James White | Flesh and Blood | Learn, Grow, Succeed

Hey, good morning everybody. I'm James White, founder and CEO of Legend Story Studios. Firstly, I just want to say thank you to John, Josh, and Marcie for bringing this event together today. I think it's a fantastic thing to do for the industry, but even more so, I'd like to thank all of the local game stores who are joining us today. I really can't overstate how important you are to society. Now more than ever, we need things that create commonality between people and places where people can come together to form local communities. That's the reason why I'm here today, that's the reason why I'm in this industry, and I just want to say thank you for opening your doors every day so people can come together to play great games. So let me share what we're going to talk about today. I've been 25 years committed to the trading card game industry, and it's spanned quite a range of roles throughout that time. In my younger years, I was a very competitive player. I played Magic: The Gathering, traveled the world, and played many World Championships for New Zealand. I was an open community leader. I launched Oceania's first online community, which served as a hub for players spanning many games to come together and for local game stores across New Zealand to engage with those communities. Then I became a national distributor for over 10 years, and now I am the creator of Flesh and Blood. Our focus is Legend Story Studios, designing and publishing Flesh and Blood, and ultimately I am a supporter of local game stores. Today, I really want to share some tips from my journey that have been really important in finding success, and I hope they will help you to do the same. I want to start by sharing my vision for Legend Story Studios, which is to bring people together in the flesh and blood through the common language of playing great games. The primary place where we see this happening is in local game stores, which is why I am such a champion and supporter of local game stores all across the world. The topics we're going to go through today are in line with the theme of this conference: Learn, Grow, Succeed. So learn to use financial reporting, broken down into two sections: what's your margins and stock turns. Then we're going to talk about growing towards your goals and succeeding through taking action. Many of you who are trading today may already be implementing and doing these things regularly in your business, and if you are, I applaud you and well done. But from my experience working with small business owners over the years, many owners have benefited from either learning or just being reminded of these simple fundamentals. As I say throughout my journey, these really basic fundamental principles have been an integral part of my growth and the success of the businesses I've been involved with. So we're going to start with the real basics, like revenue versus gross profit and what the difference is. Revenue is simply how much money your business derives from selling stuff. Gross profit is how much of that money your business actually gets to retain within the business. The reason this is really important is that gross profit is what powers your business to grow. Once we start watching our margins and using financial reporting, you need to ask yourself how well you actually know your business. What I mean by that is which products are actually contributing the most to your gross profit? There are two important metrics I like to look at when thinking about this: what is the absolute contribution, so maybe the product, brand, or category which is contributing the most collectively to the gross profit of your business. Essentially, that is what your core business is today. But once we start analyzing the data and getting more granular, you're able to identify maybe some products that have a very high per-unit contribution, a very high gross margin. Maybe they're not contributing a material amount to the overall business, but this is where the growth opportunities for tomorrow lie. This is key to really knowing your business. I can tell you firsthand, and I speak to you today mostly from my experiences as a national distributor because this aligns closest to your business in terms of inventory profile. The number of SKUs we used to carry will be similar to what a local game store will be carrying, and the kind of sell-through profiles. Back when we implemented these kinds of systems in our national distribution company, it was eye-opening in terms of what we thought our business was really wasn't what our business actually was in terms of where the gross profit was being derived from. So a couple of key definers here: gross profit is your revenue minus your COGS, or cost of goods sold. This term COGS is going to come up many times throughout this presentation. The cost of goods sold is the purchase price of your inventory plus the freight to get it to the place where you sell it. So how to measure gross profit or margin by SKU? This is the really important thing. We want to drill down deeper than just looking at the macro level of our gross profit. We want to understand which product lines, SKUs, or parts of our business are really driving the profitability of your organization. Most inventory management systems or point-of-sale systems are able to track COGS and gross profit by SKU. I really encourage you to take an hour to explore the systems you currently use. Don't worry about the outcomes. Just look at it as a very experimental thing. If you're not familiar with the kind of reporting or intelligence that your