Marketing Case

Copyright © 2015 by the Case Research Journal and by Eric Dolansky. An earlier version of this case was presented at the 2014 North American Case Research Association conference and the 2014 Administra- tive Sciences Association of Canada conference.

John Park looked around his store, 401 Games, with satisfaction. The move to the new store location in the summer of 2013 had been a success. Furthermore, the response to the sale in honour of the store move had been overwhelming. In the twenty-two-year history of 401 Games, the business had never been stronger and the future was full of possibilities. But as he always had with his business, John wanted to make sure he was not leaving any opportunity unexamined.

Following a strategy of cautious growth, 401 Games had become one of Toronto’s best-known and largest retailers of board games, card games, and collectibles. John reflected on how he had achieved this and considered how to sustain or accelerate the growth of 401 Games. John believed that his business had reached this point through the careful consideration of every conceivable opportunity coupled with a cautious approach to growth. John also knew that luck, with respect to timing, had played a role in his success. With the board game industry booming, he wanted to make sure he was capturing as much value from that boom as possible while still remaining true to 401 Games’ positioning and customers. John knew there was always more he could do to grow the business, and in 2013 he saw more opportunities than he could pursue at once. He wondered: what’s my next move?

401 Games

John Park and his father founded 401 Games (called 401 Convenience at the time) in December of 1992. Named after its location at 401 Yonge Street in Toronto, the twenty-four-hour convenience store faced numerous competitors. Corner stores were extremely common, most boasted no special qualities to differentiate them, and oper- ated with very low margins. For example, a pack of cigarettes selling for around $4 yielded a contribution margin of only twenty-five to fifty cents.1 Furthermore, to be convenient to customers, a minimum level of inventory needed to be kept on hand for a variety of different products. As a result, the business struggled when it opened.

Three months after store opening, John convinced his father to start carrying col- lectible sports cards. He had a passion for sports cards and thought they might help

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2 Case Research Journal • Volume 35 • Issue 3 • Summer 2015

to drum up more business. While this change itself did not significantly increase rev- enues, he observed that the sports cards lovers were in a different consumer segment than convenience store customers. “Card buyers” had specific needs and John began to learn more about their interests and the types of products they wanted.

maGic: The GaTherinG

One product of interest to this new segment was a collectible card game called Magic: The Gathering (MTG). Described as the grandfather of the collectible card game, players built a deck of cards and challenged opponents. With over 17,000 different cards available, individuals could collect and build quite varied decks. This two-player game basically required players to use their cards in a duel to the death.

Starting in 1993 John began hearing his customers talk about this new game. From the way they spoke, customers had an insatiable demand for new cards to play. In 1994 John decided to try selling the product, so he bought one box of cards to sell and priced them very aggressively. He sold the entire box in one week, so the following week he bought two boxes. These also all sold in one week, as did the three boxes the week after. It seemed no matter how many he bought, they would sell out in no time at all. Soon after, a friend taught him how to play the game and he fell in love with it. He remained a fan of MTG since then, and was active in the Toronto gaming community.

At the time, there were only two leading retailers selling MTG cards in Toronto (1,000,000 Comix and Silver Snail, both comic book stores). When, at a trade show, John was offered a case of MTG cards that was much larger than a usual order, he seized the opportunity and instantly became one of the largest retailers of MTG cards in the city. An additional advantage that this particular purchase provided was the ability to sell individual cards rather than sets or packs. Customers desperately wanted specific cards, so selling single cards helped increase the profile of his store, and provided him a greater margin than packaged cards (see Exhibit 1 for contribution margin information).

By late 1994, John began running MTG tournaments in his store. He did not profit directly from the tournaments (a fee was charged but it went directly to the prizes for the tournament winners), but it gave John a chance to promote his store and draw more MTG players to see what he had for sale. Customers could also trade with each other, and this put 401 Convenience right in the middle of the growing MTG community in Toronto.

As the sports cards and MTG cards took over more and more space in the store, the convenience side of the business shrunk. A larger portion of the revenue was coming from the games, and in 2000, 401 Convenience became 401 Games.

