Killing Your Darling - Inventory Turnover and When to Let Products Die

I attempted to play competitive Magic for quite some time, before and during working for a game store, and when I would be getting ready for a tournament and have some "homebrew" deck I came up with or a dated deck list that wasn't very good in the current metagame but was something I really liked playing, my friend John would often tell me "If you want to win sometimes you have to kill your darlings," which continues to be one of my favorite sayings and is applicable to every situation where your judgement is skewed by your passions. 

There are lots of games that are the motivating force for people wanting to start their own game shop. Magic is a big one, followed by the Game Workshop brands, sometimes Warmachine and Yu-gi-oh!, and rarely other, smaller games. Regardless of what got you to open your store, if you want to keep it open, you have to cater to the market you get. I'll use a recent local store in Springfield as an example. A good friend of mine opened up a Magic shop and LAN center. His store is literally split down the middle with gaming tables and singles on one side, and 14 gaming PCs on the other. After a few months of business trying to get Magic tournaments and sales going, he realized that the market in Springfield was saturated already with what he was trying to do, but realized that he was selling out his LAN center on most of the busy nights and even had waiting lists. While the solution to his problem was extremely easy, and he sold his Magic stock to expand on his LAN center, most gaming stores aren't going to have this as cut and dry. Monitoring inventory turnover (ITO) is going to be your best tool for figuring out if things are worth your effort or not.

Calculating ITO

Inventory Turnover is figured out by taking the total sales of a certain item (or product category) and dividing it by the average amount of inventory you keep in stock of that item (in dollars). For example, if you were calculating ITO for Yu-gi-oh, you would take your sales in Yu-gi-oh! for a time period (say, for the year 2012) and divide it by the average dollar amount of Yu-gi-oh! inventory you keep in stock (if you have good numbers, you can figure this out easy, if you only take inventory so often, just use your beginning of year inventory averaged with your current level), and you'll get a ratio. This number is, theoretically, how many times you sell that given item over the course of a year. Hopefully this concept isn't too complicated, I may edit this a few times and add an example later, but its a fairly simple financial ratio and I'd imagine a Google search can probably help you understand it further.

Interpreting ITO

So now that you have your ITO ratio....what does it do? Well what I've done with it at Meta-Games is used it to compare our product lines to see what was slacking and what was not. I would never publish any of our private financial data anywhere, but when we first looked at these numbers (about six months ago), we were very shocked that one of our "most popular" lines, which sold "pretty well" required a huge inventory investment to get its sales, where unsuprising brands like Magic, Yu-gi-oh! and board games like Small World and Munchkin would turn over dozens and dozens of times in a year based on their average inventory levels. We since have re-evaluated our spending on this line and have seen the ITO ratio for that line fall more in line with what we want our products at.

Using ITO

I'll make a quick hypothetical list of ITO ratios for a couple brands

Yugioh - 12.8

Magic - 18.4

Warhammer - 1.8

Munchkin - 10.3

Well we see that Magic is super high compared to our average, while Warhammer is terribly low. How do we use this information to better run our business? Well trying to fix Warhammer is clearly our most important goal. We have entirely too much inventory compared to the sales that inventory is generating. We can do two things 1) promote Warhammer or 2) order less Warhammer. These things aren't mutually exclusive, and doing a combination of both is going to yield you the best results. Maybe run a sale on items that have been in your inventory over 180 days, or maybe cut your inventory levels on some units from 2 box sets to 1, and have more controlled stocking on new orders using pre-orders and moderation. 

While it may not seem like it at first glance, Magic could also be a problem. Extremely high ITO ratios can sometimes mean you aren't stocking enough product to meet certain unexpected rushes (although more often than not its just safe to say Magic sales aren't comparable to your other product lines). You can fix this by trying to keep a deeper back stock of the most current products. Keep an eye on high ratios in board games, as sometimes having what seems like an unreasonable number of copies of a game in stock can still not last you a week. 

If you try to promote or discount a product line, and its ITO is still bad...sometimes you just have to clearance it and let it go. There have been lots of products that I've loved over the years that have come through and had faith in and...well...just didn't pan out. Just let them die. You don't have to keep everything in stock. If people have the option of special ordering from you or from Amazon, and you can compete with the price point, they'll always chose you(even if you just make a couple dollars above cost, if all the effort you have to extend is a phone call or a mouse click, you better do it every time). Once you make sure you are only carrying product lines worth carrying, your efforts will become much more focused and your profits will be much easier to earn.