system has available, just deep dive into it, export a bunch of reports, have a dig around, don't worry about messing things up, just really dig into it and explore and see what is actually possible. But the other side of that is you really need to understand how data flows through your organization, because there are a few key pieces of data you are going to need to track to be able to generate these kinds of financial reports, very simple financial reports that are going to make a meaningful difference to your business of watching your margins and monitoring your stock turns. When I say understand your data flows, this isn't explicitly computer systems. This means the systems and processes you have in place to capture data. An example would be you place an order with your distributor, stock has arrived. Whoever is receiving that stock at your store needs to receive that stock into your system. That is the moment in this data flow where you should be capturing the cost of each of these units and entering it into your system. It requires discipline, having a standard process in place, checklists are very good for this kind of thing, and making sure that whoever is responsible for receiving that stock into your business is following this process and capturing that data in the first instance. The other thing about understanding your data flows is working out what reports are meaningful to you. I'll be very honest, that takes time. It takes time to understand what kind of reports are possible to generate from the systems you use, and you will 100% find that over time you will evolve the reports. You'll discard some that you were generating and realize, 'Oh, actually I really want to know more about this part of my business,' and move in those directions. In particular, for measuring and watching your margins, which is monitoring your gross profit by SKU, the data fields you are going to need to track are the product name and/or SKU, the unit of measure (so if we're looking at a trading card game, that would be whether you're selling it as a display or as a booster pack), the cost of goods sold (the COGS), and ideally the moving average cost. What we mean by the moving average cost is, I'm going to use a single card as an example. Let's say you bought one Jace, the Mind Sculptor for $60, and that's in your inventory currently. Then you buy a second Jace, the Mind Sculptor for $50 and put that into your system. Ideally, your POS or inventory management system would now have a moving average cost of $55 for both of those Jace, the Mind Sculptors. Most systems are able to do that, but you do need to understand how that works and be very disciplined to enter in the purchase price each time the inventory is received to actually generate accurate moving average costs. Obviously, you're going to have to capture what the unit sale price is and the date that it was sold so that you can generate reports by a date range. Optional but I highly encourage capturing this data is brand, for example Flesh and Blood, Pokémon, Magic, Yu-Gi-Oh, or category: TCGs, RPGs, board games, and so on. It might feel daunting right now, but we're going to run through a couple of examples that I hope will make it look a little bit easier. I just really implore you to be patient. It takes time to work this stuff out. It takes discipline to just stick at it and keep plugging away to work out these data flows, to understand the systems, to collect all of these data fields. This is a marathon, not a sprint. So this is an example report. This is just fictitious data we've made up, but this is an example of a report we would generate in terms of the format. This is just a very small snapshot of a segment. If your store is selling 600 different SKUs or a thousand, obviously your report is going to be much larger than this. But there's a lot of the POS systems and inventory management systems that will visualize data for you. For this kind of granular analysis, just downloading a CSV spreadsheet and getting the raw data, select all, turn it into a table, and then you can filter it and organize the data so that it's meaningful for you. On this particular example report, we've filtered it by brand so we can have a look. Okay, how is Flesh and Blood doing? How is this Mega Core Games, which is like, my cash register has been ringing hot with the Dinosaur Robots Raw over the last quarter? Let's have a look at the data here. When you're on the cold front and you're doing the business, or you're not looking at this sort of analytics, and you're just seeing sale after sale after sale of Dinosaur Robots Raw, and Mega Core Games is just the most important thing in your business, it's all about this product. It's really easy to not actually understand your business. Things become apparent once you start drilling down into this data. In this particular example, we can see that Dinosaur Robots Raw has accounted for 60% of our revenue for this period of time, but it's only contributed to 32% of the gross profit. Once you start seeing things like this, that's when the alarm bell goes off. You start asking questions: why is this? Why is it only generating 30% of my gross profit when it's generating 60% of my sales? Some pretty common explanations for this kind of scenario are: are we discounting? Is the price competition so high that I'm having to sell so far under MSRP that my gross margin is just getting hammered? In this particular model we've got in front of us on this example report, this Dinosaur Robots Raw is a $39.99 MSRP product that's been sold through at $29.99, and that's why you're seeing these kinds of