Pokémon

This trend continued as John began to take advantage of a new game craze called Poké- mon. Launched in 1997, and based on a pair of Nintendo games (the Pokémon brand and its associated products were trademarked and owned by Nintendo), it quickly became a phenomenon. Pokémon was a new collectible card game, and the first to challenge MTG’s dominant position in the genre. The games were fairly similar in that both were battle games with the goal of defeating your opponent. The success of Pokémon (short for “Pocket Monsters”) spread into movies, TV shows, Manga, toys, Do N

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401 Games 3

books, and so on. As of 2012, 700 episodes of the Pokémon TV show had aired since the launch, and 230 million Pokémon video games and 19 billion Pokémon cards had been sold.

John was quick to catch onto this new trend and swiftly entered the Pokémon market. Though sales in the first six months were strong enough to justify carrying the product, they later took off and dwarfed the rest of his business. He was able to buy each box of Pokémon cards for $60–70 and sell it for $200, and could barely keep stock on the shelves. With sales of MTG still strong, 401 Games continued to grow.

Not one to be afraid of experimenting with new product lines, over the following few years John added cigars, Anime, videos, and comics with mixed success. One other category that resulted in high revenues was collectible toys. 401 Games began selling toys in the early 2000s, often bringing in more than $1,000 a day. Collectible toys soon became the top category in the store, though the category’s popularity eventually faded and by the end of the decade had lost its position as a high revenue earner for the store.

Board Games

John began stocking board games in his store in 2003, again as a response to customer demand. The games did not move as quickly as the cards and some of his other new products, but they did sell and each year demand was a little higher. Then, beginning in 2008, a combination of factors led to a surprising increase in demand for board games. By 2013 revenues in the hobby game market in the United States and Canada was approximately $700 million. John believed the resurgence of board games was due to the following factors:

• Better games. Starting with the 1995 launch of the game “The Settlers of Catan,” a new wave of “designer” or “German-style” board games began to emerge. These games involved more intricate strategies, better artwork, and a more social, involving experience than the typical board game. Though some- times more complicated and expensive than a game like Sorry! or Monopoly, the more active and involving gameplay brought attention back to games.

• The rise of “geek” culture. Over the previous five years, being a “geek” changed in meaning from describing an anti-social nerd or academically-minded loner to being applied to anyone with an interest in popular culture, comic books, and/or science fiction regardless of social standing. Typical “geeky” interests like comic books were becoming increasingly mainstream (the movie based on the comic The Avengers was the third-highest grossing film of all time; the top spot was owned by Avatar, a science-fiction movie). Popular television shows like The Big Bang Theory also advanced this trend. While board games had always seemed geeky, being geeky was more accepted and could even be seen as desirable.

• iPad burnout. One reason that games have taken off is that people were tired of playing games on their game consoles, tablets, and computers. Many games were repetitive and it was easy to lose interest. Board games gave individuals an opportunity to use similar problem solving and strategic skills as were used in video games, but in a new and sometimes more complex manner. Milton Griepp, CEO and founder of ICv2 (a pop-culture website and magazine), was quoted in the Boston Globe as saying that “for several years now, we have been Do

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4 Case Research Journal • Volume 35 • Issue 3 • Summer 2015

seeing a trend in gaming away from games played on a screen and towards tabletop games played in person with other players.”

• Personal connection. Internet usage was nearly universal and people spent a significant portion of their time online. Even so, there was still a desire to spend time with people face-to-face. As such, people tended to place a high value on time spent with others, and board games provided an opportunity for this. Playing video games or surfing the web did not allow for as mean- ingful a social interaction as board games did, even when playing on a game network with others.

• Online buzz. Websites like Board Game Geek (www.boardgamegeek.com) offered the opportunity to learn about and discuss games. Online shows like Tabletop (http://tabletop.geekandsundry.com), hosted by actor Wil Wheaton, also spurred interest in games—each episode drew about 500,000 views and there was a documented “Wheaton effect” in which games featured on the show saw a spike in demand immediately after.

• Online versions. Players could practice or try new games at very low cost. While it might cost $50 to buy a physical version of a board game, the digital version often sold for five dollars or less. If people liked the game, they were more likely to share it with their friends and to buy the physical game.

