Discounting, Disintermediation, and the Death of the Professional Card Shop

 

This week I counted four 100+ comment threads in game retail Facebook groups about Magic booster discounting, and I’m not even in most of those groups.

The new Magic set, Aether Revolt, is not selling terribly well. This, on the heels of a winter weather event that caused shipping delays and business slowdowns during what for many is a critical post-holiday cash crunch, means that many sellers large and small are dumping quantities of Magic product onto the marketplace at pennies above wholesale cost. For some retailers it is currently as cheap to buy Kaladesh boxes from StarCityGames as through distribution.

This is an acute moment in what many retailers believe to be the industry’s chronic condition. Many stores, including stores much larger and better than mine, have seen Magic sealed product sales drop to near-zero levels. We’re fortunate to be a diversified store, but the bulk of game stores are actually card shops, and a dip in Magic frequently results in a wave of store closings. When customers can buy their product online for near-wholesale prices, store owners who never made much money may run out of cash altogether, and store owners with more profitable businesses may find that there are better uses of their time.

Leaving aside for the moment that you can always count on intermediaries to be firmly against disintermediation, the evaporation of the middleman in this particular industry matters more than most, since it’s at the middleman’s tables that Magic: The Gathering is played. If you can’t find someone with whom to play, you may soon give up your Magic habit. If there’s no shop to centralize that activity, it’ll be easier for you to play Hearthstone instead.

That’s the conventional wisdom among retailers: “Discounting will lead to the death of Magic!”

I think they’re wrong.

The barriers to entry in the card-shop business are essentially zero: You can get in with a thousand square feet of questionably-zoned space, some tables and chairs from Sams Club, and $1,500 for some stuff to sell. Since Magic product has a turn-rate that is fantastic, this non-business-plan sort of works out in the same way that IKEA furniture is a good deal when you don’t value your time or the result’s durability.

This compounds that online discounting problem by adding to the mix inexperienced business owners who, very recently having been mere consumers, know of only one way to grow their business: discounting. “I’m buying customers,” they say, as they sell unprofitable product to attract players to unprofitable events, or maybe the other way around.

So they chug along, working six days a week, until the end is brought on by the ballooning lease they signed without the help of an attorney, or the need to buy groceries, or the end of their spouse’s patience with their lack of progress. They close their store or sell it at an escape-with-your-life price to some other fool (this is how I bought my store) and then, presumably, they go join a local co-op and start teaching workshops about running a startup.

When the hamster dies, another is waiting to defer its student loans and take the wheel.

And when a card shop fails, like a fairy getting its wings, another poor dumb bastard gets a commercial lease, and commences throwing the best years of their life down an unprofitable well without so much as an index-card business plan. Hakuna matata, it’s the circle of mediocrity, and it moves us all through despair and hope. There’s always a place to play Magic, because there’s always someone willing to sign a two or three year lease to run a clubhouse that keeps the lights on without much left over. Last I checked we are making underemployed twenty-somethings at a pretty steady pace, so I don’t see the cannon fodder drying up any time soon.

Wizards of the Coast will of course insist that they want clean, professionally-run stores, but the resources dedicated to that are mostly a team of web developers and maybe one or two sacrificial lambs that herd cats in the WPN Retailer Facebook group. Wizards doesn’t appear to be doing anything about the race to the bottom resulting in a cycle of mediocre, unprofitable clubhouses because to Wizards, it’s not really a problem. If you accept that their responsibility is to create shareholder value, it shouldn’t be: If you had a nearly-unlimited supply of free labor facilitating the movement of your product out of your warehouses, would you really care if your free labor is making 5% or 40% margin? Would your shareholders allow you to care?

This is all very cynical, perhaps more cynical than I intended it to be. Magic is about a quarter of my business and I don’t see it going away entirely anytime soon. I do anticipate my peer group getting smaller over the course of the next year. Magic is so very sweet when times are good, but running a dedicated card shop is like depending on the only person who knows where you live to keep bringing you food. My hope is that some who will remain will diversify soon and build a cash buffer so that they can survive and thrive and, just maybe, provide a play space for Magic players that doesn’t have big holes in the floor.

The January Slump Grumps (Take a Knee, Drink Some Water)

I paid $10 for this stock photo and I feel like it’s a sign that I’m finally growing up.

