Stock Options Part Three

Returns. They cost everyone money and in general are no good. Except that they can provide a safety net. Not much of one, but if you do the math correctly, enough.

First: it is NEVER a good idea to trade significant margin for returnability. When I say significant I mean a variety of numbers depending on the financial circumstances of each store. In general, for a reasonably well run store, returnability is worth at most 3.5 points of margin and often as little as 2 or fewer points once the costs incurred from returning the product is considered.

As a quick example, lets take a store that has $450 to apply to new inventory, completely unproven product that the store want to take a chance on (for us, a lot of manga titles fall into this category). Assuming an average retail value of $15 per title, that’s $9 each w/a 40% discount from a wholesaler, allowing the store to purchase 50 different items (presumably all different titles). That same investment nets 60 different items if purchased at a 50% discount from Diamond or Cold Cut. Assuming an 80% sell through (decent but not particularly good), the store sells 40 titles if purchased from the wholesaler for a total of $600 ($150 profit). 80% of the titles purchased at the higher discount equals 48 titles sold for a profit of $270. Returns will even that up only marginally. It’s no contest. Even with more titles sitting unsold on the rack, the ten points of margin are worth nearly twice the profit.

Where returnability becomes worthwhile is when the difference is more in the neighborhood of 2 or 3 points, say when reordering from Diamond a title that has a max discount of 45%, minus 3% reorder penalty. Now you’re dealing with 40% discount from the wholesaler and 42% from Diamond.

Same $450 dollars, same $150 profit from the wholesaler. Now Diamond with a 42% discount only gets the store 51.72 titles compared to 50 (we’re dealing in decimals from here on out). With 80% sell through that’s 41.38 titles sold and a profit of $170.69. Still better than the wholesaler. Here’s where returns make a difference.

The first thing to know is that you can’t just return anything that doesn’t sell. Most wholesalers reserve the right to refuse returns that exceed 10% of all orders, essentially making just 10% of each order actually returnable. Plus, there’s shipping and manpower costs to deal with, generally equal to about 4-5% of the retail value of the returned merchandise (higher the less the return shipments are consolidated). The final catch is that the credit is only equal to 50% of the retail value of the returns, rather than the 60% the store originally paid. Basically you rented the items from the wholesaler for 10% retail.

Back to our example, we’ve sold 40 of the 50 titles ordered from the wholesaler. 10% of the order equals 5 titles, or $37.50 credit once returned. Once shipping and manpower costs have come out of that (assuming these returns were combined with returns from other orders), the credit is roughly $34. With a profit of $150 off the sales and a return credit of $34 the store does come out ahead of the $170.69 profit with the 42% discount. Many would say that simply selling the leftover stock ordered from Diamond at a deep discount would be better and they may be right, though that still forces the store to find someone to buy the product even at that discount. Plus, if such tactics are necessary on a regular basis, it can create unfortunate habits among customers who will wait to see if an unpopular title might end up in the bargain bin.

There are many drawbacks to using wholesalers, and the non-returnability of the direct market is that way for a reason. But if used wisely, particularly on titles that are anything but sure-fire, wholesaler returnability can be utilized effectively to help a store’s bottom line.

Ultimately, this all boils down to having as many avenues to get hold of product as possible (including, as Jason pointed out in the comments, the publishers themselves). If there is one lesson to take away it is that putting all of your orders in one basket for the sake of a single point of margin and at the potential cost of one or more turns of inventory is never worth it. Margin is important but inventory turn is bread and butter.

There’s more math to back that up, but my brain needs time to heal.

Stock Options Part Two

Sorry, no post yesterday, this is a long one and its got a lot of math. Part two today, part three tomorrow or Monday.

We left off last time discussing the legwork that may be necessary to carry certain products, namely Understanding Comics. Immediately surrounding it on Amazon’s sales list are In Cold Blood and Lolita two solid backlist titles for the chain bookstores, which means a direct market store should be able to sell the heck out of this book.

So, how to get it on our shelves? The same way Amazon and Barnes & Noble do: buy it from a wholesaler. Now, this is dicey territory because wholesale book suppliers, like Ingram and Baker & Taylor, are only going to give a retailer 40% discount off of the retail price of the book versus the 45% to 50+% it is possible to get from Diamond and Cold Cut. What this requires of retailers is to apply all of that “free time” to analyzing which supplier is the best to actually purchase the product from. Each retailer has to determine that for their own individual circumstances but I’ll walk you through my own thoughts on this.