This booming board game market saw approximately 900 new games published each year by about forty active publishing houses. Many game designers created games as a hobby rather than as part of a paid job. A game, whether traditional or designer, could cost tens of thousands of dollars to develop, print, and publish, and yet not carry very large margins in dollar terms (a game that cost $15 to make may have sold to retailers for $25). With such high competition and costs, it was hard for publishers to find financial success. Board game retailers, however, had relatively high margins and lower competition, especially for so-called designer or German-style games. Even Toronto, a city with a population in the millions, had only around twenty retailers devoted to board games. New games and designer games were sold almost exclusively in stores with a considerable focus on tabletop gaming, as opposed to mass-market retailers.

401 Games in 2013

With 401 Convenience long gone, John used his own knowledge and interest in board games, as well as his familiarity with the gaming community, to transform his store into a board game aficionado’s paradise. Forty percent of his approximately $3 million annual store revenue was still generated by collectible cards, but he had about half of the floor space in his store devoted to tabletop gaming, and the acquisition of a new store location was mostly to provide more space for games, both on the shelves and for playing space. He was listed as one of the top board game retailers in Toronto and enjoyed a loyal clientele. See Exhibit 1 for a breakdown of 401 Games’ product lines and contribution margin.

John’s approach to the business was centered on building the confidence of the consumer. He built this confidence in three ways: pricing, selection, and expertise. He claimed to have among the lowest prices in his market. He had a very extensive selection with thousands of games in stock. Additionally, he hired and trained his twelve employees to be very knowledgeable about a wide variety of games. One of his Do N

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401 Games 5

employees was the son of the former owner of one of his key competitors, the Silver Snail comic book store. Staffing was managed so that there were, on average, three to four employees working at any one time (including John himself for about half of the open hours of the store). John made sure that he had experts in different categories working together, so that customers interested in any one category would be able to speak to someone knowledgeable. John paid his employees a moderate premium over the $10/hour required minimum wage to account for their experience and expertise.

All three of these factors combined to ensure that customers felt that they could shop at 401 Games knowing they would get the best game for them, in stock, and at the right price. Because his store had been around for a relatively long time, John and his employees had also developed relationships with many customers.

cusTomers and comPeTiTion

According to John Park, the customer base for board games was very different from the segments that 401 Games had been serving with collectible card games (though this information was only based on his observations and those of his employees, not any specific industry knowledge). The typical MTG customer was almost always male and between the ages of twelve and thirty (with most in their early twenties)—in other words, the stereotypical geek. Board game customers, on the other hand, comprised a much broader segment. This customer segment was about 40 percent female and ranged from kids to seniors; as John said, “games bring in the whole family.” For all of his product lines, almost all of his customers were residents of the Greater Toronto Area. Within the board game market customers had typically been segmented into “hardcore gamers” and “casual gamers,” though those in the board game industry and the market did not like this very simplistic distinction. Modern board games varied on a number of factors (e.g., targeted age, theme, playing time, mechanics, and design were but a few of them) so there were many ways to segment the market.

As the board game market grew, competitors emerged. Most could not match the selection, price, and expertise offered by 401 Games. According to John it would require “a great deal” of startup capital to replicate his store, not even counting the cost of building the word-of-mouth and reputation he enjoyed. This, he says, “takes a long time to build, and you will need deep pockets if you are going to last.” John also believed he had an advantage in his diversified product offerings, so if one area began to falter (like the collectible toy market did), the other areas could pick up the slack. Should the board game market slow any new imitator who came in and only sold board games would be at a sharp disadvantage. Even so, John said that “the board game boom is helping everyone, and I see room for competition in the market.”

Selling board games also meant that 401 Games faced new competitors, such as the Hairy Tarantula, F. G. Bradley’s, and Mind Games (competitors and related details are listed in Exhibit 2; selected competitors and their prices are available in Exhibit 3). Large retailers like Toys “R” Us, WalMart, and Target, which did sell games, were not considered to be direct competition, as they almost exclusively sold traditional (i.e., non-designer) games and children’s games. John estimated only about a 1–2 percent overlap between the titles he sold and the games sold at Toys “R” Us, but this overlap was slowly increasing with the overall increase in board game demand.

