Talking Tariffs 2 From the Retail Perspective

NPR’s The Indicator podcast is a short (9-10 minutes) look at one aspect or another of the economy, business, work, etc. Recent episodes have looked at such things as the similarities between Thanos and 19^th century economist Thomas Malthus in their approach to allocation of resources. A recent episode drew my interest because it looked at the effect the recent tariffs had on one game store. As I noted in a previous column, the tariffs imposed by the administration have not  yet directly affected game stores or the game industry here in the US. The effect of said tariffs on stores in other countries though is an entirely different matter  and the May 23^rd episode of the podcast looked at just that.

Wizard’s Tower is one of the top stores in Canada dealing in Magic, with, according to the podcast, over 90% of its sales coming from Magic and Magic related products. You may remember that last year the United States, claiming national security, imposed tariffs of 10% on aluminum and 25 % on steel imported from Canada, Mexico and the European Union. What didn’t get near as much attention here is the US was the retaliatory tariffs our trading partners imposed on products imported from the US, specifically, for the purposes of the podcast and this column, a general 10% tariff placed by Canada last July, on all products imported from the US. Wizards prints Magic here in the US and Wizard’s Tower imports it from here to its store in Ottawa, meaning that not only are the cost of its purchases subject to the fluctuations of the Canadian dollar against the American one. but now, thanks to the 10% tariff that Canada placed on many imports from the United States, which included playing cards, the cost Wizard’s Tower pays for a box of Magic increased by 10%, with no compensatory increase in MSRP (Remember, WOTC  had not eliminated MSRP yet, so the list price for a pack of Magic is still $3.99). This means Wizard’s Tower is paying 10% more for its products than before. Due to the exchange rate, to maintain a profitable gross margin, Wizard’s Tower prior to the tariffs sold a pack of Magic for about $4.50. As a result of the tariff, the store raised the price of a pack of Magic to $5.

 In addition, to try to maintain the average markup storewide, the store raised the price of a number of events, primarily Friday Night Magic. However, price elasticity kicked in and many of the store’s players deserted its events for cheaper ones at other stores. In order to regain them , Wizard’s Tower found it necessary to lower the event prices back to where they were before, meaning lower profits and less capital to invest in various aspects of store operation, including a much desired website redesign. The store cut costs and reduced inventory until finally on May 17^th, the US announced it was lifting the tariffs on steel and aluminum, causing Canada to end the tariffs it had imposed on American products, including cards, reducing Wizard’s Tower’ cost on Magic back to where it was last summer.

Of course , the store is not home free yet. In order to stay in business, it did have to purchase Magic at the tariff increased price and, although costs of new product have dropped, it still has inventory of the higher priced product which it must either try to sell at the higher price or accept a reduced margin in order to move it out of inventory

This is a cautionary tale for US game stores  and publishers. Although the top trading card games are printed in the US, allowing them to avoid tariffs, as are D&D books (Pathfinder is currently printed in China), things such as dice, plastic sleeves and boardgames often get manufactured in China, opeing the US industry to the same tariff effects Wizard’s Tower saw.

Talking Tariffs

The game industry has been able to ignore the effects of the trade war between the US and China for the past year, primarily because the tariffs focused on raw materials and processed goods, not products sold to the end user (although the average price of a washing machine rose about $89 last year due to the tariffs. Even though there was no tariff on them , manufacturers increased prices on dryers a comparable amount, primarily because consumers generally purchased them as a pair and did not  notice the price increase)..The latest announcement from the administration of more tariffs on Chinese imports targeting some $300 billion in goods, most of which are consumer goods means there will be a significant impact on the gaming industry as the goods targeted include HTS 9504.90.6000, chess, checkers and other games played on boards.