As I mentioned at the beginning of the previous Stock Options post, there are two primary factors, availability and cost, in determining which supplier to use with a delicate balance of the two being the determining factor. First, availability trumps cost when a title is available from only one supplier. Since it’s been so useful thus far, let’s return to Understanding Comics. Diversity of material is goal number one at MacGuffin and as such we subscribe to the mile wide, inch deep philosophy of retail. There was, therefore, zero chance that we would not carry Understanding Comics if it was at all possible to do so. Availability trumped price and we ordered it through Ingram, at a 40% discount.

Let’s assume for a minute, though, that as a result of an improbable temporal singularity, Diamond, Cold Cut and Ingram all had this title available at the same time. Availability is not necessarily equal at this point because, while all three can ship in stock items almost immediately, cost becomes an element of availability. But first, let’s look at simple discount as the primary cost factor in this decision.

Any store’s discount from Diamond is primarily based on monthly pre-orders. For a much better, more detailed breakdown of this, check out Brian Hibbs excellent Tilting at Windmills column on the subject. Go ahead, I’ll be here when you get back.

Ready?

Okay, in general, MacGuffin gets a 50% discount on everything we order from DC, Image and Dark Horse, regardless of when we order. We’re still young so Marvel is nice enough to give us 53% on everything we order. We get a 50% discount on items from several other publishers if the order is placed with our regular Previews preorder (due 2 months before books ship). This is an incredibly inefficient way to manage inventory, however, because it virtually guarantees a title that has just sold will be off the shelves for several weeks at a minimum. Therefore we reorder with our weekly shipments, limiting our time without said title to roughly a week and a half. To do this, however, we’re penalized 3% by Diamond (Marvel, DC, Image and Dark Horse absorb this cost for us, hence the any time part). For most other publishers, however, particularly the bigger “independents” like Fantagraphics and Drawn & Quarterly, our initial discount it limited to 45% or 40% with another 3% deducted from reorders.

Here’s where Cold Cut and Ingram get our business. Understanding Comics is published by HarperCollins and would come at a 37% discount from Diamond (as a reorder), realistically a 45% discount from Cold Cut (I’ll break down their discount system in part 3), and a 40% discount from Ingram. With a cover price of $22.95 that’s $14.46 from Diamond, $12.62 from Cold Cut and $13.77 from Ingram. Unless Diamond is the only option, we will never order this title from them. Now Cold Cut would be cheapest, but shipping costs are a factor. Ingram offers free freight for orders of 50 items or more while Cold Cut offers a 90% rebate on shipping for orders over $2000. So the one thing that can tip this order in Ingram’s favor is free freight, but only if we’re ordering 50 titles, which is not (at least yet) feasible on a weekly basis. This is the only area where Diamond wins, because we have a shipment coming from them every week regardless and adding one or two extra titles is not going to affect the shipping cost (20 or 30 titles on the other hand, probably means another box and additional cost).

Basically the way it breaks down is this-
Marvel, DC, Dark Horse & Image:
If available from Diamond you’ll get the best price there

A few select other publishers who offer a 50% base discount from Diamond:
If available from Diamond you’ll get the best price there

Fantagraphics, Drawn & Quarterly & everyone else:
Cold Cut is option number one, but only if providing a 50% discount and several items can be ordered at the same time to save on shipping; otherwise Ingram is the best bet.

There’s one final element that occasionally makes Ingram a better, though potentially controversial, bet and that’s returnability. Sounds perfect for those fringe titles: doesn’t sell, just send it back right? Not exactly.

Up Next: The math of the market

Recommended Reviewing

Nextwave #1
I’ve been trying to figure out what I think about this one for the last 24 hours, which mean Ellis and Immonen have succeeded on some level. I don’t know what kind of legs the whole thing will have, particularly because most of the over the top elements are its weakest (Dirk Anger?), but I’ll definitely be back next issue. I was left with the impression that I had just watched something on Cartoon Network that was pitched as a show for kids and then taken over by a show runner with absolutely no interest in appealing to children as the primary audience.

The Good:
The characters. I’d probably be willing to read twelve issues of these five talking.
Making Boom Boom and Photon interesting.
The Bad:
The Etheric Loop Recall Televocometer? Really?
The huh?
The voiceover-like omniscient caption boxes. Has potential but already threatening to get out of hand.

