Friday, June 6, 2014

Inventory Management: How to run a Retail Hobby Location

The largest problem our hobby faces, especially in the tourist infested, price inflated Santa Barbara, is having a place to buy and play. While many big cities like Los Angeles, San Jose, Chicago, Etc. have multiple wargaming stores, GW stores, and other hobby retailers, lots of smaller towns may only have one.

Santa Barbara is one of those towns, featuring a quiet little comic shop with a mediocre range of wargaming products lined up against the their fall wall. While their location is great, right off the main drag of the town, their advertising is lack-luster and their main cash driver is comic books. So how does a small shop that doesn't have the space for playing or the knowledge for selling push their inventory lower while still addressing the needs of the sizable gaming community in the area?

This is an issue that our gaming store has faced since the late 1990s. While comics are their main focus, they have a LOT of old inventory cluttering their shelves. The entire floor space below their blister racks are stacked 4-5 boxes high with tanks, monsters, and terrain that just aren't moving like they probably initially hoped. Part of the problem is a lack of exposure.

Most gamers I have encountered in my town had no idea that the comic shop sold Games Workshop or Privateer Press. Once they find out, they are very excited and head over to the store right away to get their weekly daily fix. However, because the lack of knowledge at the shop in the world of miniature gaming is absolutely zero, most of the items people want are special order only, and the items people already have, like special characters, have five or six blisters hanging on the wall.

This leaves potential buyers with two options, either special order from the retailer at full price or order online at 25% off and receive it at your doorstep in the same (or often in less) time. This leaves customers with a bad taste in their mouth of the store, and causes them to look very much like this:

So now the store is faced with a problem: Do they invest in stock, holding thousands of dollars in inventory that may or may not sell, or do they run as lean as possible, only offering special orders? My solution is the happy medium, but one that requires the business owner, or at least their underlings, to understand how the hobby and, more importantly, each game system works.

I call it like-lean or the 20/80 system. Basically, if you stock the 20% of things people need to get started in the game, while also offering the remaining 80% as special order your inventory will flow smoothly through your doors without much, if any, backlog. The concept is that you limit special characters and large boxes to special order only, while having a comprehensive stock of the primary kits used to build a beginner army, you will move product easier than if you just bought one of everything and always reordered each item you sold. Per individual customer, kits that sell for $75 and up are usually annual purchases for gamers, and special characters are usually only purchased the day the come out, and then never again. Why should you reorder something that costs 60% of retail and sits on your shelf for 12+ months when, instead, you can provide the basic needs for your consumer while offering an easy solution to getting those special models the customer wants.

This is where product, and more importantly, customer knowledge comes into play. Now, I do not expect owners to know everything about the products they sell, especially when they have 100 or more product lines in their shop. Their employees should be the ones who know and specialize in different aspects of each product line. Owners should be like a captain in Star Trek, and less like a captain in Star Wars.

The employee is an integral part of learning about the customer, and getting the customer to learn about the store and what the store can offer them with regards to the hobby. This will be covered in greater detail later on.

The like-lean system focuses on efficiency of product placement and asset allocation. Too much capital tied up in static inventory means you may not have enough liquidity to purchase new, hot sellers as they roll out, forcing the business to either stockpile poor goods or selling off items at a steep discount, in turn gutting your revenue. In these circumstances its pretty clear, you have
Even crazy aliens guy knows your problem!
Instead, the owner or purchaser needs to look at what customers need to start the hobby while also making sure they have items that get the customer excited about what the hobby can offer. Now assuming the business in question is like the local comic book store in Santa Barbara, in that it doesn't have enough space or enough man power to run gaming demos. There is no physical place for the customers to interact with the miniatures outside of their boxes. There are options for this, which will be addressed in the third article of this series. Without tactile aides to show the customer what they are buying into, the box art and display must be enticing enough to garner interest from potential and returning buyers. This means no dusty shelves, no haphazardly placed boxes, and NO OLD PRODUCT.

Keeping the like-lean means that your boxes do not have to be stacked on their sides, they can be standing up, facing out towards the customer showing off the exciting models within. These colorful box fronts draw the eye of the customer to them, like a moth to the flame. Once the customer has engaged with the product, the trained employees can begin the process of interacting with them.

Giving the example of Games Workshop, because their product line is the easiest to work with in this scenario, we will stock a small gaming store not unlike that comic book shop I keep referring to.

After spending all afternoon working on spreadsheets...

I needed to take a break. So I pulled up excel and started working on more spreadsheets, but for fun! By utilizing the 20/80 principle I was able to tally up the total recommended product for Warhammer Fantasy and Warhammer 40k for the comic book shop here in town. The total stock for Warhammer Fantasy totaled 178 kits, and Warhammer 40k came out to 203 kits. This includes duplicates. The goal was to have 1 or 2 of each generic hero or HQ choice, 2 kits of each VIABLE core or troop choice, and then 1-2 special choices with 1 large kit under $75. Now, I had to attack Space Marines differently, mainly because of all the flavors of space marine available and because of how many armies use their vehicles.

The idea behind my approach was that customers should be awarded for their purchases. Each time they go into the store they see that big kit on the shelf, it's something they want, but thanks to the employee's knowledge, they know they cannot use yet. It gives them a goal to shoot for. Build up an army to justify buying that big, cool kit. It also gives them a frame of reference for pricing. While each box of 10 models may cost $30-$50 bucks, that one model costs $75, so I am getting a good deal here. It's both an incentive to buy more product while also an incentive to make that annual big purchase. The big kit is also there for impulse buyers and hobbyists. Hobbyists and impulse buyers do not follow the same formula for normal customers, they usually grab the coolest looking thing in the store and they are set. These people still have their big toys to buy without the company breaking the bank keeping all the big kits in stock.

If the company is facing the same situation our comic book store is facing, they already have a ton of product that needs to be sold before they can transition to the "like-lean" method. This is actually simpler than it may seem. Just stop buying product.

Yup. Force your inventory levels to drop so you can afford to move to the like-lean system. Stop reordering Sigvald the Magnificent. Stop ordering Sisters of Battle (no, seriously, let it go). Just restock the items from the list that has been developed. If someone comes in looking for a special model, let them special order it, do NOT keep it in stock.

On to special orders: Why would a customer wait to buy a model from the store when they could just purchase it online for cheaper? Because the store offers a competitive discount. It doesn't need to match the online price, but it needs to come close for convenience sake. These special orders are about maintaining loyalty, not making hand over fist money, that is what the in stock items and impulse buys are for. I would propose at 15% conservative discount, about double the CA sales tax, or a 20% if competition is fairly high. Without having to pay shipping costs, the customer is getting what they want for essentially the same price as online, and they know where the company that is selling them the product is located. Offering the pre-order discount also encourages the customer to spend more at the store thanks to up-selling. They have just saved money, which warps their view on value. If the kit they purchased cost them $85 instead of $100, they have $15 more in their pocket than they used to. $15 is enough to buy a hero or HQ (at least part of one) and it's well on its way to purchasing a regiment box. Encourage them to look around, buy paint or hobby tools, or have an employee show the customer some high margin items like books and magazines. Now you have taken that special order, added a value discount, and sold more than you initially would have if you had the item in stock.

I hope these ideas have given you an idea of how inventory management in a hobby store setting feels like, and how you might improve the shop you are currently working at or running. Up next: Employee Success: Rules of Engagement.

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