Monday, November 3, 2014

The Ol' One-Two from WOTC



WOTC hit stores with a one-two punch this past week, one that will hurt somewhat starting next year and one that I do not know what the future effect will be and how to react to it.
Punch #1—WOTC announced that, starting late December, stores will receive 2% less gross margin on all Magic product (D&D and Avalon Hill product lines excluded), with the MSRP unchanged. What does this mean in non-retailer speak?

MSRP stands for Manufacturer’s Suggested Retail Price. Most products you buy release with a suggested price set by the manufacturer. The retailer has the option of selling the product at MSRP, below MSRP or above MSRP. Selling below MSRP is commonly called discounting while selling products above MSRP generally reflects a lack of availability of the product (see Betrayal at House on the Hill, by coincidence an Avalon Hill game, which has a MSRP of $49.99 but often sells for over $100 due to scarcity).

Gross margin is the difference between what the retailer pays for a product and what the store sells it for. As noted in last week’s column, all retailers pay less for products then the MSRP (except for loss leaders but those are not commonly used in the gaming industry, though, by an incredible coincidence, Magic is often used as a loss leader by many retailers. More on loss leaders in another column). MSRP on Magic boosters is $3.99, meaning that, despite what your local store or online place might tell you, the MSRP on a display of Magic boosters is $143.64. Most stores sell full displays of Magic boosters for slightly less to much less than that. This, as noted above, is called discounting. It does not matter at what price the retailer chooses to sell Magic boosters, the price the store pays is figured as a percentage off that $3.99 MSRP. Starting in late December, the percentage off paid by every store will shrink by 2%, effectively meaning a 2% price increase in Magic to every store carrying the product.

As noted last week, typically when there is a price increase businesses pass them along to the customer (sorry but that’s the way business works). Unfortunately, due to the MSRP on Magic not changing (the price on Magic boosters last increased from $3.69 to $3.99 back in 2006. If Magic pricing kept up with inflation, it would cost around $4.25 a pack right now) and the prevalence of discounting on the product, stores will find it almost impossible to raise the price 2% to recapture that lost margin. That means the store will have to accept a lower gross margin on Magic products, meaning less profit for the store. A store that is diversified (carries lots of different products) will be hurt a little. A store relying heavily on Magic sealed product for sales will find 2% of its operating budget vanishing overnight. Ultimately, due to the importance of Magic sales in many stores, retailers will absorb the profit loss and find areas to cut in small ways. We may reduce a staff member's hours, reduce prize support or put off buying new fixtures for the store.

Punch #2—WOTC will move to paperless recording of DCI number. Currently, players fill out a DCI card to get a number with which to play in sanctioned tournaments. WOTC will now allow players to register for a DCI number directly online. Since a store’s standing with WOTC partially depends on how many new players it registers per year, understanding how WOTC will now capture new players per store is of quite a bit of interest to stores, but certainly not as financially imminent as Punch #1.