I’m not a psychologist. In college I bought a Psychology for Dummies book, read it in a day, barely passed the CLEP exam to fulfill the requirement, and promptly forgot everything. Even though I don’t have any formal training in helping people with their feelings, I am a person who has feelings at least once or twice a month.

Something I noticed this week as I dealt with the aftermath of my aborted expansion came courtesy of Facebook, which has started helpfully showing me posts from my account on the same day in previous years. The thing I noticed is that I’ve been a genuine bummer this time of year ever since I purchased my business. I’m frequently angry, scared, or sick in January, in contrast to December and February when sales are rocking due to Christmas or Tax Refund Season and I’m king of the world.

As I investigated further, I found that this wasn’t limited to my posts. As I looked through January posts from the half-dozen Facebook industry groups that I’m in, I found that people were being awful to each other, in contrast, again, to their nominally-civil behavior at other times.

This is a hard time of year. You’re probably seeing what feels like a dramatic slowdown in sales as Christmas wraps up and the Grandma Money that was given to your customers runs out. Our sales are never bad in January, but with the payroll and credit terms coming due from the comparatively-bonkers holiday season, it can feel like a pinch. This is in addition to all of the the things that non-retailers go through this time of year, like family stress, Seasonal Affective Disorder, disruption of diet and activity routines, and the post-holiday-shopping financial crunch.

Once again I’ll stress that I’m not a professional brain-helping person, but here are some things that are helping me:

Make a list of the the things that are making you sad.

This week I was struggling with the feeling that my business was in a spiral. Everything was a giant hassle, every product line was doomed, it was all a lot of trouble, and I didn’t want to do it anymore. I found myself in the shower leaning my forehead against the wall when I decided to make my list. I hope you won’t be weirded out if I share it.

  1. The disappointment of cancelling my expansion plans.
  2. Stress related to the Magic Prerelease and all of the problems caused by too-limited allocation and flawed technology.
  3. Stress related to what is probably a vent hood problem at one of my neighbors, which has caused my store to intermittently smell like farts through no fault of anyone inside.
  4. Unusually-intense pain related to an injury sustained in my previous career.

Once I made the list, I realized that my brain was lying to itself about the overall state of my business and my life. Nothing is perfect, but these problems are far from insurmountable. The last three were probably exacerbated by my feelings about the first. I made the decision that it was okay to be bummed about curtailing my expansion, as long as those feelings were honest, specific, and not outside the scope of the decision’s actual consequences. For instance, it’s okay to be sad about the fixtures I bought that will not be used. It’s not okay to feel like I’m a failure and that giving up was a show of weakness.

Make a list of opportunities and the things that are going right.

I can give you a few of those right now, too!

  1. We had a steady 2016, and process improvements meant that it was our most profitable year ever.
  2. My staff is wonderful. We have no problem children, and my managers are growing into the professionals that every store owner wants.
  3. Cancelling the expansion means that I suddenly have extra cash, which is allowing me to correct some of the tightfisted budget behavior that has held us back in areas.
  4. We have lots of inventory, which means that our profits in Tax Refund Season should be obscene.
  5. My store looks flippin’ awesome, my technology is all humming along correctly, and we have a more-professional presence than ever.
  6. The GAMA Trade Show is only a couple of months away. I get to see some really great friends. I have so many opportunities to help and be helped! They’re letting me present about video games!

Step away from social media, or at least try to understand the stress that your peers are under.

I have turned off Facebook notifications on my phone. I’m going to limit my Facebook time to intentional daily time spent using it, rather than grazing throughout the day. I have sent notes of apology to several of the peers with whom I’ve been snarky this week, even if they totally had it coming. I’m going to make an effort to be positive, uplifting, and helpful for the remainder of this month when talking to others in my industry. Edify, stupid!

Engage in therapy through generosity.

If you’ve been under the gun, your staff have been feeling it, too. This is a great time to spread around modest bonuses if you can afford it. If you can’t justify something in the paycheck, then consider a little extra store credit or a pizza. If you’ve got staff that have knocked it out of the park this holiday season, it is not an insignificant gesture to write them a note telling them how much their work means to you and your business.

Reconnect with the things that you love about your business.

This week I’m going to intentionally make some time for process improvement, repairing some game equipment, and making quality-of-life changes to our point of sale system that our employees have been requesting. Your list probably looks nothing like mine since I do my best work for the store while away from the store, but the important thing is to attempt to put yourself into the situations in which you do your best work for the improvement of your business.

