Games Workshop Group (GAW)
Games Workshop: Is the rest of the world crazy?
Two things are concerning about the rhetoric in Games Workshop's annual report for the year ending June 2014. Tom Kirby, the longstanding guardian of the fantasy wargaming hobby is as florid and zealous as usual, but he also comes across a little unhinged.Is the rest of the world crazy, or is he?
We're talking about the financial world, and its short termism, which is a little crazy. Chairman and chief executive Kirby stands opposed to that. Share Sleuth portfolio member Games Workshop (GAW), he has repeated over the years, is in business to make the best fantasy miniatures in the world and sell them profitably, forever.
If it needs cash to invest, it will pay a lower dividend. If it goes through a rough patch, it will pay a lower dividend. Investors have to lump it, secure in the knowledge they will do well in the end through an investment in a company that has virtually no competition and just needs to play its own game well to succeed.
Over the long-term, its done well, even including a debacle towards the end of the last decade when the company's costly expansion due to the phenomenal but ephemeral popularity of its games based on the Lord of the Rings proved unwarranted.
Various threats have come along to test the business model. Computer games are too far removed from the social, collectible, and modelling aspects of tabletop wargaming to dent it, providing instead an opportunity to profit through licensing Games Workshop's Warhammer universe to games developers.
The latest threat comes from two kinds of copiers: people and businesses that turn out copies of miniatures and sell them, and the possibility quite soon, that anybody will be able to make a miniature with their personal 3D printer. Games Workshop sues the first kind of copier, spending an ‘indecent amount’ of shareholder money in the process.
Kirby does not think personal printing will happen. Achieving the level of detail required is unlikely to be possible, and the speeds at which 3D printers operate means it would require months or years to produce an army. That would be an army of old clones, not the latest models.
Even if printing miniatures becomes viable eventually, Kirby says, as a company at the forefront of 3D printing, it would supply 3D printers primed to print Warhammer miniatures to grateful hobbyists.
The fact that Games Workshop controls every aspect of the design, manufacture, and the majority of sales through its hobby stores leads to the seductive notion that so long as it doesn't do anything stupid Games Workshop will survive and prosper, a conclusion Kirby fosters in his rhetoric.
Some customers do think it’s doing something stupid. A previous article on this site has become a magnet for disgruntled gamers and collectors expressing frustration at ever-rising prices, and the increasing frequency of rule changes and model launches. For them, the hobby has become unaffordable, and such was their attachment to it, they resent the company. Some switch to far less popular wargames, some continue playing Warhammer but buy the models second hand, or from counterfeit suppliers.
Could it be that in the quest for profitability, Games Workshop is killing the goose that laid the golden egg: the goodwill of its customers that buy new models and introduce new customers? Maybe. Or maybe these customers are victims of Games Workshop's niche strategy, which is essentially to produce a product of the highest quality and find those customers that can afford it.
That's one of the concerns about the rhetoric, the company's "take it or leave it attitude" seems to apply to customers as well as short-termist investors. Games Workshop conducts no demographic research and no focus groups, it does not ask the market what it wants. How does it know then, if it’s going a little off course? A niche strategy requires tough choices, but they should be informed.
The second matter of concern is a slight shift of emphasis concerning the source of future profit. The potential for growth is still mentioned, but in cautious terms: single digit sales growth after 2015 (and no more).
What really comes across in the annual report is cost cutting. In the last year, the company has switched to a one man store format, which has to a degree unanticipated in the company's public statements disrupted the business and reduced profit. Games Workshop’s also cut out an entire layer of middle management, closed down overseas headquarters, and now runs nearly everything from Nottingham. It’s reduced costs by £2 million per annum (at an exceptional cost of £4.5 million). Kirby describes the new stores as:
...Small (cheap), off the beaten track (cheap), and with only one member of staff [also cheap - I'm paraphrasing this bit]
This cost cutting sets Games Workshop up for growth after the disruption, which will continue into 2015, is over, which is why 2014 has been a good year according to Kirby, despite an 8% fall in sales and a 20% fall in adjusted profit.
The company must strike a delicate balance between making a good profit for shareholders in the short-term and alienating customers or damaging the business in the long-term, which Kirby recognised last year::
Now we have reached 50+% each year [return on capital] it is harder to improve it and we need to be sensitive to what is a reasonable rate so we do not damage the long-term prospects of the business through clumsy and inappropriate cost saving or, worse, inadequate investment in our future.
Time will tell if the cost cutting (and price rises) are clumsy or strategic. Meanwhile faithful customers and investors must grin and bear it.
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About the author
Richard is companies editor of Interactive Investor and a columnist at Money Observer magazine. A keen private investor through his Self Invested Personal Pension, he manages two virtual portfolios. The Share Sleuth portfolio is a hand-picked collection of mostly small-cap value shares, while the Nifty Thrifty is a mechanical portfolio designed to pick large, successful companies at cheap prices.
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