Drowning in Gold: How Too Many Games Are Breaking The Three-Tier System

As we turn over from one year to the next, and perhaps from one decade to the next, depending one who you ask, I wanted to share reflections on the tabletop industry itself, and how that will impact consumers, designers, publishers, and everyone involved in making and playing board games. This is the first in a multipart series I’m calling Drowning in Gold.

The last five years have completely transformed the tabletop industry. From Kickstarter and miniatures, to mass-market adoption of hobby games, to the continued penetration of games into popular culture, board games are enjoying a cultural flowering that is heady, joyous, and mostly a delight to gamers, game-makers and the games business.

However, like Clay Shirky said, abundance is far more disruptive than scarcity, and the abundance of games is causing enormous disruption to the three-tier system of retail gaming. I’m not myself a retailer, a distributor, or much of a publisher, but over the last six years, I have interviewed over a hundred industry professionals in all these tiers, and I’ve listened in on industry forums had the opportunity sit in on meetings where these issues have been discussed. I will probably get some details wrong, I think the big picture is correct. The industry is facing enormous challenges, and change is coming.

The Three Tiers

When a game is sold at retail, the price a customer pays represents the revenue pie that everyone who makes the game shares in. The publisher typically sets an MSRP (Manufacturer Suggest Retail Price, also called SRP or RRP) which is in the area of 6x to 10x the landed cost of production (the cost of printing the game and then shipping it to the US). Everyone who makes games, from designers, artists, and printers, to publishers, distributors and retailers, gets a piece of that pie. Here’s how the three tiers of retail, distribution and publishing work together to share that revenue.

In the US, games are:

• Manufactured and imported by Publishers
• Distributors buy games from Publishers in large quantities for about 35-40% discount from of the MSRP, and store them in large warehouses, ready to ship out to their customers, retail stores
• Retailers buy from distributors in smaller quantities, at a discount of about 50% off of the MSRP, and sell to the final customer, gamers, at MSRP

This isn’t the only system that can exist, and indeed, in Europe, publishers often operate as distributors too, and in the case of Games Workshop, they even operate retail stores. Why does the system exist? Because it offers each tier specific advantages.

Publishers

Publishers like to work with distributors because distributors offer scale. There are over 1,000 game retailers around the country, and publishers don’t have the staff and resources to maintain sales relationships with each store, or to pick-and-pack small shipments to all those stores. Instead, publishers sell to distributors, at a very steep discount. The Publisher avoids the logistical hassles, and has to manage only a couple of distribution relationships. As a result, a game sold at $50 MSRP only earns the Publisher about $18-20 per unit, out of which they must pay for all their costs.

Retailers

Retailers have the same challenge as publishers, but in reverse. They need to stock their shelves with games from many different publishers. And not just board game publishers! Stores need to stock RPGs, miniatures games, trading card games, and more. A typical retailer will have many thousands of individual products or variants, known as SKUs (Stock Keeping Units) to track and inventory. Reordering from hundreds of different publishers is a logistical nightmare!

That’s why retailers prefer to open accounts with a couple of distributors, so the can order games from the catalogs of many different publishers more easily. Usually, they’re able to order games even one copy of a game from any given publisher, combine it with their other orders, and get free shipping. They can also order quickly, with distributors typically shipping out within a day of receiving an order. Traditionally, distributors have also been a good source of information about upcoming games, hot trends, and publisher promotions.

Retailers buy at about 50% off of MSRP and sell at MSPR, so a $50 game earns the retailer $25, which must pay for the store and the employees and all the other expenses of the business.

Distributors

If you’re following along, you might be asking, why the heck are distributors willing to put up with all the logistical dirty work? It sounds like huge hassle! To make things worse, distributors get the smallest slice of the revenue generated by board game sales, amounting to 10-15% of MSRP. One reason is that distributors have lower costs. Typically located in low-cost areas in the middle of the country, or in hubs central to their regions, distributors have cheap warehouses, low labor costs, and lower shipping costs. Distributors do spend a lot of money, but it’s mostly on stock, which they can sell, rather than on salary or marketing costs.

Distributors also generally have lower risks because they have few competitors. There are five major US distributors – Alliance, ACD, GTS, PHD, and Southern Hobby. All game publishers funnel most of the games they collectively sell through these five businesses. While starting a new publishing house is relatively easy, and even opening a retail store is relatively doable, starting a new distributor is very hard and takes a lot of up-front capital. Distributors also operate within a commodified structure: pricing varies little from one distributor to the other, since prices are largely set by the MSRP framework everyone works in. Competition in distribution is largely about reliability and service, not price.

A Happy Family?

For the twenty or so years since Catan, this system has basically worked. Publishers sold to distributors, who sold to retailers, who sold to consumers. When games were successful, publishers reprinted games, in larger runs, and distributors and retailers stocked them more deeply, to minimize the situation where a customer at any point in the chain would want to buy a game, but have it be out-of-stock. Games that sold poorly were not reprinted, and were eventually sold at increasing discounts and clearances, at every level. For everyone, the goal was the same: expand on the group of “evergreen” titles that continue to sell, year after year, with little need for special marketing or hand-selling. Successful evergreens made everybody the most money, for the least effort!

This happy state of affairs may have persisted for some time, but it was soon threatened. Next time, we’ll talk about the rise of Online Game Store, exclusive distribution, and consolidators. And after that… Kickstarter.

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