“There’s no ‘should’ or ‘should not’ when it comes to having feelings. They’re part of who we are and their origins are beyond our control. When we can believe that, we may find it easier to make constructive choices about what to do with those feelings.” -Fred Rogers, The World According to Mister Rogers: Important Things to Remember

Scared Money Makes Plenty of Money

Nope!

About a year ago, in early 2016, I made a short-notice someone-is-closing-their-store trip about two and a half hours away. These trips happen often enough that I keep a bag packed for them, but they’re rarely successful. Usually by the time an owner has decided to bail, they’ve already gone through a series of clearance sales that cause whatever is left to be garbage. This trip was different: The store was fully stocked and hopping. The owner was behind the counter and drunk.

I asked him for his story and found out that he was being forced to liquidate the store because of his pending divorce. When I asked him for his sales records and an asking price for all of the assets of the business, he produced them, and I liked what I saw. He and I were standing outside while I looked over his numbers, when a passing bird pooped on the paper and my hand. I probably should have taken this as an omen, immediately wished him good luck, and departed.

I asked him on the spot if he would lock the door and sign an asset purchase agreement with me as soon as my attorney could send one over. He said yes, excused himself to the bathroom for twenty minutes, then came back and said maybe.

Things kind of went downhill from there, with three increasingly-desperate trips to see him over the next five days. The final trip involved showing up unannounced with $20,000 in a bag. I finally got a handshake agreement to sell me everything in the store if I could get it all out the next day. I rushed over to a storage unit place five minutes after it closed, plunked $100 down, and got a phone call on my way out of the parking lot: The game store owner couldn’t sell me the stuff because there was a bank lien on it. Of course I’d asked him about this three days prior, but he didn’t think I was talking about THAT kind of bank lien. Yeah, it was that kind of a negotiation.

I was bummed that I hadn’t been able to execute my plan of signing the agreement, locking the door, and reopening the store six weeks later under my own brand. Still, I had seen his numbers, and I had spent some time researching the town. The town was seriously under-served. I kicked myself for not having the resources to immediately act, but gave myself a plan to open a store there in May 2017.

In 2016 I gathered a substantial amount of cash. I hired an additional manager, freeing up one of my existing managers to move to the new town and co-manage the store with me while we built a staff. Hastings’ timely death was the perfect opportunity to get the type of fixtures we use, so I chased Hastings stores all over the state. I put 4,000 miles on my truck in one month. As 2016 drew to a close I poured a few dozen hours into working multi-location awareness into my point of sale software.

I made half a dozen scouting trips with my wife and each of my managers, and we picked some likely locations. Christmas was maybe not quite as profitable as I’d hoped, but we seemed to still be in the safe zone for making the expansion happen. If I wanted everything on track to build out and open a location, I needed to have a signed lease by the end of January at the latest. This week I scheduled meetings with five different commercial real estate agents and left for a three-day trip to make my decision about the location. Yesterday I arrived in town, met with my first agent in the most promising spot, and nailed down enough details that all that remained was putting our lawyers in touch.

It was scary in the way that buying a house or a new car is scary, and I told my wife that all I really wanted to do was get back to my Airbnb condo and punch numbers into spreadsheets to assure myself that it would be okay. I’ve done this about a dozen times in my life when I or my wife lost a job, or had an air conditioner break, or had our insurance premiums triple (cough). Putting the numbers on paper and planning out my cash flow almost always makes me feel better about a major decision. This time it didn’t.

I looked at the number in my spreadsheet representing my startup costs for the new store, plus two months of rent and lights. I looked at my cash flow estimates, subtracted out our typical operating cash buffer for my original store, and compared the numbers. They were nearly equal. I could do it safely, maybe? (If you have to qualify something as “maybe safe” then it’s not safe.) If everything went swimmingly, we didn’t have any unexpected setbacks, we didn’t miss any expenses in our planning, and if the store performed reasonably well right out of the gate, then we could make it through the labor and delivery.

If anything went wrong, I’d be out of cash. I always held in the back of my head that I was willing to borrow a reasonable amount of money if we ran into a cash crunch. If things went a little more than slightly wrong, I might not realize how much trouble I was in until the debt was sufficient to harm my net income in a long-term way. I asked myself how much cash it would take to make these fears go away, and the answer was in the low six figures. I wasn’t going to go deeply into debt for a business model that could expire five to fifteen years from now. It was at that moment I realized that this expansion wasn’t worthwhile at the price that it would cost to do correctly and safely.

