The Distribution Chain

Interestingly enough, as much as I complain about the distribution chain in the game trade, developing Fortress Geek as also shown what an industry without a few major distributors is like – and let me tell you, it’s not pretty.

The Distribution Chain in Gaming

Let’s talk about what distributors do.  They are clearing houses for our favorite games, the places where publishers sell boxes / cartons / etc of games and who then consolidate and sell these games to us.  The major advantages for a retailer of a game distributor is the ability to consolidate their orders and for the distributors to ‘break’ cases, allowing gamers to buy smaller quantities of each game.  As I’ve written before, there are numerous other reasons but this consolidation and breaking of games makes a huge difference in how easy it is to run such a store.

Right now, in the US there are about 2 major distributors and another 3 to 4 medium sized distributors.  In Canada, there is 1 major distributor and another 3 or so smaller distributors.  To give a context of size, the major distributor in Canada is still smaller than most of the medium distributors in the US.

This is not a huge number of distributors, but it is enough to ensure that there is a decent amount of competition in the industry.

Now let’s take a look at another example in the general ‘Geek’ product world.

The Distribution Chain in the ‘Geek’ World

Let’s be clear here, when we say ‘geek’; it encompasses a lot – from figurines to collectibles to toys to t-shirts and apparel.  As such, in many ways; the entire concept of a single distributor who could cover all this is unlikely.  However, there are 2 major players in the market (Diamond who supply all the Comics being one of them).  These distributors however are pretty much oligopolies (and in Diamond’s case for comics a monopoly) and as such are able to dictate pricing, markup and quantities to a significant degree.  As such, they often do not break-up cases and if they do, margins are painfully low.

That is, if you can get the items you want.  A significant number of products can only be purchased direct from the suppliers themselves.  This of course creates a whole host of problems:

  • Minimum orders at each supplier
  • Lack of transparency of stock levels (many don’t have a method to view current stock levels)
  • Significantly increased number of supplier contacts and ensuing paperwork
  • Licensing & verification issues
  • Increased length of restocks

It’s no wonder that, if you look at the number of generic ‘geek’ stores in Canada; there just aren’t that many.  It’s extremely difficult to run such a store as we are finding out – its extremely difficult to go broad and deep as it requires a significant capital outlay.  In many cases, we have to stock multiple copies of an item even before we know if it’ll sell.

So while publishers and retailers might complain about the distribution chain (and yeah, there are issues); it’s at least better than the current system evidenced in the ‘geek’ world.

Whispering in the Wind

Sometimes it’s scary posting online on this blog.  It’s not that as if we are such a big player that what we do / what we think / what we want is going to change anything by posting.  In fact, posting anything controversial is just asking to be signaled out as a troublemaker.  It wasn’t a problem when we were tiny and no one read this blog (like when we started); but now we actually get citations from Wikipedia and even have people read us across the world.

It’s not as if we even get money from this blog – at least, not the business posts.  So why bother?

Truthfully, I think it’s the perverse side of me that likes poking the bear.  Or teasing my wife.

There are other less self-destructive reasons of course:

  • Education – somethings are outside our control. The more we educate our customers on these aspects, the less difference there is between their expectations and our reality there is to occur.  It creates a smoother customer flow.
  • Analysis – writing these posts generally require me to conduct analysis, not only on the topic on-hand but on my thinking processes.  Occasionally, that’s actually been useful.  I hate writing reports, but a blog post can help me structure my thoughts in the same way.

Overall, I post what I want when I want to. I try to watch what I post though based off the idea that nothing I ever post will disappear; so I best be willing to stand by it.  That corollary though means that I don’t post a lot of things, because this is a public forum still.

Exclusive distribution

It’s interesting to see how exclusive distribution has fast become the norm. Here’s a list of all the exclusive deals that are now in place among all the big publishers:

  • Mayfair Games
  • Queen Games
  • Asmodee Editions
  • Z-Man Games
  • Days of Wonder
  • WizKids
  • Playroom Entertainment

Here’s the list of big publishers who have yet to do so:

  • Fantasy Flight Games
  • Alderac Entertainment Group
  • Flying Frog Productions
  • GMT
  • Paizo

I am leaving out a few mid-level publishers from this list, many of whom are still unrestricted.  I’m also leaving out Game Salute, since technically they only restrict distribution to online game stores (us).

