekly events for GoT, stock new releases on release day (we stock nearly everything the day of release), and we generally support the game, with our events coordinator and our manager as big time players.

    I think LCG's are where most card games should be, or else as a stand alone card game with occasional expansions, like Munchkin. I would be vastly happier if our "marginal" CCGs had this model: YGO, Pokemon, Bleach, WoW, Naruto, etc. One of my major beefs with the marginal games is the old sets are instantly obsolete the moment a new one arrives. There is a lot of loss in dead product. Compare that to LCGs where I can safely stock every expansion produced. It's great for everyone.

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  5. Here's where I have to plug my favorite CCG, Vampire the Eternal Struggle. Only 11 banned cards in all the sets that have been produced since 1994, all other sets are legal and playable (well, the original Jyhad set has a different back than the rest, but that is easily solved by using opaque sleeves).

    That said, some expansions are not as popular as others due to certain cards found therein. And since almost no store carries the cards, 95%+ of the player base is used to buying the cards online at around $65 per box (retail is 107.64).

    But if you can develop a player base, your tournaments will be hosting a crowd that tends to be older, and have more discretionary spending money (well, in these times, that's hard to find at any income level...).

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  6. Now that's a player group we want to attract - a bunch of people who are already trained to buy their cards online at near wholesale prices.

    I see so much potential profit from giving up the gaming space to them for one night a week! (sarcasm)

    Also, V:tes is NOT an LCG (at least as far as I can tell by looking at the White Wolf site).
    LCGs are characterized by having a base set, and then fixed chapter packs that come out at regular times. Distribution is not random, and there are no "booster" packs.
    The Living Card Game format is designed to avoid chase cards and having to buy boxes of cards to try to collect a complete set or playset of cards.
    I think you are confusing LCG with "Not yet discontinued, and surviving on minimal/suboptimal support from the manufacturer".

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  7. Actually Joe, what I was saying was in response to Gary mentioning that most CCG's tend to obselesce their product on purpose (YGO, PK, Bleach, etc); while VTES bends over backwards to keep all of their existing cards playable - much like an LCG does.

    All of your CCG players are used to buying online. If you are going to host CCG events, that's reality.

    That said, the VTES players tend to be more in the demographic you are looking for (ie more mature, less likely to steal from you, etc etc); and will also tend to understand that you are a business, and will buy some packs from you. At least that's how VTES in my store worked. (Caveat: it's the only game I play regularly, and I knew all the players, so perhaps that influenced their purchasing decisions.) Having played at Eudomonia however, I'm pretty sure Bay Area folks will spend money in the store on product if you have it.

    Perhaps one night a week isn't a good idea, but host tournaments every 3 months or so. VTES tournaments typically were some of my best regular days. Of course you need a group. AFAIK, most of the Bay Area VTES players are further south, either in SF or the South Bay. I do know one in Vallejo, but he's rarely plays in Real Life.

    Finally, White Wolf gives pretty good support to VTES, they continue to produce tournament kits, have special events etc etc.

    I'm not sure why your attitude is what it is Joe - I know Gary has never carried VTES in the store, so are you speaking from personal experience from working at another store?

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  8. Librarian,

    my response is not based on the game itself. It is based on the fact that people who are used to buying product online at little over cost are reluctant to pay full retail for the same product - in store play or no in store play. This is especially true of a game where the in-store play adds little to the play experience (unlike miniatures gamers, most adult CCG players have a suitable table at home). Yes, they may buy a pack or two every once in a while, but will they be buying boxes of new releases at the store, or online?
    If such a player group approached the store, we might give it a shot, but I don't see it as a group the store would really set out to court. BDG has given play space to several smaller CCGs, including Warlord, AGoT, and others. In most cases, the players were too, in Gary's words "mercenary", to make it worthwhile for the store.

    As to the policy of keeping cards playable forever, this is not what Living Card Game means. It is more of (if you'll pardon the pun) and "undead" card game.