Local #3
First, we’re what an hour from Richmond? It’s always cool to recognize landmarks in a story. This is as slice of life as it gets, in fact it’s four separate slices of four separate lives. Wood does a nice job using the interview as a framing device since it allows for easy juxtapositions between what we see in the panels and read in the captions. An interesting story, a good read, but I’m left with the same impression that every other issue has left: where’s the rest of the story? Sure there’s enough there to make the point, but like issues one and two, it felt like a chapter, not the whole thing. I guess that’s a problem inherent to this format but it wasn’t nearly as obvious in Demo and is really exacerbated by having four leads in a 24 page story.

The Good:
The disappointed fan. We’ve all been there.
The awkwardness of returning home when it’s not really home anymore.
The Bad:
The missing bits of motivation. The reader can fill in the gaps but only by applying band clichés.
The huh?
There’s ambiguous endings and then there’s leaving the reader hanging. For a band’s break-up to have been “planned well in advance” there’s something missing here.

Ganges #1
Not a classic but definitely worth the time, particularly if you’ve ever had an interest in storytelling. The first half is essentially a visualization of the creative process and the latter half of being an audience (be it reader, listener or video game player). Not exactly action packed but its got some really nice moments and is definitely worth the effort.

The Good:
The various iterations of the Litterer. Anyone whose ever written a story gets that one.
“Not to scale.”
The Bad:
Trying a bit too hard, but to good effect.
The huh?
I like recurring motifs and bringing back the atom drawing for the sleepers, but what’s with the Litterer in the backyard?

Catwoman #51
The Good:
The Zooey Deschanel Cover. Yeah, sue me. Plus it’s got a Lost reference.
The Bad:
Yeah.
The huh?
Catwoman gets pulled over by the cops in a stolen car. Really couldn’t have done anything better with that page?

Other noteworthy releases: Truth Serum, Godland, Polly & the Pirates, Phil Hester's Oversight, Fallen Angel and Usagi Yojimbo.

Stock Options

There are two primary issues that any store has to deal with when addressing inventory:
1) Cost
2) Availability

Let’s go in reverse order and then talk about how in reality the two are deeply entwined. There have been several online discussions/columns/investigations over the past month about issues of availability. Most recently Chris Butcher let us all know what it is exactly that’s preventing Top Shelf and the retailing community from selling a copy of From Hell to everyone without a copy as well as those who need to replace a copy that’s falling apart. Meanwhile Brian Hibbs played Cassiopeia not once but twice, pointing out what we’ve all pretty much known: Diamond is not only a de facto monopoly, it’s one that seems to operate on a conservative if not completely shortsighted business plan.

Toss in the near fisticuffs between Dirk Deppey and Tom Spurgeon, basically a critic speak version of bookstore vs. direct market (mainstream vs. ghetto), and we’ve seen quite a bit of discussion of distribution on an industry-wide scale. What this means for our 1200 square feet breaks down to what do we want to carry and who can we get it from (what are they going to charge us for it comes later). The niche we’re carving out is to serve the “standard” direct market customer looking for Teen Titans, X-Men and maybe an Usagi as well as the bookstore customer who enjoyed Persepolis but is not sure where to go next (or somehow just can’t find Persepolis 2 at Barnes & Noble or Borders). What becomes an issue is, to steal Hibbs’ example, how are we going to carry Understanding Comics? Diamond doesn’t carry it, won’t know when they can fill a backorder for it (Brian is dead on about the insanity of that particular inventory strategy). Generally option number two is Cold Cut, only they don’t have any in stock either. Even if both companies had it in stock, neither is going to give us better than 45% margin (more on that later).

So, two of the best-selling products our industry has to offer Understanding Comics, currently in the top 1500 of ALL books on Amazon.com, and From Hell, currently out of print because the only digital version of the book apparently resides on Amazon.com’s Search Inside feature, are unavailable to the majority of direct market stores. Is distribution broken? Yeah, pretty much. Time to put in the extra leg work to get past that little hurdle.

Up Next: 40% margin? Seriously?

Addition or Subtraction

I mentioned a few days ago that a press release on Newsarama had been our most effective advertising and that remains the case. This blog is another form of advertisement, though it’s much more useful as a wall against which to fling my thoughts. The next step in the evolution of this store experiment, though, is to find a more local, focused form of advertising, preferably one that doesn’t kill our checkbook.

