Monday, June 17, 2019

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 19th 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 23rd 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 17th, 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.

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