The Magic Street Journal: So You Want to Open a Game Store

In this edition of The Magic Street Journal, accountant and MTGSalvation content manager Alex Haggstrom focuses on a simple question: "So, you want to open a game store?" It's a fairly common ambition, but a very difficult one to make a reality. To that end, she outlines the basics of creating a strong business strategy that will help any business owner, current or prospective, ensure their business has the best chances of success. 

There are many reasons to open a game store. Some people do it out of love of the game. Some do it because they want to make money. Others do it because they want to be successful on their own terms. Whatever the reason for their entrepreneurial spirit, they take the plunge and commit to running a small business. Unfortunately, this is a difficult path to follow. Many businesses wind up failing. The specific number varies considerably based on who you ask. The Washington Post reports that "half of all new establishments survive five years or more and about one third survive 10 years or more." If you ask Forbes, it's an 80% failure rate within 18 months. The takeaway is that opening any small business is a risky endeavour, and being in a niche market like gaming only compounds this.


A common reason for a small business failing ultimately comes down to a lack of preparation on the owner's part. You can do everything right on the tactical, day-to-day level, but a mistake on the strategic, long-term level can make that all irrelevant. It's the equivalent of attending a Magic tournament and making no play errors, yet still going 0-2 drop because you chose the wrong deck, built the wrong sideboard, or made a deck registration error that catches up to you on the deck check. Business administration is a difficult, lengthy skill to learn, and not every prospective store owner has the time or resources to attend four years of university for a bachelor's degree. Thankfully, the basics are sound enough that, with planning, you can avoid the pitfalls that trap the unprepared and ensure you're not in that fifty to eighty percent figure.
Disclaimer
There's no single strategy that works for all businesses. All this article can do is show you how to frame and approach business issues. It can't solve those issues for you. Only you can do that. Relevant terms will be placed in bold so any game store owner or manager, current or prospective, can research them in greater detail when it comes time to write out a formal business plan.

Business Strategy

A business strategy is, in short, your plan for taking your business in a specific direction, staking out a market position, attracting customers, and achieving financial success. A good strategy involves making decisions that are different from what your competitors do in ways they can't reasonably follow. Here are six questions to ask yourself when it comes to developing your strategy:

  • How do I attract and please customers?
  • How do I compete against my rivals?
  • How do I position myself so I can take advantage of opportunities?
  • How do I respond to changing economic or market conditions?
  • How do I manage my business functions?
  • How do I achieve the level of success I want?
Over the course of this article, we'll look at how to answer each of these questions in a way that will help you succeed where fifty to eighty percent of new businesses fail.

How Do I Attract and Please Customers?

The 1989 classic Field of Dreams popularized the phrase, "If you build it, he will come." Unfortunately, it doesn't quite work like that when opening a small business. You're just one storefront among many, and standing out from the crowd relies on knowing what the crowd is like. Just as you can't effectively make a Sealed deck until you've analyzed your card pool, you can't make effective business decisions until you've analyzed the industry and your competition.

The first thing to understand are the key success factors required to accomplish your business objectives. Generally, on the front end, a local game store needs to keep good relationships with local play groups, ensure that events are run in a competent and timely manner, and retain a friendly and knowledgeable judging staff. On the back end, a local game store needs to ensure proper marketing including social media presence, thorough training of all employees, and avoiding inventory backlog in order to keep quick inventory turnover. This is by no means an exhaustive list in both respects, nor does it take into account local factors. If your local Magic scene leans heavily towards one format, then the ability to run efficient events in that format with desirable payouts becomes a key success factor. Research accordingly. Look at what keeps successful stores afloat. Talk to players in your area. Don't assume when fact can be your guide.