When we launched, not a single one of these companies were in exclusive distributorship contracts.  These days, more than half the ‘large’ companies are. I wish I could say that I’ve seen an improvement in distribution and availability as well as lower costs as promised by the publishers, but I can’t.

As of this moment, these items are out of print / unavailable to me:

I would have to guess that at least 80% of our bestsellers have gone out of print for longer than a month in the last year – many of them items owned by these exclusive publishers.

Worst, we’ve seen an on-going increase in costs as our discount structures have been hit and (in the case of Canadian distributors), shipping costs have increased. We’ve seen an increase in cost by about 2% on our cost-of-goods sold.  That’s huge when you are talking in the hundreds of thousands of dollars.

Just as bad, we are held over the barrel with our distributors constantly.  Don’t like the way the distributor hires monkey’s to pack your boxes? Tough. Have an issue with the ding & dent policy? Tough.  Can’t get hold of your sales representative? Tough.  You either deal with it or you don’t get the distributors exclusive games.

Used Games – A Business Perspective

We started selling used games over a year and a half ago now, back in August 2012.  It’s been a interesting experiment, one that we got into due to demand from our customers and a view to making our business somewhat differentiated.  As far as I know, we’re the only Canadian online store that does take used board games.  It’s actually created a few significant challenges, which I thought I’d write about.

The Quote

One of the hardest parts of setting this up was figuring out what the quote / how much we were going to pay.  We had two options – have a general guideline and ‘wing’ it or have a more formalised quoting procedure.  Within that, we also had to decide on the discount we provided for demand (i.e. how fast it’d sell) and damages.

When we first started, we had damage grades up to D.  Grade D is still on the site as a guide, but we no longer take such games as experience has shown that customers just don’t buy Grade D damaged items.  Another question was the demand ratio – at what discount were we going to place on products that sold slowly.  It’s interesting to note that some products have ‘sat’ for ages, while others like any bestseller flies off the shelf.

The trickiest part right now is our Out of Print items and one that I think we’ll be revising very soon.  Certain long out of print items are easy enough to price – there’s a decently stable OOP market (e.g. Heroclix).  On the other hand, newer out of print items see a lot more fluctuation and can be priced at an extremely high level.  It’s something we have to adjust I think as we find ourselves with some great OOP items, which are for one reason or the other, extremely highly priced.

The Inspection

Outside of quoting, inspecting games has been the biggest headache.  Used game counting is low on the general priority list of tasks that need to be done by the staff in-house.  There’s always something else to do – from cleaning to shipping to adding new products to the site.  So Used Games get shoved to the back of the pile, with the result being that we often get a huge backlog. It doesn’t help that we often have ‘dumps’ from customers – we’ve had as much as 50 games come in from 1 customer before.

The actual inspection process took a few revisions before we got it right.  Initially we didn’t have an inspection fee, but after a bit of work we realised we were deathly afraid of GMT and FFG games.   Too many counters, too many chits.  With GMT in particular, finding an actual counter count was often difficult – we have had to look up counter sheet images to get an idea of quantity.  Since then, we’ve instituted a processing fee which kicks in when a game is taking up a significant amount of our time.

Unfortunately, the inspection process is necessary.  While 90% of all games received are complete, the 10% of missing components can be difficult.  Sometimes, the missing parts are significant enough that we can’t sell the game.

The Payout

One of the most interesting / tough parts of doing used games is how they are paid out.  It’s a matter of cashflow really – 99% of our gift cards we pay out are used within a week.  I’d say at least 80% are used within 48 hours.  Games however can take longer to sell – anywhere from a few weeks to a few months.  While the gift card isn’t cash – we still have to replace the products bought, which is a cashflow hit.

It’s one factor we have to take into account on how we price and/or quote our used games at.  We obviously want to get as much money as possible, which means pricing these products higher but we also want to ensure that we do not have too significant a delay between payout and sale.  Like any of our other product lines, we want a decent turn rate from this area.  In addition, we need to generate a higher overall profit margin than with our normal games due to the cost of quoting, receiving, inspection and customer service.  It’s significantly more work to sell our used games than to sell a new game which has to reflect in our overall profit.