gross profit contributions so low. If you compare it to something like the Flesh and Blood products which are now listed on this report, they're only contributing 39% of the total revenue, but they are contributing 67% of the gross profit. It's because there's probably little to no discounting going on, and it's delivering solid gross margins and contributing materially to your business. When we go through these sorts of things, we can sometimes see some outliers. Our Witches and Warlocks here by Alchemy Labs, very low turnover, very low revenue, but it does have a very high gross margin. It's pretty immaterial to the composition of this particular business, but at least when you sell it, you're making good margin. Maybe Witches and Warlocks looks fantastic on your shelf, and you're happy to have it there for that reason. So the next thing we want to look at is stock turns, which is the second part. Stock turns are simply a measure of how many times you sell all of your inventory in a period, which is typically one year. What is a good stock turn for a retail business? In general, it's generally accepted that a stock turn of between two and four is the sweet spot for a general retail business. In fact, there's a five-year benchmark for hobby, toy, and game stores from the Retailers Owners Institute which has tracked it at between 2.4 and 3.9 stock turns per annum for toy, gaming, and hobby stores. Again, it's absolutely vital to be able to obtain data on your COGS to be able to generate a stock turn report. The calculation is simply the cost of goods sold divided by your average inventory for the time period. Stock turns become powerful when we can start looking at it by brand. When we move away from looking at the macro level of our organization, we can start measuring the performance of the brands which are making up the product portfolio we are selling in our business. Let's look at a couple of examples. Example one is a business which has a very low inventory turnover or stock turn rate, way below the bottom end of the sweet spot of two. What this indicates is that the most probable cause is that there is too much dead stock in this business, or purchasing levels are too high. But in this particular example, because the opening and closing inventory levels are very stable, it's probably a historic issue where there is just too much dead stock in this business. Example two is a business which has a stock turn rate way above that industry benchmark. What this typically means is that this business is not carrying enough stock. Let's have a look at what the implications of that actually are. A business with a low stock turn rate has inefficient use of capital and shelf space. Shelf space is valuable, and if your shelf space is getting cluttered up with stock which has very low stock turns, you are not delivering a good return per square meter or square foot, and your working capital is getting tied up in dead stock. The other thing is that you're potentially paying too much tax if your assets are overstated. Some actions you could take to address this issue: first, run an inventory report to identify what the outdated stock is that you are carrying. Second, write down your outdated SKUs. You probably want to check with your accountant to make sure you comply with your local tax laws, but this is how you can potentially reduce your tax bill by accurately representing the asset value of your inventory on your balance sheet. You should be looking at discounting, bundling, or even donating or disposing of outdated SKUs. Again, your shelf space is valuable. It is a cost to have dead, bad stock on your shelves or in your storage. By reducing your holdings of these low-turnover SKUs, you are going to free up working capital to put into other more productive parts of your business. One tip I do have if you are doing a write-down: back when we were running a national distribution company, we would be writing down hundreds and hundreds of SKUs each quarter. You want to be doing this with bulk CSV imports. Try to understand your POS system or inventory management system, work out how you can export all of your inventory list, then do your write-down and change the cost which is allocated to each SKU, and then import that CSV back in to update all of the moving average costs. It'll save you a lot of time. Let's have a look at the consequences of having a high stock turn rate, a stock turn above four. You're potentially missing out on sales because having a stock turn rate this high means you are likely to be out of stock of hot, fast-moving popular lines, which means you're going to be missing out on potential sales. The risk that comes with that is it may impact your customer loyalty. If you develop a reputation of just being out of stock of things people want to buy, but someone down the road has it, people are just going to naturally gravitate towards going to the option down the road where they can just buy the thing in the first instance. The actions to take if your stock turns are this high: you need to boost your holding of the high stock turn products. You need to consider putting additional capital into the business if possible. It's completely reasonable to go and see debt financing in this situation because this will help you invest more working capital into inventory and stop missing out on sales by being out of stock. You should review your pricing. If you are discounting on MSRP and your stock turns are this high, you should consider raising your prices in line with MSRP. In summary for this section: invest in your data. Invest in trying to capture the data