GW’s Financials 2016: Death Of A Salesman?

Fantasy wargamers are drama queens. They loooove horrible monsters, chivalrous knights and bright colours. They either love or hate Games Workshop – no reasonable inbetween, if I might believe the forums. And they looove the fear or hope that GW will die. The Downfall Of An Empire. Death Of A King. That storyline.

Personally I’m not really into fantasy – Napoleon is my hero, not a fictional Sigmar on a gryphon – but I’m very interested in how the top companies try to dominate the market and what their strategies are. Just like football: I don’t play it, but I just can’t get enough of football stats and formation stuff. So I happen to follow Games Workshop. And what do GW’s results tell us? I tried to figure out. 

A Company In Trouble

Fantasy miniature wargaming is in decline. I stumbled upon a Guardian article about the rise of boardgames. A manager told the newspaper:

When he started at Esdevium, Hogg says the gamers they supplied were primarily interested in “geekier titles”, such as fantasy war game Warhammer. Today, he says, “we are seeing a much bigger crossover audience. The level of interest is much higher than ever before.”

And manager Wooding from Orc’s Nest, once a major miniature shop, said:

“About five years ago, I noticed we were selling fewer miniatures,” says Wooding, “so I started putting shelves of board games down here” – he gestures to rows of colourful game boxes with snappy titles, Small World, Agricola, Carcassonne, Pandemic – “and every time we did that the takings went up.” He also noted a decline in what he tactfully describes as the “stereotypical gamer” – dyed-in-the-wool hobbyists who would typically be lone, white men.

Games Workshop published it’s financials in July. Richard Beddard, investor and journalist, is one of the few who tries to understand their market strategy. In his recent blog he’s critical, not so much because of the bare financials but for their style and business organisation.

He writes:

The table reveals that revenue has fallen marginally. Profit derived from that revenue has fallen 27%. Games Workshop sells fantasy miniatures, collectibles and models for its Warhammer universes, which people assemble, paint, collect, and use to play wargames.

The overall result is no disaster, though. A dramatic surge from an additional source of income, royalty payments, came to Games Workshop’s rescue. Computer game designers license the Warhammer characters and mythology to use in games they design and market.
Revenue is stable but not convincing:

Despite flip-flopping between expansion and efficiency drives, the company hasn’t convincingly lifted revenue since a sustained and dramatic period of expansion in the 1990s (…) Generally rising prices over the period, combined with stable revenue, suggests Games Workshop is selling fewer miniatures. Maybe the hobby’s popularity is diminishing, albeit to a pool of big spenders. (…) Excluding sales from the new stores, retail sales fell 4.4%. Trade sales to independent hobby stores increased 0.1% and mail order sales fell 1.8%. A note on page 42 shows that retail sales are most significant, closely followed by trade sales, with mail order contributing just over 20%.

Return on investment has fallen but the profits are still impressive. He’s critical however about the core business income and the management style.

Gamers, who complain on the Internet that price rises and rule changes are driving them away from the game are dismissed. The core customers are modellers who may never play the game – yet my impression remains that the game is the gateway to recruiting new modellers. [ Some annual report] sections read like propaganda to me. (…) 

The whole annual report, like previous ones, is didactic, giving the impression of a company run ruthlessly from the top down. Games Workshop brooks little criticism and I wonder how long an organisation run that way can remain healthy (…) 2016 was a relatively bad year for the core business, yet Games Workshop is healthy. A share price of just under 490p values the enterprise at just over £200 million, or 13 times adjusted profit (including royalties). The earnings yield, albeit buoyed perhaps unsustainably by the royalty bounty, is a reasonably attractive 8%. Kirby is an owner-manager. By most of the measures I use to weigh the merits of a long-term investment, Games Workshop scores highly.

