Warehouse or Retail Store?

Game LibraryWe are coming up on our end of the lease fast and while we’ve made the decision that we will be moving to a new location as our rents have now increased to a point that we no longer think it’s worthwhile to stay, the question we are still working our way through is whether to go full retail or stay as an online store.

Warehouse

Continuing to run a warehouse makes a lot of sense in many ways.  There are some major pros including:

  • well optimised polices and procedures
  • ability to take on more and larger Kickstarter projects
  • potentially branching into other non-related product lines in ways that don’t create confusion among our customers (e.g. selling sporting equipment on a new website)
  • lower cost (we can get warehouse spaces for cheaper than what we are paying right now, so we’d actually drop our cost!)

The Cons though are somewhat more nebulous

  • new location likely to be less central significantly
  • growth has to come from new categories as our gaming category has slowed
  • potentially being locked out further by publishers
  • it’s boring…

Retail Store

Going with the retail store, things get a bit more interesting for the future, with some of the pro’s including:

  • new revenue streams from snacks & drinks & events
  • ability to access and run events / games likes Magic the Gathering and miniature games
  • increase in sales to casual drop-in’s and potential increase in sales from impulse buying of our geek products
  • significantly more options for PR and social media outreach

However, there are some major cons:

  • significantly higher lease cost (we’re looking at least another $4,000 a month at a minimum, more likely $5-7k).
  • new staff and staffing hours would be required.  Approximately $3k more in terms of staffing cost per month
  • loss of revenue from Kickstarter projects.  We probably could handle the smaller projects still, but the larger projects would be difficult (i.e. we couldn’t quote on projects over a few hundred games just due to lack of storage areas for them)
  • new capital requirements for shelving, gondolas, POS systems, etc.  At least another 5 – 10k depending on how nice we want to go.
  • potentially sub-par location.  We need a minimum of 2,500 sq ft and are probably looking at 3,000 up to 5,000 sq ft.  There just aren’t that many locations of that size in Vancouver, especially in retail and for the prices we can afford which would raise the total rent even higher
  • too close locations are another major issue as there are so many game stores right now, finding a location that isn’t too close to an existing store is another problem.

There’s also a rather concerning trend in real estate pricing.  In general, commercial pricing seems to run 2 – 3 years behind retail pricing, so if there is a drop in sales in retail pricing, we might expect a price drop in a few years which means that any lease we sign right now might be on the high price.

Grow or Perish

Grow or dieOne of the aspects about any business is that to a certain extent, you are always forced to grow.  Standing still (in terms of revenue at the very least) is death.  Every year, your costs go up (unless you are lucky / down-sizing for some reason).  A real world example – our product shipping cost has grown by a good 4% in the last 2  years due to the fact that we have to buy from Canadian distributors rather than US distributors.   As mentioned, our portion of real estate taxes doubled in 3 years.  And that’s just the tip of the iceberg.   Every year, costs go up.

As a business, you need to grow your revenues at least enough to cover the increase in costs.   That means you need to see a 2% increase at the very least (based off CPI)/ Most of the time of course you want to grow even more than that.  Unfortunately, for most of us, growth like this requires more than a wish and hope, it also requires spending more for advertising and often, working on new plans and streams.

For us, over the last few years it’s been about growing new product lines outside of board games.  Increased competition by gaming stores (both physical and online) means that the pie is being fought over ever more, and exclusives level the playing field in terms of stock availability in many ways.  Even with the gaming market growing, it seems that the increase in game stores is on-par and we no longer see the aggressive growth numbers we were used to seeing from our gaming categories.

It’s one reason why we’ve invested so heavily into other items like Pop! figures, geeky clothing and the like.   Don’t let that statement fool you though, gaming is by far our biggest category (so big that on our backend we split products up so that we can better track the types of revenue) and even low % growth is still significant.  Still, knowing that we have to grow is always on our mind and it’s been something I’ve been pondering more and more recently.

As I’ve mentioned, our lease is coming to an end next year and while we have an extension option, there’s been some significant consideration to opening a physical B&M store.  We have had more than a few customers want to browse our inventory and when we ran our Open Houses, we had significant interest.  Having a full B&M store opens up the option of doing events as well and snake & drink sales.  Presumably, many of our impulse purchase items would also see an increase in revenue, potentially significant enough to recover the difference in cost.

The biggest hurdle is capital. Having invested a significant amount of capital into inventory for our various other categories, we don’t have a lot of left.  That means opening the store would be on a shoe-string budget for things like tables, new bookcases, etc. There’s also a chance that sales don’t grow like we expect or at the rate that we expect, burdening us with significant fixed expenses and not enough revenue generated.  It’s why I’d love to be able to go into it with a significant capital cushion, which probably means looking at some form of external financing.