There also existed many online competitors, such as Meeplemart (www.meeplemart. com) and Amazon (www.amazon.ca). These retailers offered a huge selection of games Do

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6 Case Research Journal • Volume 35 • Issue 3 • Summer 2015

at competitive prices. Up to 2013, John had no interest in adding online sales to his business; he saw a lot of competition and not much upside. Furthermore, competi- tion online was only increasing, as new online retailers entered the market (e.g. Board Game Bliss and Solid Board Gamers in Canada), many with a low-price, wide selec- tion strategy. On the other hand, John did worry that the bulk of the board game retailing industry would move online, as had happened with other product categories in the past (e.g., books and music).

One competitor that made a big splash in the market was Snakes and Lattes. Billed as a “board game café,” Snakes and Lattes had an extensive collection of board games (more than 2500) that were open and available for customers to play. It also sold food and drink items as well as new unopened games. It charged competitive prices for the café items and a $5 flat fee to play games (with no time limit). This concept proved easily imitable (several other such cafes sprung up in Toronto, Hamilton, London, and Ottawa) and extremely popular. It was very difficult to get a table at Snakes and Lattes any day of the week. John said that “the board game cafés are good for my business. I would be interested in doing that too.” The cafés introduced new players to board games in a social, low risk manner and broadened the gaming community.

ProducTs

John estimated that he had about 90 percent of the available board game titles on his store shelves. His goal was to stock 100 percent of available titles, but that was dif- ficult for a variety of reasons. One was the brisk pace of sales his store enjoyed; many times a popular title would be out of stock. For example, Hanabi, a card game that won the prestigious Spiel des Jahres prize (Game of the Year) was consistently out of stock for a period of weeks after the prize was announced in spring 2013. Each new shipment (sometimes of 100 copies or more) would all sell out in a matter of days. Other games might be out of stock for other reasons. Cards Against Humanity, a popular adult party game, had an exclusive distribution deal with one of 401 Games’ competitors. Other games might be out of stock with his distributors, temporarily unavailable, or between editions. On the rare occasion that he could not get a game, and he knew his competitors could (such as with Cards Against Humanity), he had no problem directing customers to a rival store. “You have to be confident,” he said, “and you have to make sure that you can compete with anybody.”

Board game products typically carried an average contribution margin of around 25 percent (games from different publishers and distributors had different margins). This was in contrast to sealed box sets of collectible card games (such as MTG, Yu- Gi-Oh, Pokémon, and Vanguard, among others), which had contribution margins of around 20 percent. Sales of individual cards from collectible card games, however, carried margins of around 50 percent.

disTriBuTion

Most of the games sold at 401 Games arrived from Canadian and American board game distributors (Lionrampant, Grosner, Universal, and Everest in Canada; Alliances and Diamond Comics in the United States). These accounted for about 90 percent of incoming shipments. The rest came directly from board game publishers such as Wizards of the Coast and Konami. 401 Games bore the cost of inbound shipping, Do N

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401 Games 7

which worked out to about 5 percent of the selling price of the game. The reason for these relatively high shipping costs was the large size of the games. Whereas a $500 box of MTG cards (costing $2–3 in shipping) was only about three inches thick and one to two feet in width and depth, a $500 box of board games was large and heavy, and therefore carried a higher shipping cost.

There was a long-term intention to open more stores, but at a slow pace. John wanted to imitate the rollout model of the toy store Mastermind, which had been around since 1984 but opened few new stores and did not saturate the market. For example, Mastermind had twenty-eight locations, most of which opened in the previ- ous ten years once the business was proven and the existing locations were successful. John planned to open new locations in Toronto, perhaps starting in 2014. He was in no rush to expand and wanted to make sure it was done right. After all, expansion involved a duplication of many of his existing costs, such as rent, wages, and utilities. A high inventory level was also required for any new stores, assuming that the customer confidence positioning was to be maintained. Finally, John was concerned that a new store could cannibalize sales from his existing store, and would want to make sure that a sufficient number of new customers would be attracted. There were few apparent advantages, aside from increased volume, that could be seen, as multiple retail loca- tions in this industry did not lead to many synergies apart from brand recognition.

As he had no online sales, the store was his only distribution outlet. To counterbal- ance this, John kept 401 Games open relatively long hours (9:30 a.m. to 10:00 p.m. most days). Even so, the fact that there was a single location in a downtown area meant that customers were either local to the area or would have needed to pay for public transit or parking, which in Toronto and its environs could cost up to $30 per trip to the store.

