Games Workshop Group (GAW)


Games Workshop’s revenue problem

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Games Workshop may not have convincingly raised revenue for over a decade. Why should we believe it’s going to from now?

No doubt some of the interest in Games Workshop shares since its annual report was published earlier in the month, is the promise of an end to the company’s restructuring and a return to sales growth. In the company’s 2012 annual report Tom Kirby, who over decades has exchanged the roles of chairman and chief executive many times, described the company’s sales record:

My favourite graph in our internal reporting shows the sales in each country going as far back as we have records. 1988, I believe. The really great part about it is that it has over 20 years of data. You can see proper trends over 20 years, and if your intention is to build a business that lasts, which mine always has been, then ‘long term’ means decades.

What does the graph show? It shows our rapid increase of sales in the 90s when we opened a lot of stores in the UK and a lot of businesses around the world. The UK line then shows a period of consolidation as that growth demanded we sort out our manufacturing and warehousing. Then we enter a short surge due to our intoxicating Lord of the Rings tie-in (everywhere except the US, interestingly enough) followed by a long hangover in Europe and a shorter one in the UK. Recently we have been flat and very recently trending upwards again.

Here’s a simpler chart showing Games Workshop’s total revenue (taken from SharePad) going back as far as 1990, the earliest data I have.

It shows the same trends minus the country specific detail, except that since 2013, revenue has been falling again. In particular you can see the Lord of the Rings effect between 2002 and 2004, when many fans of the popular Lord of the Rings films released around that time bought a Lord of the Rings branded game designed and manufactured by Games Workshop. The fad didn’t last though and new customers didn’t become dedicated model collectors. The company makes most of its money from the models it sells to gamers and collectors.

Games Workshops explanation for the fall in revenue in 2015 and 2014 is short-term disruption caused by a complete overhaul of its two major sales channels, independent retailers and its own stores, which each earn the company roughly 40% of revenue. But the phases of cost cutting, the substitution of resin for pewter in its models, the one man stores, and most recently the repatriation of Games Workshop’s overseas trade sales network, started much earlier, when the company realised it had expanded wastefully, encouraged by the ephemeral success of the Lord of the Rings games.

Back to Kirby’s description:

Looking closely at the trend lines reveals interesting strategic information. The gradient of the US growth changed dramatically when we switched from using distributors to going direct to retailers… It is impossible to see where various electronic games devices were released, or the effect they have had on our sales. Each of these devices supposedly heralded the end for our antiquated miniatures - oh ye of little faith…

Why is this so interesting? First, it shows that even as we are very intent on the future growth of the business so we are constantly looking at our record to learn what not to do, and what to do again. Second, it gives perspective to our view that short-term issues are short-term. Third, it underlines what I said earlier: when we say we are a long-term business we mean it. We cannot guarantee to be around in 50 years time, but we certainly intend to be.

Short-termism is one of the evils of modern society. More shareholder value is destroyed by managers making dumb short-term decisions to enable them to produce glowing quarterly reports than ever is gained in the laughably inappropriately named ‘transparency‘ they are supposed to bring.

I agree, long-termism is one of the reasons I’m attracted to Games Workshop. But I wonder as Kirby looks at his chart, whether he sees a short-term sales problem or a long-term one.

This is crude, but taking 2002 as the starting point from which to measure Games Workshop’s sales performance, after its rapid growth in the UK, conditions that are unlikely to be repeated, but before the ephemeral growth related to the Lord of The Rings, gives us 13 years over which to judge the company, surely not a short term.

In that time Games Workshop lifted revenue from just under £109m to just over £119m, a compound annual growth rate of less than 1%.

That’s not very impressive considering Games Workshop owns a unique franchise in Warhammer, the game it invented, that cannot be legally copied by any other company and that dwarfs all other other fantasy war gaming, modelling and collecting businesses. Since the entry to the modelling hobby is through the game, and the game must be played with other people, Warhammer’s popularity is a huge advantage in itself. The company controls and therefore profits from almost every aspect of the hobby from the design and manufacture of the miniatures to distribution, retail and promotion through its own publications, so it’s destiny is largely in its own hands.

There may be external susceptibilities. The company denies the impact of computer gaming, the possibility that customers might print their own miniatures using 3D Printers is still largely science fiction, and although bootleg cast models are available, Games Workshop works tirelessly to shut down businesses that infringe its intellectual property rights.

I think one botched expansion, and one protracted and so far unconvincing rationalisation that has restored profitability but not sales growth, suggest its more likely the problem lies within Games Workshop, which is why I’m intrigued by this statement from its new chief executive, Kevin Rountree:

In my opinion the greatest risk is the same one that we repeat each year, namely, management. So long as we have great people we will be fine. Problems will arise if the board allows egos and private agendas to rule. I will do my utmost to ensure that this does not happen on my watch.

I don’t think he’s referring to his fellow directors, but the middle management they’ve been busy flattening. The company’s annual reports written by Kirby and, when he hasn’t also been chief executive, his protégés, reek of ego to me, though, and I wonder if, hell-bent, on cutting costs, Games Workshop has neglected sales (and by inference customers), to the detriment of shareholders.

Rountree is an internal appointment and judging by his first annual report, the jury’s out on whether he’ll make any decisive breaks with the past. His plan for sales growth is a combination of the old, and potentially the new. The company will open lots of new one man-shops, its favoured format in recent years, but also some bigger stores in prime locations. He’s considering introducing new products at new, presumably cheaper, price points, which may encourage more people to start playing and modelling. The company is known for premium products and rising prices.

But he’s also retained the chairman, who, it should not be forgotten, led the company’s dramatic growth in the 1990’s, as a consultant on a £200,000 salary.

Back in 2012, Kirby concluded his critique of short-termism this way.

If you would like more transparency on Games Workshop, come to our annual general meeting. You will see our facilities, and maybe be quite surprised by how interesting they are. You will get to meet all the people who do the important things and talk to them about their jobs. You will also get, if such is your desire, a foaming pint of Bugman’s best in our famous bar. No, shareholders do not get a discount on beer. We don’t do discounts, not even for you.

The next ones on September 16. I’m going. It sounds like fun. And I hope to gain some insight into whether Games Workshop really is learning from the past.

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