In the space of about two hours, I went from normal nervousness, to deep anxiety, to a certainty that it was the wrong move if I wanted to be sure of the future of my first store. I called my wife to let her know what I’d decided, then called the manager who was planning to move to let him know. I sent out emails to cancel my remaining appointments, had an adult beverage, watched an episode of Archer, slept five hours, and came home.

Rationally, I knew that there would come a go/no-go moment and I would have to make a decision. I know that I have too many people counting on me to go with a reckless plan when prudence tells me that it’s a close shave. Our culture values hard-chargers and risk-takers highly, but I value this business and the jobs it provides more highly. Emotionally, it’s a mixed bag. I can relax the tightfisted finances I’ve operated over the last nine months. I can make plans that don’t involve working myself half to death. Still, my gut calls softly to my intellect: Coward.

Whatever. My gut has crap for brains. I’m going to write some bonus checks and then take a week off.

Variable Trade Value (Fair Payouts, Great Stuff)

This is a super-crunchy, kinda mathy post, but if you hang in there, you might find yourself making a lot more money running a much better business.

When I started this post I wasn’t really sure who it was for. Really it’s most useful to those who are developing point-of-sale solutions for game stores, but there’s not many of those people, and most of my current readers are game store owners. I suppose that this is still useful to them as both an introduction to what I think is an important concept, and an idea of a feature in their Point of Sale solution that they didn’t know they were missing. Customers of POS vendors: You need to be asking for this.

I’m going to talk about the problem in terms of video games for the most part, because that’s where it started for me and it’s where I think examples will be the most relatable. I’ve now come to see that this is every bit as essential if you’re dealing in Magic: The Gathering singles.

The Problem: Feasts of garbage and famines of quality

When I first started out, I paid a flat 50% cash on all games. My point of sale system didn’t have an elegant store credit solution, and I knew that I couldn’t kludge one together out of index cards or spreadsheets, so we just paid cash for everything. As time went on, I realized that I was getting far too many of some categories (Playstation 2) and far too few of others (Xbox 360, which was still current-gen at the time). I changed our price update routine so that some systems had different payouts. For example, I paid 25% for a long time on NES games.

This was still bad. For NES, I was paying over a buck for Captain Skyhawk and Silent Service, which are two garbage bulk games that few people actually want. Meanwhile, I was making trade-in customers of games like Final Fantasy and Kirby’s Adventure very, very angry. I had a LOT of inventory on the shelves, but it was mostly crap and I paid too much for almost all of it. What little high-quality merchandise I had on hand was the result of us inadvertently taking advantage of someone who didn’t know what they had, or me making exceptions to try to account for the shortcomings of our trade offers.

(Systematizing All The Things is always the goal, because it corrects for the deficiencies of your lackeys and of your frail meatbag brain. I’ll make a blog post on it.)

The Solution: VTV – Variable Trade Value

There are junk games for which you only want to pay a pittance. There are great games for which you’ll happily pay a premium. Even if you were relying on your judgment (which you shouldn’t do), you’d be able to make these calls easily. What about everything in-between? Some systems allow for pricing rules on trade-ins that will allow you to create a stair-step tiered trade-value regime, but even those involve a lot of fiddling, and take a lot of labor to adjust. Here’s the component parts of what I figured out and has worked well for me for four years:

  • LowPercentage – This is the percentage of your sell price that you’ll pay out in store credit on the low-end chaff.
  • HighPercentage – This is the percentage of your sell price that you’ll pay out in store credit for the high-end, desirable items.
  • LowThreshold – At or below this price, you pay out the LowPercentage trade value.
  • HighThreshold – At or above this price, you pay out the HighPercentage trade value.
  • CashPenalty – The percentage taken off the trade value if the customer wants cash instead of store credit.

Everything in between the LowThreshold and HighThreshold price has its trade value determined by a straight line that runs between the LowPercentage and HighPercentage numbers. It looks like this:

2016-03-24-11-10-40

This photo was taken while eating a sandwich at Desert Sky Games in Arizona the week after GAMA 2016. I taught them video games, they taught me comics. I think I got the better end of the trade.