 If you want to read through the whole proposal, here it is, but in short, due to cost savings, a lot of manufacturers in our industry produce their products in China, making them subject to the tariff increases.  Gary Ray, owner of Black Diamond Games, published a blog post back in 2017 looking at his store’s top sellers and where they are produced. Not surprisingly, roughly 80% of them come from China, meaning that, barring some settlement, those companies will be hit with a 20-25% price increase should the tariffs come into effect.

Looking back at tariffs in US history, their use has been tied into the country’s government and economic policy since its founding and before. Britain viewed the American colonies as a source of raw materials for its industries at home and frowned upon when the colonists worked to develop their own industry.  One of the major complaints by residents of the colonies was the refusal of the British government to allow them to enact tariffs to protect the nascent American industries from outside sources that could undercut them, destroying the developing enterprises  before they could grow strong enough to stand on their own.

Not surprisingly, almost immediately after securing independence , the new States passed laws  putting tariffs into place, using them as the primary funding source for the federal government (The previous Articles of Confederation had required the government to fund itself by asking the individual states for money. That worked really well). Although Britain was the first country to utilize tariffs as a means of protecting its industries, the United States, after its founding, embraced the idea of protectionism far more ardently, with tariffs of up to 40% providing up to 95% of funding for the federal government and making protectionism the country’s  economic policy from roughly 1800 until just after World War 2, when the US took a much stronger position on the international stage , liberalizing its trade policy and reducing its reliance on tariffs, reducing them to a historic low for the US wherein only 30% of imported goods were subject to tariffs and likely cumulating in the North America Free Trade Act, which effectively eliminated tariffs on good passing between the US, Canada and Mexico.

So it is not as if the US  is unfamiliar with tariffs (your sneakers currently are subject to a 48% tariff and shelled peanuts to a 132% one) insomuch as one is getting slapped on our industry, without giving the companies involved much time to make changes in their supply chains by either moving production back to the US or finding low cost sources overseas.  If you want voice your opposition to them, The Toy Association has an online petition you can fill out and submit.

Betrayal Legacy

The design for  Betrayal Legacy as WOTC is referring to it, comes from Rob Daviau, one of the designers of the original Betrayal at House on the Hill and designer of the Legacy series of games:  Risk Legacy, Pandemic Legacy Seasons 1 and 2 and Seafall. All of these are, for want of a better word, customizable boardgames. In fact, as far as I am aware, Risk Legacy paved the way for what could be called the customizable board game, a campaign style of game in which the board gets modified permanently, cards get altered or destroyed and the players wind up with a individualized, but still playable, game.  Games in a similar vein include Charterstone and Gloomhaven. As you play the game, over time you wind up with an individualized version of the game.  The Legacy version of Betrayal is projected to include a prologue and a thirteen chapter story arc covering several generations in the history of one family that occupies the House on the Hill with player characters aging over the course of gameplay and even descendants of the original characters making appearances in later stories.

However, based on recent experience, I am not particularly sure about how well this version of the game will sell. Risk Legacy did pretty well, but the game established a new category and games that create their own product niche always dominate that niche until competitive arises (See Dominion and deckbuilding games). Pandemic Legacy Season 1 did pretty well but nowise as well as Risk Legacy and I do not think we have moved a copy of Pandemic Legacy Season 2 yet. As far as Seafall, we still have our original copy on the shelf and I noticed Asmodee/ Plaid Hat Games had the game listed on their annual Christmas clearance sale last year. Charterstone has done OK, moving quite well when it first came out but sales have slowed down on the game since Stonemaier Games dealt with the out of stock problems Charterstone had when it first released, a problem that Cephalofair Games has not managed to overcome yet with Gloomhaven as it still suffers from horrendous out of stock problems for the past year. This, however, has not affected demand for the game as, of this writing, it still ranks number one on BoardGameGeek’s Hotness Index and sports a 9.0 ranking on the website.

