The Distribution Chain for Gaming

An interesting conversation was started in Fortress AmeriTrash recently about how the distribution chain works and how it’s failing small publishers.  To summarise the points as I saw them:

  • Distributors demand pricing at 40% of MSRP with Free Shipping from Publishers.  That works out to Publishers receiving 35% of MSRP.
  • Distributors then generally sell games at either 50-55% of MSRP to retailers
  • Since distributors do not actively market / sell these games to retailers, you are basically paying distributors to ‘sit’ on your stock and ship it out to various retailers.
  • This system benefits retailers and distributors more than publishers; and potentially just distributors.
  • As such, publishers should look into either selling directly to retailers & customers or establishing a co-op distributor.

Since I came across the article rather late; I thought I’d avoid adding flames to the fire by posting further there.  Instead, I’m going to do highlight this from my viewpoint.  Here’s a few things to keep in mind about my business.

  •  I currently re-stock on a weekly basis from distributors
  • We carry approximately CAD$40,000 of inventory (at cost!) of board games & accessories on about 1,500 active SKUs.  Minimal RPGs & miniatures.
  • Generally, we order / stock between 1 to 2 copies of a game unless it sells well

Direct to Retailers Model

Now, let’s take a single MSRP $50 board game. Cost from a distributor is $25.  Cost from the publisher to distributor is then $20.  So, figure the publisher gets $17.50 (at the 35% COGS above) for each game sold.

To increase profitability for the publisher, let’s say they sell at 45% MSRP – or $22.50. However, if you figure shipping cost is about $15 per order, the new cost to the retailer is $37.50. To get it to $25 again; and assuming shipping costs doesn’t change much for increasing the number of games; you’re looking at purchasing 5 games (i.e.  product cost + shipping = ($112.50 +$15)/5 = $25.50).

Of course, you might notice the problem here – to keep profits the same, the retailer now needs to buy a lot more games; in much longer intervals.  If you manage to get a turn rate of 4 (i.e. 4 copies sold a year)) which is the desired amount, you’re looking at purchasing once a year at best.

In addition, with each game costing $127.50 to stock, your total number of SKUs  drop dramatically on the same inventory amount to 313.  Of course, this number is not entirely true since you have multiple products that can be purchased from the same publisher and some other items that are much cheaper / more expensive to ship and buy.  Still, it gives you an idea of the vast change this forces on retailers.  You will see less diverse selection but potentially, much deeper selections.

Worst, this change would actually make it harder for new publishers to break in.  If a retailer has to commit to5 – 6 games (a full year’s stock) for each order; they would have to be nearly certain the games would sell.  Which means purchasing either highly rated games or games from well-known publishers.   Retailers are much less likely to take a chance on an independent published game which managed to make its way into the distributor channel where we could add the game to an existing free shipping order.

Lastly, remember – I’m a pure board game retailer.  A generic game store, with $40,000 worth of inventory spread across 4 product lines is going to have only $10,000 to dedicate to board gaming.

Co-Op Distribution

Now, the Co-Op Distribution model might actually work out well.  My major concern here would be the types of games available – you’d need a critical mass of games to make it worthwhile for retailers to open an account and order regularly.  The best option to make it work would be to get some of the main publishers (Rio Grande Games, Z-Man Games, FFG, etc) involved and stocking.