Sometimes you just want a
little something for everyone.
Image © nuts.com
Once you know what it takes to succeed, you can start analyzing the competition with what's called competitive analysis. Take a look around you. Ask yourself who your direct competitors are. This will likely be the other local game stores in your area, but also extend to anything that would take business away from you, such as college clubs that attract players to their own locations. Ask yourself what products or services those competitors offer. Try to quantify what mix of sealed product and singles they sell, what events they run, and the like. Then repeat that process for other games such as Yu-Gi-Oh! and Pokémon. We'll come back to that in a moment. For now, once you've done all that, figure out what your competitors' strategies are, how they market themselves, and what their strengths and weaknesses are. Figure out what opportunities are present in your competitors' weaknesses and what threats their strengths represent. You don't necessarily have to perform a formal, structured SWOT analysis, but every little bit of helps.

A store can't operate on Magic alone. It may be a strong draw for a store, or even the main draw, but if you lean too hard on Magic and your Magic-related foot traffic dies down, you're hosed. In financial terms, betting everything on one investment creates a lot of specific risk, i.e. the risk inherent to that one single investment. Diversifying your product offerings lowers your risk because if Magic dies, you can still make money selling Yu-Gi-Oh! or Pokémon products and running events for those games. You can offer product and gaming space for miniatures like Warhammer 40,000 or X-Wing. You can appeal to the board game crowd. You could even go outside tabletop gaming altogether and offer other products such as sports memorabilia. If your competitive assessment determines there's a good opportunity available, seize it.

How Do I Compete Against Rivals?

No business can survive without having what's called a competitive advantage. Roughly speaking, a competitive advantage is what your business does the best. Not "better," but "the best." It's not enough to outperform two competitors in one area and lose out to the third. A competitive advantage can be anything from being able to offer the lowest price, to having the best and most knowledgeable staff, or having the most easily accessible location. For stores dealing in Magic, you may be able to offer the largest tournament venue for Competitive REL events, or you may offer a safe and welcoming space to women when other stores in your city are content to let sexist behaviour slide. Whatever it is, if you can't determine what your store will be the best at before you open it, you're highly prone to fail.

Generally speaking, competitive advantage comes in two strategic forms: Cost leadership and differentiation.

Cost Leadership

A cost leadership strategy isn't about simply offering lower prices. If it costs you and your competition $1 to buy something from a supplier, and you sell the item at $1.10 compared to the competition's $1.20, then you're only making 10 cents per sale instead of 20. You need to sell twice as much as your competition to match their profits, and that kind of discount won't deliver it. However, if you can bring your cost down to 90 cents per item and sell it at $1.10, you undercut the competition and make the same profit per sale. The lower price for your customers isn't what's advantageous. The lower cost for you is.

The downside to this is that costs can only go so low. As a small business, you're going to run into problems larger businesses don't. For example, you might order a hundred packs of card sleeves from a distributor, but the larger business ordering a thousand is going to get them for a lower rate. This sort of advantage is called economy of scale, and it's very hard to overcome. Budget wisely if you want to go this route, and realize that if you do, you're likely to get undercut by companies that can afford to cut costs you can't. You also have to decide whether you want to try having the lowest costs on every product and event in an overall low-cost strategy or whether you want to try having the lowest costs on specific things, such as being "that store with the cheap drafts," in a focused low-cost strategy.

Differentiation


Most people wouldn't pay nearly
as much for this without the logo.
Image © Apple Inc.
Many people don't pay a premium for Apple phones because they think the hardware or software is necessarily better than Android or Windows. Some do, but what Apple's really selling with its high prices is its prestigious brand. It's also why you pay more for accommodation at good hotels, as they can provide you a legitimately better experience. Whether by having a desirable brand or some superior function, differentiation represents a competitive advantage because it means your customers are willing to pay more for your products. In Magic terms, a player might tolerate slightly higher prices if they can get to your store quickly and easily, or because they find the environment more pleasant than other stores, or because your store is the only one that maintains an active Legacy stock. Those stores offer that little something extra worth paying for. What form that something takes depends on what type of differentiation you want to pursue. Broad differentiation in this case means trying to appeal to the entire Magic community. Focused differentiation means appealing to one specific group, such as Limited players or grinders. If you decide on broad differentiation and then try to put it into action by hosting expensive Competitive REL events with high, top-heavy payouts, you're going to have a bad time.