as it flows through your organization and really understanding what your POS or inventory management system is capable of doing so you can generate these gross profit reports and stock turn analyses at a granular level, at least at the category level and preferably at the brand level. This is how you get to know your business. So let's move on to the second stage: growing towards your goals. I always think that the most important thing when thinking about these concepts is defining and understanding what you're actually growing towards, or goal setting. I personally believe it's very important to understand what you're growing towards two years from now, five years from now, ten years from now. The further into the future you're looking, the more hazy and maybe vague it gets, but a lot of things can change over the span of ten years. But at least sitting down and writing down where you would like to be in ten years, five years, and two years, because once you really start to understand this, you can start aligning your decision-making with achieving these milestones. For this example, we're going to use a pretty typical goal of an SME or SMB business owner, which is: I would like to be able to pay myself X dollars per year. Let's say X in this case is $60,000, and you currently pay yourself $40,000 per year. So the goal here is to grow the profitability of your business by $20,000. So what can we do to grow our business using the methods we've just talked about? It's pretty simple: identify your high gross profit, high stock turn SKUs and invest in these. Identify your low gross profit and low stock turn SKUs and divest from these. We're going to use Flesh and Blood as a case study of a product to invest in. From what we see, it certainly ticks the boxes for a high gross profit, high stock turn SKU. I would know: Legendary Studios does direct Flesh and Blood to local game stores in the New Zealand market. The following case study is based on actual data, just converted to US dollars for the purpose of this presentation. In New Zealand, a typical two-month Flesh and Blood sales profile looks like this. We've broken it into low, medium, and high, with low being the bottom 10th percentile of stores, mid being the 50th percentile, and high being the 90th percentile. High isn't the biggest store, but it's the 90th percentile. Again, this is converted to US dollars. This is just a typical two-month window, not a release month, just on average what a two-month sales period looks like in New Zealand. A low store is selling through 48 displays of Flesh and Blood in a two-month period, 100 displays for a mid, and a high is at 300 displays. The case study we want to look at is: say my store is in the low category, and I see an opportunity to move up to mid. We're using Flesh and Blood here, but you could apply this approach to any product you are able to monitor or measure, or that you're interested in, and do some analytics on. So what does this look like if we annualize this? For a low store, we're generating about $12,500 USD of gross profit, and at four stock turns per year, your average inventory holding is going to be about $3,800. You can also think about how much working capital you have employed to carry the stock to achieve this outcome. But how do we move? Remember our goal here is to increase profitability by $20,000. That's our goal we're growing towards. Keep that in mind as we move through this. First, if we could move from the low tier to a mid-tier store, the first thing we would need to do is invest some working capital into inventory. We cannot get to the mid tier without having sufficient inventory to actually generate that level of sales. If we're able to invest another $4,000 in this inventory in Flesh and Blood, it is going to generate for us about another $12,000 of gross profit. That's more than halfway towards our goal of increasing profitability by $20,000. The other thing you can think about here, coming back to the working capital, is that this doesn't necessarily mean going out and borrowing $4,000 or somehow obtaining an extra $4,000. This may be achieved by diverting your purchasing away from low gross profit, low stock turn products into better performing products with a higher gross profit margin and higher stock turns. That is why the financial reporting is so important, so you can identify the products you need to divest from and direct those resources towards the products you need to invest in to grow towards your goals. But there's another part to growing towards your goals with any product, whether it's Flesh and Blood or any product you carry. You need to invest in marketing as well. Obviously, with trading card games, a big part of that is organized play. I know it's tough right now with COVID. The world will move past COVID. We do have programs in place to support local game stores during COVID, such as the Skirmish Season which we are running in selected stores around the world from late February through to mid-April in all Northern Hemisphere territories. There's great documentation and videos available on our website for how to run webcam-based OP. But the more fundamental point here is investing time to build your community. When you do that well, and you're all local game store owners so you know this as well as I do, when you invest in building community through creating incredible organized play experiences, you create long-term engaged customers, customers for life. The other part of marketing is digital marketing and in-store presence. With Flesh and Blood, we have a ton of digital assets available on our