PromoTion

Marketing communications had not been a large part of 401 Games’ marketing plan. The store was listed in the Yellow Pages and had advertised there (in both the print ver- sion and on www.yellowpages.ca), but John did not perceive sufficient benefits from doing so and ended the paid advertisements. In fact, John never relied very much on traditional advertising, as he did not believe that a sufficient return on investment existed. He preferred to build awareness, interest, and purchase intention through word-of-mouth, and he felt that this had worked well for him thus far for the types of products he sold, especially with those inside the gaming community. Additionally, 401 Games was listed on manufacturer websites as an authorized retailer. The store also enjoyed favourable reviews on customer review websites like Yelp.com. Though John believed in word-of-mouth as a useful strategy, those customers who were not mem- bers of the gaming community (e.g., new or casual players) had few ways of learning about 401 Games beyond the results of an Internet search for board game retailers.

Events continued to be a large part of 401 Games’ word of mouth strategy, with frequent tournaments the centerpiece of this plan. In the new location, a gaming space was set up in the basement, though John hoped to move that area upstairs in 2014. There were six tables set up in the main store area providing a welcoming feel to gamers. This gaming space was used for both tournaments and casual play, with no fee charged for casual play. While traditionally customers needed to bring their own games (or buy them) to play in the gaming space (as there were no open-box games Do

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8 Case Research Journal • Volume 35 • Issue 3 • Summer 2015

available), in October 2013, John began providing a small collection of about twenty- five open-box games for customers to play, free of charge. These games consisted of highly popular titles.

Although there was no functionality for online sales, 401 Games did have an online presence through its website (www.401games.ca). It included a searchable product database (including prices), store information, and information about upcoming events. Additionally, John had established Facebook and Twitter accounts for 401 Games. The Twitter account was primarily used to announce events and update cus- tomers regarding incoming shipments of product, and the Facebook account simply mirrored the content posted on Twitter. There was very little done on social media to foster any kind of dialogue or relationship with customers, and John did not know if greater social media engagement was something his customers wanted.

Price

In 2011 John drastically changed his pricing policy for board games. Previous prices had been set based on costs and margins. With board game revenues typically hit- ting $300 per day there appeared to be room for improvement. The change was also spurred by an overheard customer conversation. The customers had browsed at 401 Games and had made product choices based on 401 Games’ superior product selection and expertise, but they said that they would just go online to Meeplemart to buy the games (this had become common in retail, and was called “showrooming”). At that point John decided that he would simply match Meeplemart’s prices. This had been the pricing policy of 401 Games since then.

In implementing this pricing policy John had hoped to double his business; in fact, he did better than that. Typical daily revenue for board games increased to $800, and was often higher. He extended his price matching to product matching, making sure he had all of the same games at the same prices as Meeplemart. The final price to the customer at 401 Games was even cheaper, as products ordered online from Meeplemart incurred a shipping cost as well ($9.95 on all online orders shipped within Canada, regardless of size). It was assumed that this would offset the difference in con- venience between ordering online and having to go to a store. Meeplemart did have a physical store as well, but it was not centrally located and was open only four or five hours a day, mostly in the evening.

There was little fluctuation in the prices of the games. 401 Games typically had only about one sale per year, and it was usually in response to a sale at Meeplemart. For example, Meeplemart had a post-Christmas sale in 2012, so 401 Games offered the same 10 percent discount. In celebration of the summer 2013 move to the new location, and to draw existing and new customers to the new store location, there was a discount sale offering 10 percent off all board games. Individual products were also occasionally marked down if they were not selling, out of print, or slated for removal from the product list. These markdowns tended to be more severe, although they did occasionally backfire. There had been several instances where the price of a given title was drastically reduced, only to see the now-cheaper game fly off the shelves, build some buzz, and result in greater demand at the store; John would then have to re-order the product that was supposed to be on the way out.