The downside to either type, of course, is that if your competitive advantage is too easily mimicked, other stores will do it. If it's as simple as luring Modern players away by aggressively buylisting staples and undercutting you, your newly-acquired Modern crowd is going to leave you. This is where appealing to your local community comes in handy, because if you can build up a reputation for having that dedication from your Modern community, those exclusive gaming supplies with art you source yourself, or a specific atmosphere that's welcoming to women or minorities, you can create momentum that's difficult for competitors to overcome. Sure, they can try to attract loyal players away from you, but if their store has been unwelcoming in the past and yours has always been friendly, they're going to find it a hard sell.

How Do I Take Advantage of Opportunities?

The opportunities available to you depend on whether you're operating on an offensive strategy or a defensive strategy. An offensive strategy is focused on attacking your competition by eating away at their competitive advantages, trying to lead them in margins or market share, or even enjoying the highest reputation in your area. A defensive strategy is focused on protecting yourself from such attacks by your competition. Which one is best for your business depends on your local environment. There's no single correct answer that's best for every situation, just as there's no single correct deck for a given Magic format. Degenerate metagames exist, of course, but they're best avoided.

Offensive strategies are most likely to be successful when they exploit competitors' weaknesses rather than attacking their strengths. For example, if you can negotiate a better deal with your distributors while your competitors have to suffer high costs, you're more likely to succeed than if they already have a cost advantage of their own. The same principle holds true for trying to capture play groups and formats your competitors are weak in, or for creating a presence in non-Magic games where competitors offer nothing. If no one's offering events for, say, Force of Will, there could easily be good money in capturing that market share early. If the prospects look good, don't wait for competitors to try it out first. Aside from competitors with notable weaknesses, worthwhile targets for offensive strategies include struggling competitors that may go under and competitors with more limited capabilities than yourself.

By contrast, defensive strategies focus less on your business in relation to your competitors. Here, you mainly want to build up on your strengths, such as by offering better service, treating employees and volunteers well, or creating loyalty programs for your customers. Store credit is ubiquitous in the industry, but there's always room to consider other ways to keep players loyal to your store. For example, in addition to giving out Wizards-supplied free sample decks to new players, consider tossing in a few packs or some introductory store credit. It's a good way to clear out back stock unlikely to sell and helps newer players feel more welcome. If you have access to a level 2 or higher judge, you could offer your store as a location for judge training and mentoring. Store-branded accessories are a good way to get your name out there, especially if you have access to unique art to put on them. You don't need a professional artist, either. Ask around your community and see if you can partner with a player who has some art skills. The benefits will be mutual.

How Do I Respond to Changing Conditions?


Honda is a best-cost provider, with customer
satisfaction ratings as high as more expensive
brands, but still being relatively affordable.
Image © Honda Motor Co. Ltd.
No business strategy is ever set in stone. You have to be able to evaluate and reevaluate your strategy as conditions change. Play groups come and go, competitors enter and exit the marketplace, new sets and bannings cause interest in formats to wax and wane, and trends in card prices affect players' ability and willingness to compete in various formats. Your financial situation may change considerably as time goes on, for better or for worse. An offensive strategy may fail, requiring you to change to a defensive one. Differentiation may create opportunities that lead to the ability to offer higher-quality products and services at a remarkably low cost—the best cost provider strategy, not mentioned above due to the difficulty in achieving it. It's not something you can realistically set out to do, but you could find yourself achieving it if things go well enough.

Don't be afraid to shift gears, recover costs where you can, and get out of a particular strategy. Maybe those Modern event decks didn't sell as well as you'd hoped and interest fell through in starting Modern events. Maybe you overstocked on Commander product and now have twenty preconstructed decks you'd be lucky to sell one of per month. It's not weakness to admit you misjudged demand and proceed to eBay them off or cannibalize them for salable cards. Shelf space is valuable, and you can't waste it on things that aren't going to sell. If your diehard Khans of Tarkir draft group consistently fails to make eight players to sanction, awkwardly trying to hold unsanctioned four- or five-person drafts is going to be less useful than shifting to a different format. It may feel embarrassing to try striking out for new territory only to have to fall back to the same things everyone else is doing, but financial security wins out in a high-risk industry like traditional games.