website, fabtcg.com. I don't know what was going on with this slide, but I can promise you that the digital assets and all of our physical print assets look a lot better than this mishmash of a slide here. Check out the website. There's a retailer section. You can download all of the digital assets there, you can download the process to print. We also send out monthly kits. Our OP kits go out to every registered store who is able to run OP, whether it's online or in-store, and they all include A2 beautiful posters. For the high-performing stores, we also have incredible banner packs, two-meter banners that go out to the stores which are in their mid to high performance tier. We have an entire program designed for activating your community. We want to make it as easy as possible for local game stores to activate a community once they've decided to bring Flesh and Blood into their stable. All of this is available on fabtcg.com in the retailer section. It starts with a welcome event. We have specific welcome decks which have been designed for that first play experience, supported by our learn-to-play six-minute video. We've seen incredible success around the world with stores hosting these welcome events. The entire package to run this is provided free of charge. It has 24 welcome decks and prize materials. Feedback unanimously from all stores who have run this is that players are able to just sit down, open the welcome deck, watch the six-minute video on their phone, and they're good to go. It requires minimal time investment from staff. You do not need to be sitting down and teaching people one-on-one how to play this game. It's really easy to pick up and play. It's a very simple progression pathway: you do the welcome event with the welcome decks, move on to sealed or draft. Flesh and Blood is designed for an incredible sealed deck and draft experience, a very low-cost way to just play the game at the next level. We have two constructed formats: Blitz, which is 52 cards, a fun fast format, games are typically 10 to 15 minutes, and Classic Constructed is your big serious tournament format. But yeah, a very clean progression pathway for new customers. Again, the macro point here is to grow towards your goals. One part of it is inventory, making sure you have the working capital allocated to the high gross profit, high inventory turn product lines. But the other part that always has to come with it is investing in building your community and marketing the products which you want to be successful in your store. So we're moving on to the final part, folks, which is succeed through taking action. When you're able to do the margin analysis and the stock turn analysis at the brand level, you're able to really understand where you need to be directing your resources, where the opportunity lies in your business. But it does require you to invest the time to understand and explore your inventory management system or your POS system, and investing the time to set up the systems that capture the data flows through your organization. Again, these are the tangible, physical actions your staff are taking. Oftentimes, this needs to be backed up with checklists, with training. It takes time. Both of these things—understanding your inventory management system and POS, training your staff, building your system—take time. You need to be chipping away at this sort of week after week and be patient with yourself, be patient with your team. But if you are committed to implementing these things, and it can take a year, it can take two years. From my experience with the businesses I've been involved with, it took us years to implement and refine these kinds of systems to the point where we were able to really start harnessing the power and unleashing the efficiencies that took us to being very successful. The second step is, once you've set up the systems and you're able to capture this data, it's identifying your best performing, highest potential SKUs. Obviously, the best are products that have high gross profit and high stock turns. If there are products that have just high gross profit but you think you can increase the stock turns, maybe through more investment in building an in-store community or marketing programs around them, then this is where potential lies for your business to grow. Invest your time and your working capital in your high gross margin products with high stock turns. You need to divest from the products which are low gross margin, low stock turn products. And just set some realistic goals about business development. Personally, I found it very useful in my journey to allocate a day to just business development. For a number of years, every Friday was Business Development Friday. It doesn't need to be an entire day. Maybe you start allocating half a day per week, maybe it's 9 to 1 on Fridays. This is the time you need to carve out, you need to cherish, you need to protect. You need to say, 'During this period of time, I'm going to be working on my business, not in my business.' If you can have the discipline and the focus to do that, then you will start moving towards your goals. You'll start growing towards your goals, and you'll start unleashing the efficiency that comes with financial reporting, in particular watching your margins and monitoring your stock turns. So folks, that is the end of the presentation. I just again hope that this is useful to improving your business. I just want to thank you all for opening your doors every day for people to come together and play great games. What you do for society is meaningful, and never ever forget that. Thank you so much.