Much of the demand for Gloomhaven is driven by the scarcity of the game. Since stores have been told they should see much of the scarcity problem alleviated when a new printing arrives this summer, it will be interesting to see if demand for the game stays at the same level it is now, with copies selling for over $400. Pre-sales of the new printing indicate a drop in interest as some stores are taking preorders for as little as $92. Based on this, it looks to me as if the great interest by customers in Gloomhaven is driven more by scarcity than by actual gameplay and I worry we may see the same reaction with Betrayal Legacy. The original Betrayal still sells well, as does the Widow’s Walk expansion, but Betrayal at Baldur’s Gate met with a distinct lack of enthusiasm among customers. Given WOTC’s supply chain, I do not expect to see any shortages in Betrayal Legacy, so demand for the game will be driven by customer perception of gameplay, not scarcity. Will be interesting to see what happens.

London Mulligan

wizards announced that a new mulligan format will enter tournament play with the release of Magic 2020. Called the London Mulligan, it is supposed to make taking a mulligan less of a game losing proposition. Wizard's research of both tabletop and Arena play indicates that there is a strong positive correlation between taking a mulligan and losing the game, so the company hopes this format reduces the likelihood of losing the game when you take a mulligan

Effect of Tariffs on Canadian Magic 2

To follow up on yesterday's post (you can read it here), the 10% tariff imposed by Canada on playing cards meant that Wizard's Tower cost for a pack of Magic increased by 10% cutting into already thin profit margins. Remember Canadian stores have to import most of their Magic from the US and often the exchange rate between the Canadian and US dollar is not that favorable. This means that , in order to stay in business (remember that Wizards Tower does 90% of its business in Magic), the store had to raise the price of a pack of Magic from $3.99 to $4.99. Needless to say, the store's customers did not like this.

So, in order to cushion the price increase, Wizard's Tower tried to spread the price increase around by increasing the price of tournaments. Charging an extra dollar for tournaments means the store could afford to absorb some of the increase in costs from the tariff. However, players started deserting the tournaments for stores that offered cheaper entry fees. Apparently the store also had a lackluster response to Ravnica Alligences or War of the Spark, the podcast does not indicate which, meaning the store did not see its typical inventory turnover, leaving unsold inventory in stock.

The store managed to hold on and Canada removed the tariff earlier this month, meaning WT could again buy Magic at its old price. Unfortunately, that also means the store still has a significant amount of Magic it had purchased during the time of the tariff that it will have to sell at the regular, not tariff price, or alienate its customers, cutting into store margins probably for the rest of the summer.

Effect of Tariffs on Canadian Magic

This podcast from Planet Money looks at the effect of the reciprocal Canadian tariffs on one Canadian game store. After the administration imposed 25% tariffs on Canadian steel, the Canadian government responded by imposing a 10% tariff on a wide variety of American imports including, playing cards. Since Magic falls into that category, the Wizard's Tower game store, which imports all of its Magic from the US, saw its prices rise automatically by 10%, reducing an already pretty small profit. Since the store sees 90% of its sales come from Magic, dropping the line was not an option. Listen to the podcast to see what happened or come back here tomorrow.

Steve Creech Obituary

Steve Creech of Decatur Indiana passed away today. Active in the game industry for over 20 years, he owned both Bastion Press and Dragonwing Games. If you played D&D 3.0 or 3.5, you likely owned a Bastion Press product as the publisher was a major creator of OGL materials during the run of the two editions and still produced new material focused on the D20 system.  While Bastion Games was a solo operation, Creech ran Dragonwing Games in partnership with Kevin Rusch, producing material for the Pathfinder RPG.

Creech also spent over a decade as the chair of the RPG selection committee for the Origins Awards. As such, it was his job to contact publishers each year for submissions for the Award, then pull together a committee to vote on which dozen or so titles, selected from the hundred or so under consideration, should advance to the final vote by members of the gaming community. I had the opportunity to work with him on the 2019 awards and it amazed me how well organized he was and how attuned to detail. The Origin Awards and the gaming community as a whole have lost a vaulable member and friend.