How Do I Manage My Business Functions?

This is where we get into the crunchy part of the equation. Simply put, game stores are very risky, even by small business standards. In all likelihood, you're going to have some trouble at first with your finances. This is going to make managing your day-to-day business activities a bit more difficult than it might otherwise be.

Finances, Money, and Gatekeepers

First and foremost, gaming isn't the most respected of endeavours among the financial crowd. Getting a business loan may prove to be more difficult than you initially expect. Similarly, landlords are going to be more hesitant to give you the same floor space they may readily give a restaurant, clothing store, or other conventional venture. There isn't much you can do here except play to your strengths. If you can demonstrate financial security, doors will open for you. If you can establish a track record of successful previous ventures, lenders and landlords will be more at ease with your proposition. If you have a solid business plan, you'll have a leg up on every inexperienced amateur-turned-entrepreneur who's long on dreams and short on action.

You'll also want to brush up on your financial literacy if it's lacking. Knowing how much you owe and what its interest rate runs you is only the beginning. You need to know how to set sales targets in order to break even. What are the contribution margins on your goods? Are some products meeting their variable costs but not significantly contributing towards paying off your fixed costs?

Let's put this into an example. Suppose you have a monthly rent of $10,000. You buy 100 items for $10 each, with a shipping cost of an additional $10. You sell those items for $20 each, with transaction fees of an additional $1 per item. Your total unit contribution is $20 less the $10 cost less the $1 transaction fees, so that's $9 towards paying off your $10,000 monthly fixed costs. A hundred items is, therefore, $900. Add in other variable costs such as shipping, foreign exchange if you're ordering from overseas, and your sales are contributing less and less to your fixed costs. A simple break-even analysis shows that the number of items you'd need to sell simply to keep your business afloat is 10,000/(20-10-1) or 1,111 items. Only after that can you say you're profitable.
Some stores try to get away with focusing on selling packs. Don't do this. Their low contribution margins make profiting off them difficult. It's easier to break even if you include higher margin products in your lineup, such as snacks, war game kits and supplies, singles, and even things like board games. Selling 1,111 items is difficult, but you can drop that number by adding new items that contribute better to your fixed costs. Despite this, you'll still find stores that neglect this analysis. This can be a threat to profitability and therefore financial security.

You can see why niche retail stores can make lenders and landlords jittery.

Working Hard and Hardly Working

Once you've got everything set up, prepare to spend a lot of your time working at the store. A lot of time working. If you aren't prepared to spend upwards of 80 hours a week working at your store, you'll quickly find yourself at a disadvantage. That's proper labour, mind you. Not playing Magic or socializing with players. Stock needs to be sorted and laid out. Floors need to be swept. Toilets need to be cleaned. Someone has to watch over the store for loss prevention purposes during operating hours. You'll spend hours after closing simply opening packs and sorting them into sales inventory. You'll need to stock the shelves, figure out what's selling and what isn't, and prepare your restock orders. You'll need to count up the day's income and do your basic accounting. You'll need to do bank runs, office and cleaning supply runs, and garbage runs.

And only then can you go home and rest, only to start the next day anew.

Hiring an employee to handle some of this is definitely an option if you have money, but it's not going to solve all your problems. Employees need to be paid and scheduled. Tax forms need to be filled out. You need to devote proper time to networking or placing help wanted ads, potentially sorting through resumes, interviewing candidates, then training your new hire. And they might not prove as industrious a worker as advertised, leading you to take shifts and cover duties you weren't planning on. You may even need to start the process anew if you find you just hired someone more interested in playing Magic and pursuing employee discounts than doing work.

Traps to Avoid

Finally, there are two basic traps that warrant mention as things to avoid falling into. The first is over-reliance on online sales. Some online presence is mandatory in the digital age, but if your marketing mix includes too many online promotions, you're starting to compete with the likes of StarCity Games and half the people on TCG Player. Down that path lies a race to the bottom, and it's not a race you're going to win.

