Don’t stop at one tier of the industry.
It’s important to have vision for how you want your company to develop beyond the opening stages. One goal for later stage growth is vertical integration.
Vertical integration means adding elements from other tiers to your operations. For retailers, that means distribution and game production. Each of these steps involves creating a new business model—and you know how hard that can be. It’s not something to be taken lightly.
Several companies have splashed this concept. Eden Studios, Reaper Miniatures, and Guild of Blades operate retail stores. Many manufacturers operate online stores selling products other than their own. I’ve written very viable plans for others manufacturers who wish to expand into retail.
At least two major distributors have operated chains of retail stores. Games Workshop actively engages in all three tiers. They’re certainly a strong model for any expansion along these lines.
Vertical integration is the secret of the indescribably wealthy. Carnegie, Rockefeller, and others became explosively wealthy by controlling every step of their industries, from pulling raw goods out of the ground to putting them in the customer’s hands. Modern large retailers do this in the form of generic products. Publix, Sam’s Club, and Toys R Us all have extensive production capabilities.
You’re already doing this part, right?
If you’re a manufacturer or distributor and want to consider adding retail stores to your company, okay. Let’s talk.
Obviously, you gain increased profit by collecting the retail share as well. In fact, if you’re managing all three tiers, you’ll collect everything but the production cost. For $40 retail book that cost you $8 to make, you’ll collect $32. Retailers see the largest share of a product’s sales dollar, so you can see more sales per item sold.
Manufacturer to Retail
Adding physical stores to a manufacturer allows opportunities to promote your products to new customers—something most small publishers need. Small publishers tend to market their products to existing gamers. The storefront allows you a chance to make new gamers out of people who walk in out of curiosity.
Having this second tier provides manufacturers with some even cash flow. You know that cash flow is an awful thing. You pay for all of the development and production costs associated with a product weeks or even months before you start collecting for sales. Having a retail store smooths your cash flow. Games sell every day. Money comes in every day. Cash flow is less awful.
Distributor to Retail
If you’re a distributor wanting to get into retail, you have the advantage of having secure supply lines and a ready inventory already in stock, reducing the amount of capital you need to raise to open the store. That might cut 2/3 of the opening cost for you (or at least defer most of it, since you’ll have to restock those goods to continue selling them). Some distributors have found themselves getting into retail by taking over stores that found themselves deeply in debt. If you have stores in that situation and are thinking about going into retail, forgiving debt in exchange for a transfer of ownership could be an easy in.
Buying from publishers at the distribution discount and selling at retail offers a significant improvement in profit margin per item. However, the amount you’d have to buy to get those terms is much higher than you’ll ever see in a single store. Therefore, if you want to buy on those terms, you’ll have to find other customers to whom you can tell.
Retail rent and warehouse rent are very different in cost. You aren’t likely to be able to run even a small warehouse out of your store. You’ll need to find another location, get manufacturer accounts, get retailer accounts, and staff your new operation.
I’d do this part last if I were pursuing all three tiers. By its nature, you can’t dabble. Distribution takes the largest up-front investment. Also, you’ll upset your current distributors once you become their competitor. It might not be worthwhile even if you were to grow very large.
Estimates for the cost of starting a distribution center vary with who you ask. I’ll risk making a declarative statement by estimating the startup cost at $250,000 with a capital reserve of $40,000 to $60,000, exclusive of owner salary. That assumes a pretty cherry-picked selection; you could easily spend ten times that much trying to provide a broader SKU offering.
You don’t have to produce and expensive board game or a collectible card game. You could produce role-playing game adventures, or non-collectible card games, either of which is far less expensive. You could also produce a dizzying array of accessories like generic map packs, cardboard cutouts for use as miniatures, dice, painting stations, t-shirts, or other thematically-related items.
You won’t support a manufacturing division out of the sales potential for a single store, except on a very small scale. Production can be an excellent addition if you have sales channels outside of your store, like an aggressive convention schedule or a big online presence.
Production can be relatively inexpensive. As I mentioned in Link The 1k Company Revisited, you can start a gaming company for cheap. Better yet, you can remove some duplication if you already have a storefront. Putting out some accessories can cost as little as a couple of hundred dollars. Creating a board game based on the Avengers movie might cost up to a million dollars with licensing fees. Here’s a tip: because you’re already faced with a limited customer base, look for something with repeat sales potential.
If you’re a distributor, you have a couple of other options for getting involved with game production. If a game does well for you, but not for other distributors, maybe it wasn’t a failing of the game, but on their promotion. You might make the publisher an offer for rights to the game (exclusive or otherwise). A publisher who goes out of business might be interested in recovering a part of his loss by selling off rights along with remaining inventory. If the game is worthwhile, you might even be able to hire the publisher full-time, to continue developing the lines that interested you and roll out new products for your newly vertically-integrated company.