Instinct, though, tells me not to trust the board, not because it’s knowingly dishonest, but because unknowingly it believes its own hyperbole and only really listens to compliant customers, shareholders, and employees. If it’s on the wrong track, the board’s stubborn insularity is likely to keep it there. Though I have learned instinct is usually a poor way to judge an investment, my gut feeling is so strong I’m finding it difficult to suppress. Games Workshop isn’t just making an enemy of me, it’s putting me at odds with myself!Or, to put it differently:

“When you are a shoe shop selling shoes and every year you sell less and less shoes but you remain profitable because most of your income is not generated by shoes but by icecream and softdrinks, your business might be in trouble despite the numbers”

(as a commenter summarized on BoLS).

And if the management is blind for what your consumer wants, the company might go downhill quickly. That’s what many disappointed older ex-GW-gamers think. Or hope.


What do I think? First I must say that I share some of Beddard instincts. Kirby appears to be greedy and arrogant. Kirby (a former tax inspector who now earns a fixed annual fee of 250.000 pound per annum as non-executive chairman) succesfully restructured GW after buying the company from Ansell. He bought the LOTR/Hobbit franchise rights and made a lot of money between 1991-2013. He started a GW-era and established a virtual monopoly in the miniatures market.

But after that, he lost his mojo. Last five years he ousted many veteran designers. Sales were in decline. Financial results as well, but because of price increases (GW’s customers are wealthy) the financials didn’t suffer too much. Compared to big toy giant Hasbro, GW’s sales and results look bleak. Hasbro reports:

Full-year 2015 Boys category revenues increased 20% to $1.78 billion. Franchise Brand NERF revenues increased along with STAR WARS, JURASSIC WORLD and MARVEL. This growth more than offset the decline in TRANSFORMERS, which faced difficult comparisons versus 2014’s theatrical release of TRANSFORMERS: AGE OF EXTINCTION. The Boys category grew 30% absent the impact of foreign exchange.

Games category revenues increased 1% for the year to $1.28 billion. Franchise Brands MAGIC: THE GATHERING and MONOPOLY, as well as PIE FACE and several other games brands contributed to growth for the year. The Games category grew 8% absent the impact of foreign exchange.

In other words, while the markets ‘games’ and ‘boys’ are growing, according to Hasbro, GW is not recovering. The company still lacks strategic partnerships with for instance Disney, Lucasfilms and Marvel. The Star Wars franchise increased sales for Hasbro and Fantasy Flight Games. GW only has its own unique IP to franchise, like the Total War: Warhammer computer game.

What GW should do as a company is: find new franchises, like they did with Lord of the Rings. So far, they have failed to do so. Not buying the Star Wars franchise rights and adapting Battlefleet Gothic to the Star Wars environment was a first class marketing blunder. GW is vulnerable.

Or Survival?

I do believe in survival, though. GW (although late) is adapting and recovering. Apparently, GW has decided to change policies and not to sell a small static range of mass miniature armies anymore, but a more flexible range of tabletop games/tabletop miniatures and miniature board games. This might save GW, just like Airfix or Humbrol or Hornby (railway models). GW is a strong chain.

  • GW’s brick-and-mortar-shops continue to be hang-outs and recruiting centers for new teenage customers. Decreasing the cost of these shops by changing them to one-man-shops is a smart move. The shops give them an edge to internet-based competitors, like Mantic and Warlord.
  • The 40K niche is a strong brand and a quite unique market segment. I can’t see competitors quickly gaining ground in this segment. 
  • Kirby and new CEO Rountree have a lot of experience in this business. They might still have a special antenna for the core UK market.
  • The simplyfied AoS rules and the cheaper GW starting packs will make it easier to sell more miniatures to a broader group of younger and/or casual players

GW has decided to focus more on the growing board games market. This resulted in a split with Fantasy Flight Games. Crossover board games, like Talisman and Warhammer Quest, might in the future bring more return on profit than old mass miniature games like WHFB.
The company still has enough financial reserves to fuel a policy change.
The models are now manufactured in the UK. If GW moves production to India, just like Airfix, or China, then production costs will probably decrease.

The only real risks are a sale to a vampiric financial investment company, a sudden rise of cheap 3D-printing, or demographics (less teenage boys = less customers). Sales will inevitably decline. The future will be bronze or iron instead of gold. But as long as the management is financially cautious and regularly reviews their strategy (as now), they might retain their market dominance.

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