The other trap is the old adage that if you double your revenue and halve your customers, you're all right. This can be a promising thing when you're dealing with the general public as your target audience, but when you're relying on targeting a market segment that's known for strong communal bonds, pushing anyone away can be detrimental to your business. If half the casual players at your store leave because you doubled prices, the other casual players are more likely to join their friends than stay in the long term. Replacing those customers is difficult to say the least, especially if someone takes to the Internet to complain. It's best to avoid thinking of any customer as disposable unless there's no other option.

Knowing When to Scoop


Sometimes you keep going on and lose.
Sometimes you win.
It's a matter of skill to determine what to do.
Obviously, despite your best efforts, things may not work out. It could be through market forces, changing player base, or even simple bad luck, but your business could very well wind up turning enough losses to convince you it's time to hang up your hat. However, unlike the Paper Tiger, you shouldn't be too quick to fold. Simply running at a loss doesn't necessarily mean the best financial decision is to cease operations. There exists something called a shutdown point, which is the point where, financially speaking, you can either keep going or stop.

Put simply, the shutdown point is where your sales make up your total variable costs and a portion of your fixed costs. Here's a quick and easy example. Let's say all of Magic is booster box sales and interest in the game is waning. If you keep ordering boxes for $75 and have to offload them at $50, your business is completely untenable. There's no sense in continuing. But if you can sell a hundred in a month for $100 each and your monthly fixed costs are $5000, then you're still paying down half those costs. Obviously, you don't continue if that's rent, but if it's debt, you have a strong case to keep going.

There's no easy out, but don't be discouraged if things look grim. Staying in the game might just be what it takes to come out on top.

How Do I Achieve the Level of Success I Want?

There are a number of tools available to assess how well your strategy is working. The first is a simple series of qualitative questions, such as whether your sales are growing or declining, whether you're attracting new customers at a good enough rate, whether your customer retention is satisfactory, how good your image is, and so on. You may see a bunch of new faces at your store every month, but if they're gone for a whole new set of faces the next month, you know you're weak in retention and thus your goal is to figure out how to keep those customers around. Make a habit of asking yourself these questions regularly, even if you don't notice any trends at first. Sometimes you need to stop, sit down, and think about things before they become apparent.

You can find as many quantitative metrics as there are cards in Magic, but not all are going to be useful to you as most are geared towards larger businesses, corporations with shareholders, people who deal with liabilities and equity on a deeper level, and so on. What you should focus on are simple financial ratios such as your gross and operating profit margins, current ratio, working capital, and debt-to-assets ratio. Specific calculations are omitted for brevity but are easily found through cursory searching. Of particular note to game stores are activity ratios such as days in inventory and inventory turnover. It can be difficult to estimate how much inventory you're going to need of specific sets, and while things like card sleeves can sit around until they're sold, almost no one wants those Dragon's Maze boosters or deprecated intro decks anymore. You need to pay careful attention to how long things are taking to sell, and adjust your inventory orders downwards before you're stuck with walls of nice-looking but unsaleable product.

Conclusion

Condensing years of business school into the span of a single article, or even a whole series, can make things look intimidating. Don't worry if the above looks especially dense or daunting. It's really very simple as long as you keep a few things in mind:

  • Have a solid business plan, as it's essential to success.
  • Don't focus entirely on Magic.
  • Avoid setting any part of your strategy in stone.
  • Be prepared to work very hard until your business takes off.
  • Know when to hold 'em and know when to fold 'em.
Running your own store is a lot of hard work and sacrifice, but for the right person, it's an immensely rewarding experience. You get to be a pillar of the local gaming community. You get success on your own terms. You get a great number of wonderful experiences that you can't find anywhere else. Just like playing Magic, it all comes down to skill, research, careful execution, and a little bit of luck. Even if you don't win the event, you can still place, and that's something you can always be proud of.

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