Nathan here with what will be an ongoing monthly blog post where I dig into and discuss the business of board games. What’s going on behind the scenes of the industry that powers your hobby.
I guess I should start by talking about my credentials and why I think I have something to say that you should listen to. I’m the co-owner (and co-founder) of Pandasaurus Games, and we’ve been in business for going on 8 years now and have grown from a part-time gig into a full-blown 7-person operation with business partners in all regions of the globe.
Before I was lucky-enough to quit my day job and make board games for a living, I worked in finance. I was a Vice President and Global Co-Head of Regulatory Management for Goldman Sachs, VP of Regulatory Management for Deutsche Bank, worked in market regulation for FINRA (Financial Regulatory Authority). Boardgames are *much* more satisfying work.
Update: Less than 24 hours before this post was due to run, we got a reprieve for the holiday season. Toys and electronic devices likely to appear under Christmas trees were spared the 10% tariff until December.
Disclaimer: I have political opinions about things. These do not necessarily reflect the company’s opinions. He is after all a Dinosaur eating bamboo and likely has very few. I am going to try and keep an even-tone on what is going on, why and it may or may not work.
I am also not an economist, so bear with me as I am oversimplifying a lot of these concepts.
Ok. Let’s get right down to brass tacks and launch into what is probably the most hot-button issue in our industry in 2019. Tariffs with China.
What is a tariff? A tariff is a tax levied against goods when they enter or leave a country. These can take a few forms, but the tariff that we are talking about today are tariffs on goods coming from China. We’ve gone through several rounds of increasing tariffs, but the one that we are looking at today is the 10% tariff on the last remaining 300 billion dollars’ worth of goods coming from China. The other rounds of tariffs have been targeting specific industries, this is the “everything else” category. And it includes board games.
In order to give a fair shake at why we are in a trade war with China, we need to talk about Mercantilism. Mercantilism is a trade practice whereby a government takes actions designed to benefit their own economy over others. It’s effectively a charge that a nation is not participating fairly in the global economy but rather trying to position themselves to best take advantage of growth over other nations.
When Tariffs are good
Tariffs are a political and economic tool. They can be used smartly to put economic pressure on countries or industries for myriad reasons.
I think the steel industry is a prime example of “good tariffs. In the United States or other free market economies if supply outstrips demand, prices would fall to a level where it’s unprofitable to produce the material, then production would fall to levels that are supported by demand.
The Chinese government however (through subsidies, state-owned banks, and tax incentives) is propping up production that far and away outstrips domestic demand for steel in China and led Chinese steel makers to dump underpriced steel into global markets. This is “good” for the construction industry, but bad for the steel industry outside of China as it was giving Chinese firms an unfair advantage in pricing of steel since profitability was a secondary concern.
Is China a bad economic actor?
China engages in several sorts of economic activities that give Chinese companies an unfair advantage.
China has been accused of currency manipulation. Their intellectual property rights are non-existent. They close out their markets to foreign companies and investors so that foreign companies have a hard time gaining a fair foothold in the Chinese market vs. domestic companies.
But…they are getting better. And have been for some time. Economic and trade pressures have slowly been forcing China to improve their trade practices since the 90s. Improvement is absolutely needed.
Does protectionism work?
Sure. In the short term, the US can throw our weight around and get some concessions out of China, though I doubt China is in any position right now to give-in on everything. If that’s all we want, we may come out ahead in this game of chicken. But it’s already radically upsetting global supply chains and the financial markets in ways that are very real. We could wind up heading into a global recession because of this trade war, which won’t be to anyone’s benefit. China may be hurt, and they may be hurt badly by this trade war, but it doesn’t mean we will be immune.
So, lets talk about Board Games. It’s why we’re here. What exactly does a 10% tariff on the cost of goods mean to the board game industry? Well, it means things will become more expensive.
If a $60-dollar board game has a $9.3 dollar cost of goods, it means we will be paying a $0.93 tax on the cost of goods. In order to recoup this cost, we will need to charge a minimum of 2.4 dollars more for the game at retail in order to recoup the direct cost. So, now your $60-dollar board game is a $62.5-dollar board game. That’s because publishers (generally) get about 40% of the SRP of the game, so we need to charge enough that 40% of the cost of the game cover the $0.93 tariff.
However, that’s not how capital or risk modeling works. So, let’s unwind and explain the economics of the board game industry.
If we print 5,000 units of a game that has a cost of $9.30 dollars a unit, it will cost Pandasaurus Games $46,000 dollars to print the games. It will cost us an additional $6,000–9,000 dollars to ship the games (dependent on the time of year, weight and volume of the games), bringing the cost of the game to $54,000 dollars. Factoring things like set-up fees, mold creation and artwork we can expect there to be a rough cost of an additional $12,000 –$15,000 USD for a larger game.
So, for ease of math sake, we’ll say it’s going to cost us $65,000 dollars to make, print and ship a game.