Moving the inflection points of this graph give you a lot of flexibility and power. For categories where the line between good stuff and junk is very fine, you could make the slope of the center line vertical or nearly so. If you want to pay out a flat percentage on a category, you can still do so by setting the low and high percentages to the same number. For categories where the desirability and sales velocity of the items increase steadily as value increases, you could set the LowPercentage/LowThreshold very low and the HighPercentage/HighThreshold very high.

Implementation of this is basically impossible if you’re not running a POS that was designed for game stores. If you look up your prices with a spreadsheet you could probably write this into it, but it would be a pain. In my perfect world, both IMP POS and the Dumpster-Fire Goliath POS solutions would implement this.

Basically, what you want is the formula of a line. This is what it looks like in our system:

Make Money, Improve Life

This is not purposeless fiddling: Very little else in my business changed in the year that I moved to VTV. My total dollars spent on trade-ins dropped by a third, the total volume of my trades increased, and the quality of the inventory I was buying dramatically improved, which meant that sales shot up. My net income jumped by something like 30%. I bought a new vehicle for the first time about six months after I switched this on. These improvements in business process are life-changing.

Examples: Super Nintendo

LowPercentage: 30%
HighPercentage: 65%
LowThreshold: $1.00
HighThreshold: $20.00
CashPenalty: 20%

If you sit down and think about the Super Nintendo games on the used market, you’ll probably come to the conclusion that there’s a handful of garbage low-end titles, a handful of high-value games, and quite a few desirable mid-value games in-between. We’ll look at three examples with their current payouts, and I’ll show you some sales numbers for each going back to the implementation of this software in February 2013 so you can see the larger story for each title and how our pricing has changed.

NHLPA Hockey ’93 – Sell $3.00, Trade $0.70, Buy $0.56

This game is bad. We want some copies of it, but if we paid 50% we’d attract dozens of them. At this payout we’re currently sitting on six copies.

Chrono Trigger – Sell $122.00, Trade $79.30, Buy $63.44

Chrono Trigger is an amazing game, and even if we marked it well above market value, a copy in good condition would be drooled over frequently and eventually sold. We want to give a fair payout for this game, because most people who are getting rid of it know that they could get $120 if they were only willing to deal with the hassle of eBay. If we were paying out a flat 30%, we’d be offering $36.60, which is not a fair trade offer and would upset sellers. We currently have one copy. In the report below you can see how the value of this title has shot up over the last few years.

Super Mario World – Sell $17.00, Trade $10.11, Buy $8.09

This is a common, bread-and-butter game that everybody wants, and I could probably get $25 per copy for it without too much trouble. We are currently sold-out in the post-Christmas crush. You can see from the history that it tends to move a little too quickly, meaning that I should think about adjust the pricing manually for both sales and payouts.

Extra Crunchy Extra Credit

If you’ve got a high enough volume in either games or cards, you can go a little further to protect yourself from anomalies in the trade flow. We haven’t even turned this on in our system yet, but as volume increases it may be useful. For each category we have the following fields in addition to the ones listed above:

  • default_optimal: Each item has an optimal quantity number. This is the default for that field. For most video games that’s 12. For Magic singles it might be 8, or 16, or 32, depending on how deep you want to stock. You can always adjust this for individual items if the need for an exception strikes.
  • over_optimal_penalty: This is the percentage taken off of a trade if you have over the optimal quantity.
  • default_excessive: This is the default for the excessive quantity, which is like optimal quantity but far higher. This is the “hey, there’s something wrong” number. For video games that’s 20 for us.
  • over_excessive_penalty: A very high percentage taken off if the quantity in stock is over the excessive number.

Because I Love You: Our category spreadsheet

Here’s the category spreadsheet with all of our values. You can see that many of them are the same. This is one of those 80/20 things where you get the most impact from a relatively small amount of effort. If I wanted to fiddle with it more I could probably squeeze out more efficiencies, but I am trying very hard not to fiddle for a living. It isn’t a super-pretty spreadsheet, with lots of depreciated categories and placeholder values on categories that aren’t price updated regularly, but if you’re data-minded this will help. Video Game pricing comes from PriceCharting and MTG pricing comes from exports of TCGPlayer‘s price data via Gatherer Extractor, since they won’t give out API access to stores for love or money.

I hope this helps someone.