    It is also not necessarily good for business since it means that players can simply use their ten year old cards to play, and never need to purchase any new product.
    If the group does attract new players, why wouldn't they encourage the new players to buy the bulk of their cards online, rather than pay retail for them?
    Also, how many different card sets would the store have to carry to make this work?

    The goal of the store isn't just to have people playing great games in the store and having fun, the goal is to sell enough product that Gary can pay rent, utilities, product reorder costs, salaries, taxes, insurance, etc. and still have a little bit leftover for expansion/profit.

    Now, if you're bringing that group in at an otherwise dead time, say noon to 3pm on a Tuesday, profitability is not such an issue - especially if they buy other products (like your Bridge club example). If this group ended up tripling WW RPG sales, and was coming in at a dead time in the schedule, it would probably be worthwhile. If we displaced another group to make space for them, they would have to generate more profit than the other group.

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  9. Librarian,

    my response is not based on the game itself. It is based on the fact that people who are used to buying product online at little over cost are reluctant to pay full retail for the same product - in store play or no in store play. This is especially true of a game where the in-store play adds little to the play experience (unlike miniatures gamers, most adult CCG players have a suitable table at home). Yes, they may buy a pack or two every once in a while, but will they be buying boxes of new releases at the store, or online?
    If such a player group approached the store, we might give it a shot, but I don't see it as a group the store would really set out to court. BDG has given play space to several smaller CCGs, including Warlord, AGoT, and others. In most cases, the players were too, in Gary's words "mercenary", to make it worthwhile for the store.

    As to the policy of keeping cards playable forever, this is not what Living Card Game means. It is more of (if you'll pardon the pun) and "undead" card game.

    It is also not necessarily good for business since it means that players can simply use their ten year old cards to play, and never need to purchase any new product.
    If the group does attract new players, why wouldn't they encourage the new players to buy the bulk of their cards online, rather than pay retail for them?
    Also, how many different card sets would the store have to carry to make this work?

    The goal of the store isn't just to have people playing great games in the store and having fun, the goal is to sell enough product that Gary can pay rent, utilities, product reorder costs, salaries, taxes, insurance, etc. and still have a little bit leftover for expansion/profit.

    Now, if you're bringing that group in at an otherwise dead time, say noon to 3pm on a Tuesday, profitability is not such an issue - especially if they buy other products (like your Bridge club example). If this group ended up tripling WW RPG sales, and was coming in at a dead time in the schedule, it would probably be worthwhile. If we displaced another group to make space for them, they would have to generate more profit than the other group.

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  10. Joe -

    Fair enough.

    Have you guys done analysis on how other product lines do when certain events are being played? That was something I never got around to doing, beyond gross sales numbers. I mean I knew it by "gut feel", but not by actually crunching the numbers...

    Do your Magic players buy boxes at full retail? I assume not...

    VTES is actually around $73 including shipping, so you could conceivably sell it for $79 a box.

    But whatever, I know it's a "dead" game, and I understand what you are saying about minis compared to CCG's.

    And a store with cool terrain can add considerable value to the minis game experience, which is tougher to do with CCG's.

    Honestly, I think trying to support CCG's in store is tough, unless you can do draft all the time, *and* the player base is geared towards draft, like they are in Magic.

    Which I guess is the point you have been trying to make.

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  11. We sell boxes of Magic for $99.99. Full retail is $145 or so, but you'll very rarely sell a box at this price. We came to that price through trial and error, spending a couple years rarely selling a box at full price, followed by selling a few boxes at $109.99 and then selling a LOT of boxes at $99.99. Discounting is bad, but if you can't sell the product at full retail, then it will have to be volume sales.

    As I've mentioned before, we sell Magic packs at $3.99/pack and there's a definite disconnect between pack buyers and box buyers. Many pack buyers wouldn't buy a box of Magic at $50, because they've never had $50 all in one place at one time. That we discount a box at $99 is apples and oranges to most.

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  12. As for tracking sales of other things while different games are in session, that's pretty hard. We know it happens, either from customers playing or from the general excitement vibe that entices other customers. The difference between a Saturday with an event compared to without an event can be as much as 20% in misc. sales. Again, it's hard to give a direct correlation.

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