We also have marketing costs which are usually between 3–5% of the games budget. So, let’s say we’re being prudent and set a low marketing budget for a game. I’m also going to round a bit to make life easy, so now we’re looking at a cost of goods of $70,000 USD to print 5,000 copies of a title.
We also have overhead expenses. I won’t get too much into those, but in order to pay our employees, travel to shows, run playtesting groups, keep our website running and pay for office supplies we’re going to need about $300,000 dollars a year (this is a made up number, but not far from reality of a mid-size company). Assuming new releases are responsible for half of that amount (and back-catalog titles pick up the other half) it means our new titles need to account for 150,000 in overhead costs per year. If we release 10 games a year, that means each title is responsible for $15,000 dollars of overhead cost.
This means the actual “cost” of this new release, all in is $85,000 USD.
If we sell a $60-dollar game for $24 dollars a copy (40% of SRP) we will gross about $21 dollars a copy after paying the designer and to ship the game to a distributor. This means if we sell all 5,000 copies of the game we will “make” about $20,000 dollars in actual profit, or around 23% of our total cost. Another way to think about this: We haven’t made any money until after we have sold our 4,047th copy of the game.
Spoiler: Most games do not sell out. Most games do not sell 4,000 copies. We are an extremely lucky publisher and we have 4-5 new games this year that will beat those numbers, and 5 games in our back catalog that continue to sell extremely well. Other, smaller publishers are not that lucky.
Now, the reason we do this is because we are hoping that 3–4 of the games we make a year become hits and continue to sell for years to come and our back catalog will continue to do well and the next printing of the game will be more profitable than the previous printing. New releases are all about building a stronger catalog of titles that continue to sell and grow the company.
I thought this was about tariffs.
Ok, right that. Back to our friendly 10% tariff. We’ll eat about an additional $4,700 dollars in taxes to import a game from China. We now must sell an additional 224 games to break even. This has not just squeezed our margin; this has substantially increased our risk. Our games are priced because we have decided (consciously or otherwise) that we are willing to risk losing money unless our game sells through 80% of its print run. We have now increased that risk to an 85% sell-through if we do not adjust the pricing.
Here is where I explain risk and how it works.
Not every copy of the game is the same
This is going to sound very simple, but it’s not something a lot of people think about. Not every copy of the game you sell is the same. As an established publisher our first 2,000–3,000 copies of every game we print are sold before we even announce the title. This is through years of hard work, and making good games that tend to sell well. We know FLGSs will take a certain number of games, gamers will buy some from us at shows and our website. For more established companies than us, that number is likely higher. For new start-ups that number is much lower—potentially zero “baked in” sales.
That next 1,000 games for us are what we need to sell in order to “break even”. That’s the risk that we are taking. We are basically looking a game square in the eye. Its gameplay systems, its artwork, the whole package and we are saying “we are going to do 1,000 copies above our expected sales”. These 1,000 copies are much harder to sell than the first 1,000. They are not created equal.
So, our risk-factor as a publisher has increased by a full 25%. This means in order for us to effectively run a business that understands our cashflow, our value of capital and everything else, if we are doing things the right way, we need to lower our risk factor so that we break even on the 1,000th copy sold above par. This means we need to increase the price of the game by about 5 dollars if we assume no other variables.
But...that’s not very smart. Because a $65-dollar game is not going to sell as well as a $60-dollar game. It will likely sell substantially worse, in-fact. Maybe 10–20% worse. So, I’ve just made selling that next 1,000 games to break even significantly harder. Heck, we may have even moved that “safe” 2,000-3,000 copy order down to a 1,500 to 2,500 copy order. Now we might have 1,500+ “above expected” games to sell. The math starts to get a bit harder to define.
My gut tells me a 10% tariff probably makes a $60-dollar game a $70-dollar game. This is based on years of intuition and “feel” for how the industry works, and what sort of risk we would be willing to take. It also means we probably print less copies. Maybe it’s a 4,000-copy print run so that we run less risk of losing money. Maybe for some games, we never print it at all.
What we would likely do
Now, honest answer time. How would we react to a 10% tariff as an established company? We would likely do what almost every established company is doing. We would eat it. We would eat the 10% tariff and not pass it along to you. We would eat the additional risk in hopes that it’s temporary.
The 30% nightmare
Here we go. I’m going to be very honest with all of you. If we get hit by a 30% tariff, things are going to start looking really bad for our industry. We are too niche and most of us are too small of companies to start opening factories or looking for supply chains or moving production to Vietnam. We would hope that factories open and other larger companies figure it out for us.
At a 30% tariff a $60-dollar game likely becomes and $80- or $90-dollar game, and we probably only print 3,000 copies. We likely produce far fewer games than we do now and start looking at creative ways to increase our revenue. More Kickstarter campaigns are a possibility.