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401 Games 9

LookinG ahead

In late 2013 John identified many options for where 401 Games could go. Some of these possibilities were opened up by the new location of the store. Situated at ground level at 518 Yonge Street (just a few blocks north of the old location), the space was 3,780 square feet for the main-level store (at a cost of $60 per square foot annually) as well as a 2,500 square foot basement (currently used as gaming space) and a 200 square foot garage used for storage (the basement and garage cost $25 per square foot annually). The lease of the tenants on the second and third floors was set to expire at the end of 2014 and John had been offered the opportunity to rent this space, which would add 3,500 square feet, but incur an annual cost of $25 per square foot. If he chose to rent it, he planned to use that upstairs space for casual and tournament gam- ing space, or possibly a café similar to Snakes and Lattes, though John was unclear on the revenues and costs associated with such an undertaking. This would move the playing space out of the basement, since it had not been his plan to use the basement for that purpose long term. The upstairs space could also have been used for inventory storage, more retail shelf space, or to house an online retail operation.

John’s business philosophy had always been to undertake one major change per year. In 2013, the change was to move his store; in 2014 he had the opportunity to rent the upstairs space and create a better gaming area with a large selection of open games available to play. An Internet retailing strategy was another possibility for a major change, as John continued to see more competition emerging on the Internet and was concerned that online retail would take over. Geographic expansion was yet another possibility, but John was somewhat wary of such an endeavor.

Despite his strong preference for slow growth, John recognized that the board game category was booming and the idea of pursuing more than one major change in 2014 was enticing. Given his resources and the store’s income, John thought he could afford to pursue two of these major changes if he really wanted to. Going forward in all areas at once was not possible, but John did not want to make the mistake of letting oppor- tunity pass him by due to being overly hesitant.

Of course, John knew there were always adjustments that could be made to his day- to-day operations, such as when he changed his pricing strategy to match Meeplemart. John did not see this as a “major” change, but rather the need for constant improve- ment in product selection, price, and promotion of the store. These could be done concurrently with the major changes John was considering, though there was a limit to how much overall change could be done in one year.

John had no concern that the board game boom would bust anytime soon. “I thought that MTG would be good for two or three years,” John said, “and here it is twenty years later, still going strong.” According to John, board games had a broader audience than that of MTG, more variety, and a constant stream of new ideas and products. As a result he thought they were here to stay. He also believed that his strengths of selection, price, expertise, and the convenience of long opening hours would come together to make him well positioned to compete far into the future. With so many options open to him for growth, John needed to decide where to act first, and how many new ideas to tackle at once.

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10 Case Research Journal • Volume 35 • Issue 3 • Summer 2015

Exhibit 1: 401 Games—Breakdown of Sales by Product Category

Percentage of Total Sales

Sales per Category

Contribution Margin (%)

Contribution Margin ($)

Board Games 30% $900,000 20% $180,000

Card Game Sets 20% $600,000 20% $120,000

Individual Game Cards 20% $600,000 50% $300,000

Sports Cards 15% $450,000 20% $90,000

Collectibles 5% $150,000 20% $30,000

Gaming Supplies 5% $150,000 20% $30,000

Other 5% $150,000 20% $30,000

TOTAL 100% $3,000,000 $780,000

Exhibit 2: Competitors

Competitor Website Location(s) Core Businesses Online Sales?

401 Games www.401games.ca Downtown Toronto Games, Cards, Collectibles No

1,000,000 Comix www.onemillioncomix.com Downtown Toronto Comic Books, Games Yes

Amazon.ca www.amazon.ca N/A (online only) Books, a Bit of Everything Yes

Chapters-Indigo www.chapters.indigo.ca Many across Canada Books, Décor Yes

FG Bradley’s www.fgbradleys.com Pickering, North Toronto, West Toronto Games, Leisure Yes

Fun Games Café www.fungamescafe.com N/A (online only) Games Yes

Hairy Tarantula www.htnorth.com Downtown Toronto, North Toronto Comic Books, Games, Collectibles No

Mastermind www.mastermindtoys.com 28 across the Greater Toronto Area Toys Yes

Meeplemart www.meeplemart.com East Toronto Games Yes

Mind Games www.mindgamesexpress.com 7 in Canada, 2 in the U.S. Games, Puzzles Yes

Silver Snail www.silversnail.com Downtown Toronto, Down-town Ottawa Comic Books, Games, Collectibles Yes

Snakes and Lattes www.snakesandlattes.com Downtown Toronto Games, Café Yes

Starlit Citadel www.starlitcitadel.com Vancouver Games Yes

Toys “R” Us www.toysrus.ca Many across Canada Toys Yes

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401 Games 11

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