Option #1: Guerilla, grassroots, viral whatever terminology you choose to apply, it’s all ground level marketing. It’s also relatively inexpensive. What I haven’t yet been able to determine, however, is if it’s particularly effective. Following the lead of James Sime and the Isotope Street Team we’ve distributed fliers and comics to area locations. There’s some question, though, as to the effectiveness of such a strategy in a suburban area versus a cultural smorgasbord like San Francisco. While we’re still in the early stages, the returns thus far can only be described as less than discouraging.

One of the main obstacles is an internal struggle between focused distribution and blanket coverage. It has been suggested that we conscribe a few recruits to blanket the malls and area shopping centers with those annoying windshield fliers. While I can easily get past my personal distaste for such tactics if it brings in more customers, I’m a bit more dubious that it will actually yield any results. There would seemingly be much more efficient areas to target, though none occur to me at the moment (outside of the local college campuses, which are already covered).

Is all fair in advertising? If so, I need to just start an infiltration campaign of my own and swamp every Starbucks, deli, laundromat, hair salon, food court and bookstore in the area with product and fliers. Then again, if all’s fair in advertising, then I can’t wait to see what Jason Richards' store Riot gets in the mail next. What say ye?

To Which Theory do you Subscribe?

So my store has to offer Pull/Reserve/Subscription Services right? I mean, can anyone, excepting Mr. Hanley, afford to NOT have a pull system? Hibbs and many others have pointed out the various tradeoffs involved, particularly with regards to discount, and in the early part of this enterprise I find myself agreeing with the idea that offering a discount on preorders is not the most economically sound approach. At the same time, our customers have been trained to expect a discount and can easily find nice big ones via the internet. Shouldn’t there be some trade-off for the information they provide, as well as the “guaranteed” sale? A credit towards the next purchase seems the fairest option, particularly since the majority of pull service customers are weekly/bi-weekly customers in the first place.

Again, though, this cuts into margins that, lets be honest, are fairly small to begin with. Since MacGuffin is a store that’s success or failure is closely tied to backlist, that margin is already smaller for a significant portion of our inventory that falls under Diamond’s 3% reorder penalty. The easy solution to that little dilemma is to offer a future purchase credit only on those titles that are ordered in advance by the customer. Logically speaking, so far so good. Problem is, a much larger percentage of our capital is tied up in backlist inventory (trades and graphic novels) than in frontlist, new release inventory. So while offering, say 10% of today’s frontlist items purchased off of your next purchase is logically reasonable, it doesn’t do much to offset the fact that we make a smaller margin off the majority of our inventory. This one isn’t so much a fairness issue as it is a need to keep the doors open issue.

We’ve settled on a third option to begin with, though I reserve the right to ignore any previous analysis and create a completely, randomly ridiculous new system. We will hold anything the customer would like for two weeks, with no obligation to the customer to purchase said merchandise. We will not, however, offer any discount on said merchandise. Is it fair? I have no idea. Will it work? Hopefully well enough, though there doesn’t seem to be anything particularly controversial about it.

I’m curious, though, what those of you in the internet majority believe.

Who Fixed the Internet?

I've been amazed by the power of the internet over the last few days. I'd always known how useful it was to connect with people hundred or even thousands of miles away. I hadn't really realized how useful it could be to connect with people a few blocks away. I've learned the error of my ways through the help of Newsarama, primarily their decision to post my press release about the store's opening. It has, by far, been the most successful form of advertising I've used so far. As a result, I'm going to post some pictures of the store, hoping that a few of you might see them and say to yourselves, now that looks like the kind of store I could spend a few minutes, hours, days, years at (your choice).

Therefore, without further ado, on to the photos:

Open Sesame

One week, two weeks, what's the difference? I finally opened yesterday and I must say, I really should've done some preliminary advertising. And gotten a sign. That would've helped. Unfortunately, it seems that lead times on signs in the area are exceedingly long, so we're using a banner in the meantime. Should work, right?

Apparently not, since I managed to get a grand total of zero customers yesterday. Actually, I had a few people wander over from Starbucks, which led to the always entertaining sport of watching a confused look form on their face before the realization that we sell comic books here set in.

Oh well, its the first day, can't get too discouraged right? Just need to ADVERTISE.

I may finally open -- Maybe

Its been a long 18 months, but I think I'm finally there. I think I may finally, actually, legitimately be able to call myself a comic book retailer within the next week. I finalized the oh so expensive space. I took care of the ridiculous permit paperwork. I got carpets installed and electricity turned on and inventory in (boxes and boxes, still sitting in boxes). Just to give those of you not reading an idea of what this place looks like I've included a picture which is sure to whelm (under/over) your choice.