What is Pandasaurus doing going forward?
My background is in risk management. We’re on top of it. We’re talking to producers in Vietnam, and the US, and Europe, and Taiwan, and Malaysia. We’re going to figure out how to keep bringing you games you love. But remember, we’re reasonably well established. Lots of smaller publishers aren’t this lucky. We will absolutely lose some of the creative minds that bring us some of the best games. Companies we don’t even know about won’t form. Games will never be designed.
I think the increased pressure will really hurt distribution and FLGS. Online sales will probably increase as gamers seek to save more money, and that will hurt the industry as the lifeblood of gaming are our FLGS’. That’s where discovery of new games happens most.
Why not just make games in America or Europe?
We can, we have, and we do. But the cost of goods are higher. Much higher than 10%. I would say you are likely looking at something closer to the 30% margin. The global supply chain has also shifted to China for plastic goods, so we would wind up importing most of the plastics from China in any event and still pay tariffs on those imports.
I think that we will see some uptick in US based manufacturing in industries where the US has an established foothold and still manufactures a lot of goods. Paper manufacturing in the US is currently geared towards paperboard (shipping boxes) consumer goods (plates and cups) and tissue paper. With a few notable exceptions, we’re not really making the sorts of paper goods that result in consumer packaging the way we did 50 years ago. Bringing new plants online is a costly investment both in money and time, and the political risk that any tariffs would be short lived (either through a change in policy or a change in administration) are a massive risk in investing in bringing new factory capacity online in the US. Most talk I’ve heard about new factories is in South East Asia, not the US. And those make long-term financial sense because Chinese wages are growing. The tariffs may be pushing a move to Vietnam quicker than otherwise would have happened, but things are heading towards Vietnam in either case.
I think for now you are going to see looser monetary policy by the Fed help to keep the US economy out of recession, but they can only cut rates for so long. I think China will start manipulating the yuan to the dollar more than they already do to try and stave off some of the increased cost to manufacture there (which feels counterintuitive to the stated goals of making China a better trade partner).
My honest opinion is that these tariffs are unlikely to significantly increase jobs growth in the US. They are likely to cause a global recession that could harm the job market, and they will absolutely increase the price of consumer goods. Well intentioned as they may be, the net-impact is likely going to hurt the people they are designed to help.
I’m not an economist, so I’ll let you google articles by people smarter than I am on this subject, but from our perspective, it would take very high tariffs to make producing games in America more economically viable than producing them in China, and all of the issues created by the tariffs would apply to increased production cost.
See you space cowboy
I'll be back in a couple of weeks to talk about inventory projections. Why do games sell out, why don't publishers just print more and other considerations of risk-management in the games industry.
Thanks for that Nathan, as someone who is going to KS and trying to do financial projections for everything, I find this very useful.
Yes it is true Jeff, maybe your circle of friends are active online but the online active community is still a minority in boardgames. Most people do discover new games in game clubs, shops etc. For example I regularly check KS and BGG, back new games etc but in one game night at a local shop/club I can easily discover 3-4 new games.
Thanks for the article, particularly sharing some numbers about costs of a total print run, publisher margins, and the probable impact of tariffs on all that. Hard numbers make it much easier to wrap my mind around the issue. It sounds like uncertainty, not necessarily tariffs, is the real business killer: With predictable costs you can at least weigh options and plan accordingly. With uncertainty… good luck!
@Jeff – I think that is something I’ll do for my 3rd entry. I think there is an interesting disconnect between online attention to games and the general population of gamers.
As the owner of a business, I understand your need and dependency on FLGS to get those initial units sold off your shelf.
However, I was really surprised by your statement that FLGS are “where discovery of new games happens most.”
My initial reaction is “Can this REALLY be true?”
Most of the folks, I know pull their information from Kickstarter, Boardgamegeek, or online videos, and podcasters, with a convention or two thrown in.
Perhaps this could be another topic to explore in your ongoing blog.
Thanks for an interesting and thoughtful analysis of the current tariff situation.
Thanks so much. This makes more concrete the preparation I need to do for starting my kickstarter/company.
Thank you for your humility, you clearly understand more than people like Greyson or other people who try to sound smart on the internet.
Dave – Absolutely. Kickstarters have the advantage of better profit margin, but if you are running a really expensive mini-driven campaign the tariff could wind up hurting you a ton. I think the real risk with Kickstarter right now is being caught-out not anticipating a potential tariff and not having enough money set aside for it.
Good read and information. I would be curious how Kickstarter factors into the equation for publishers. It alleviates some risk but comes with it’s own issues and overhead.
This is the kind of nuts and bolts information people need when they consider getting into into the gaming industry. Without it, everything seems too abstract. Thank you for taking the time to spell it all out.
This was a fantastic article, Nathan, cram-packed with concrete information about some of the economics that go into making games available on our local store shelves. Thanks so much for sharing your insights!