Of course, we could just continue doing what we are doing, taking on some additional side projects like the Kickstarter fulfillment; but we risk very slow growth in that case.  hat though might not be a bad idea – pay down debt, earn a little bit more money and continue onwards. Unfortunately, it’s also boring…

 

 

Growth vs Profitability

The larger you grow, the more profitable you become right? After all, that’s why companies decide to grow after all.  Unfortunately, real life isn’t as simple as Economics 101.  Real life is vastly more complicated and growing your company can actually reduce your profitability.

Staggered Costs

Costs, specifically how costs accrue in a staggered manner is one of the reasons for this.  Fixed costs are the perfect example of, and most commonly known; cause of this.  Let’s take rent – when you move from one rented building to another; your cost increases.  Since most commercial ‘professional’ leases come in multi-year formats, you have to rent with growth in mind.  As such, if you were renting for 3 years; you have to envision and plan for your companies size in 3 years.   If you expect to be doing double your business by year 3, you can’t rent a building that is suitable only for your size now.  Which means your profit (if you have any) in year 1 is going to be lower than those in year 3 just because you have to plan for growth in year 3.

Now, rent is a simple fixed cost example which most people can see and understand.  However, let’s take another example – cardboard recycling.  Having someone drop by to pick up our cardboard each month costs $40.  Obviously, as we grow and receive more products, we need to recycle more cardboard.  At a certain point, we have to do more than 1 pick-up a month. So that’s another increased cost, but it’s not gradiated at all.  A 2nd pickup might give us enough space to grow for another year, but the cost increase (the additional $20 for another pickup) is fixed.

Increased Complexity

Complexity increases with growth.  As you grow, the number of balls in the air increases and the ‘shape’ of those balls can change.  When you’re smaller, many of the problems are simple to manage.  As you grow though, what used to be a small problem increases in size as well and can become a major issue.

For example – refunds.  Refunds are simple right? A customer asks for a refund, you refund him.  Except; what if the customer asks for a refund on a card he longer uses? Normally, this is not something that would happen; but as your business size grows the number of exceptions/one-off cases increase too.  As these one-off cases are just that, one-off’s; you can’t even write processes or procedures to handle them.  You have to deal with them individually – and as such, the amount of time required to deal with them increases as well.  Get enough ‘one-off’ cases; and you can find yourself spending half a day doing nothing more than fixing unique problems.

If you’re doing that, you aren’t doing something else just as important – so you have to add more hours, which means more cost, which can mean lower profitability.   Again – things like this happen in ‘staggered’ formats; each addition coming after a certain cliff happens.

Changing Expectations

There’s also an issue of differing expectations – as you grow, you’ll find expectations for your company change too.  The type and kind of service expected from an organisation that is 1 person large compared to one that is staffed by 100 is very different.  More often than not, meeting those expectations require increased levels of management & bureaucracy, which results in increased cost.  We found this out when we went from 2 to 3 employees.  You’d think adding 1 more person wouldn’t be that much more complex; but to keep us as professional, we had to increase our bureaucracy levels significantly.

Economies of Scale

So what happened to economies of scale? Well, there is obviously some of that.  Renting a 5000 sq ft warehouse is cheaper per square foot than a 1000 sq ft warehouse.  When you finally reach optimum capacity, your margin will have improved.  However, its the interim period where things are expensive.  So remember, growth is not always the route to greater profit.

The Office Move

So, I haven’t really posted much about why we are moving.  And it’s obvious because most people who come in ask – why did we move?

The simple answer? We had outgrown the old location and needed a larger spcae.  This is easily seen by the number of days it took to set-up.  Our last move 2 1/3 years ago took us 2 days with 3 helpers on day 1 and myself on day 2.  This office move took 4 days, with up to 9 helpers on day 1 and varying numbers for the next 3 days (minimum 5 of us!).  So, the amount of work needed to move product out of the old location, move it into the new location, set-up new shelves, build new shelves, etc was significantly higher.

We had built out the old space so tightly that there really was no wasted space left – we figured we could (maybe) squeeze in another 2 shelves before we hit full capacity.  If we wanted to grow, we had to move.

Grow or Stay?

From an outside perspective, the easy answer is grow.  After all, a bigger space means more stock, more product, more sales.  More money right?

Not always.  In fact, during the growth stage it means less money.  How much less depends on how aggressive your growth targets are (and how long your lease is!).  The additional space cost, the set-up cost, the downtime, all of it are expenses.  It’s nice to grow, but with growth comes additional expenses.   Your fixed expenses balloon and you  now have to make more money to cover them before you can get back to your previous levels of profitability.

There’s also another advantage of staying – you force yourself to get more streamlined and efficient.  If you only have so much space, you learn to get creative about storage.  You watch your inventory like a hawk and move dead product out faster because you need the space for product that still sells.  With more space, with higher growth, you can let things like that slide.

For us though (okay, me); the decision to stay still or grow is relatively easy.  I have long-term goals and those don’t work for where we are; so grow it is.

The Move

I’m not going to post much about the move beyond to say that it was murderous and I made a major mistake by underestimating exactly how much work was involved.  We had grown in our old space so well that when we actually made the move, I had not realised exactly how much we had grown – and the logarithmic increase in work setting up the space meant.

All That Space

So now what? If you look at the photos you might see a huge expanse of free space in the back of the warehouse and even in the office.

Obviously, Starlit is going to continue growing.  We have plans to expand our miniature and miniature accessories further.  I am considering going ‘deeper’ on popular games so that we do not stock-out as often.  There’s this entire CCG craze that we are missing (and might continue to miss on purpose).

We also have plans to grow in another direction… but that announcement is going to have to wait 🙂

 

Company Growth as seen in product lines

Over the last few years (5 and a half and counting); we’ve grown as a game tore.  When we first launched, we had 700 products listed on the site and all of them board games.  Now, we have 3,000 products in-stock at any one time spread across most of the game accessories.

It’s an interesting thing to watch and it’s an obvious indicator of success.  Here’s a timeline based on our growth into the different categories:

The Timeline

2007 – Board Games

2008 – Accessories (dice and deck boxes mainly)

2009 –RPGs (Shadowrun, Savage Worlds, etc)

2010 – Wargames

2011 – Miniatures

2012 – Miniature Supplies

Of course, this isn’t an exact timeline.  We grow in spurts, sometimes adding categories together, other times slowly adding to existing categories to flesh them out further.  In 2012, we’ve fleshed out the Miniature and RPG sections quite significantly; and over the years we’ve added more and more board games.  We probably still have 70% of our stock in board games, but in time we’ll continue to expand into other areas of the game trade.

What dictates rates of expansion?

Capital. As we make profits from our main lines, we can then dedicate some of that profit to acquiring new stock.

Customer Interest / Special Orders. Sometimes, we expand into a particular product line because of special orders from our customers.  As we bring in / source specific products, often we end up bringing in an extra copy or two for the store to test interest from other customers.

Turn Rates. At the end of the day, each new category needs to make us money.  Each category has to sell through such that we aren’t adding inventory that will eventually become sale fodder.  While new categories are given a bit of leeway as they build a customer base, eventually all categories have to be profitable.

Growth is Expensive

Everyone talks about how cashflow and how much money you require when starting a business.  It’s drilled into the head of many new businesses how expensive it is to start; the need for sufficient capital so as not to fail.  What people don’t talk about as much is how expensive actual growth is.

The Harsh Reality

When you first start; most of your needs and the work that can be done can be handled by a single person.  As you grow; you find it harder and harder to complete all the tasks necessarily to run a business with just 1 person.    Instead of entering 1 order, 1 invoice, 1 payroll per week; you’re now looking at 100 orders, 10 invoices to enter.  Instead of just shipping 5 – 10 orders a week; you now have to manage 20 orders. You’re growing; but it’s putting a strain on your business.

The Mathematics of Growth

Let’s focus on just inventory.  Say you have 100 products, each of which you keep 2 items  in-stock.  Each of those products you buy for $20.  That’s $4000 in capital that you ‘keep’ in-stock at any time.  Now, let’s assume you get 1 order for each of those 100 products a week (i.e. 100 orders for 1 item);  you actually have 1 item per product (100 items total) in-stock – a happy medium in case of sudden surges so long as you re-stock once a week.

What if you grow to 200 orders for 200 products? Well, if your initial goal was to keep a full week’s worth of inventory on-hand at any one time; you have to increase your inventory by 200 products – another $4000 in capital.

Now, if you take our normal margins into account, that means to build up $4000 in gross profit; we’d have to sell $8,000 of product – $12,000 in Gross Sales.  That’s a very expensive proposition; especially when you take into account this is Gross Profit – not Net.  There’s still a lot of costs; some directly associated (e.g. storage, shipping, processing charges, etc). that need to be paid for.

As I said; growth is expensive.

More Complexity

Let’s add a few more thoughts.   With growth in sales, you’ll need more:

  • space to store your new inventory
  • boxes to ship the new orders
  • employee hours to handle the shipping
  • bookkeeping time to input the longer inventory lists and no. of orders
  • customer service hours to handle the additional questions
  • etc.

The worst part? Some of these costs have to be front-loaded.  You might see a slow increase in sales; but you still need to start stocking up additional inventory before the sales materialize to get the sales.  You might have to hire an employee full-time and find ‘make-work’ for him till sales improve sufficiently to justify him shipping only. And so forth.

Finding the Balance

Finding the balance between necessary growth; planned growth and available resources is difficult.  If you don’t plan for the growth; the friction of insufficient resources will result in unhappy customers and employees.   Yet finding the funds for growth can sometimes be difficult , requiring sacrifices in your plans and goals.