How GW Sees Us - An Analyst's Assessment

Interesting article in Interactive Investor written by Analyst Richard Beddard. It provides a real insight into how Games Workshop see their market and their customers.

Games Workshop is casting itself as a relentless profit making machine. Customers, staff, and investors who don’t like it better get out of the way.

On Tuesday, the day before Games Workshop’s annual general meeting, my twelve-year-old son burst into the office and noticed the proxy forms allowing me to attend and vote.

When he saw Games Workshop written in bold on the papers he asked what I was doing. I told him I was visiting headquarters to find out more about the company. “Good,” he replied, “Can you take back my set?”

I think he was hoping for some cash back. Joe had bought a kind of starter kit and had started painting the figures in preparation for his first fantasy wargame. But without friends who play the game, or a parent modeller, he ran out of steam and for the past year it’s been standing in a pile destined for eBay.

The failure of Warhammer to storm the ramparts of the Beddard household has not put me off Games Workshop as an investment, but it does add to my insecurity because my personal experience coincides with the experience of gamers protesting through various Internet channels including this web site, that the hobby is increasingly inaccessible to gamers.

I came to the AGM wondering whether Games Workshop was alive to the risk that it is serving a diminishing band of nostalgic modellers who are prepared to spend a lot of money on intricate miniatures they will probably never use in battle, while through price rises, rule changes, and staff reductions at Games Workshop stores, the company has alienated new recruits who cannot afford armies of figures, and frankly aren’t that bothered about how pretty they are.

Though it’s profitable now, such a strategy might not enhance Games Workshop’s ambition to stay in business forever.

Walking up Willow Lane in Nottingham, the company’s headquarters looms like a fortress, shuttered and battleship grey. Within the keep is the newly refurbished Warhammer World, venue for the AGM.

Shareholders are led up a wide arcing staircase through one of three shops into the events hall, a keep within the keep surrounded by mock castle walls and filled with tables for gaming and modelling, and then into Bugman’s Bar, named in honour of the greatest dwarfen brew-master. There, the AGM motions are passed without question, new chief executive Kevin Rountree gives a presentation and finance director Rachel Tongue take us through the numbers. We’re whisked through a permanent exhibition of miniatures, some standing alone, and others massed in battle on vast sets, so tumultuous sometimes its hard to work out what I’m looking at. Here we mingle with directors and other senior staff including chairman Tom Kirby, who has run the company for most of its history, and Games Workshop’s head of intellectual property. In the final chamber of the exhibition, he and the company’s head of product and supply talk about Warhammer Age of Sigmar, a complete reboot of the original Warhammer Fantasy game. Then it’s back to Bugman’s for a lunch of roast beef, syrup pudding, and a pint (and a half) of Bugman’s Best, which is a very fine beer.

As an AGM experience it beats an hour in an anonymous public relations company’s office in the City.

Touring the exhibition, I asked one of the board members if he played, or if he modelled. He used to do both, he said but now he finds running businesses is even more fun. Not for the first time that day the thought crossed my mind that Games Workshop’s management might view staff, customers, and investors as figures on a tabletop that they must manoeuvre ruthlessly to victory. Rountree’s main preoccupation is recruitment. He and Kirby have spent the last five years returning the business to high levels of profitability by taking out cost. Now, if it’s to grow, the new lean profit machine must recruit new storekeepers, particularly in continental Europe and North America. It’s a hard job, he says, running a one-man Warhammer store, and the company’s tough love, it supports managers who “want to continue in the job”, contributes to a 30% turnover rate. I’m not sure that’s bad for a retailer but considering for most of Games Workshop’s managers the job must start out a vocation, it could improve.

I’ve got bad news for disenchanted gamers complaining on the Internet. The company’s attitude towards customers is as clinical as its attitude towards staff. If you don’t like what it’s selling. You’re not a customer. The company believes only a fraction of the population are potential hobbyists, and it’s not interested in the others. The move to one-man stores has reduced the number of customers, sometimes by 30%, but the stores are profitable now.

Maybe you think you’re a customer, or a potential customer, because you like playing games. But this is the important bit. This is the bit written in every Games Workshop annual report. The company’s mission statement is “we make the best fantasy miniatures in the world and sell them globally at a profit and we intend to do this forever.”

It does not mention games. In conversation, I’m told that the word “Game” in Games Workshop encourages the misconception that games are its business, but that only about 20% of Games Workshop’s customers are gamers. The rest are modellers and collectors. Maybe half of them think about playing now and then. The other half have no intention. People actually walk into the stores because they’re curious about modelling fantastic armies.

When another shareholder asks if the company would sell games with pre-painted easy to assemble miniatures like the popular Star Wars themed X-Wing game, there’s a collective growl from the Games Workshop people. It wouldn’t be a hobby business then, it would be a toy company.

Games are easy to sell if they catch on, but it’s the modelling aspect of Warhammer that makes it a hobby, sometimes for life, and peculiarly lucrative to Games Workshop. Some of the individual models we’ve seen in glass cases, those from the company’s Forgeworld collection, retail at £1,250 each. Some customers spend many thousands of pounds a year and they paint them with incredible craftsmanship. These are good customers.

Though I’m left with little doubt where the businesses’ priorities lie there is hope for gamers who like to model. Kevin Rountree explains how introducing products at new price points is different to reducing the recommended retail price, something the company resolutely refuses to do. It’s considering “putting more value in the box”, discounting in other words, when people buy in number. That ought to encourage gamer-modellers.

The Age of Sigmar is something of a revelation too. I hadn’t appreciated how much it breaks with the past. Games Workshop has simplified the rules from 150 pages in an expensive rule book to four pages that are available for free download or in its free app. They’re easier to learn, easier to play and easier for the company to translate into many more languages. The game’s narrative will continuously unfold with associated product launches and in a trick borrowed from the Space Marines of Warhammer’s futuristic sister universe, Warhammer 40,000, gamers can employ heroes with superpowers (Stormcast Eternals). Purists think they unbalance the game, but Warhammer 40,000 grew to be a far more popular game than Warhammer Fantasy. The company cannot divulge sales figures, its in a closed period and Age of Sigmar is only in its third month, but in terms of other metrics, downloads and Sigmar themed magazine sales, management seems more than satisfied. Anyway, it’s at pains to point out, Warhammer Age of Sigmar is a long-term investment.

I leave the Games Workshop fortress confident of one thing. Managment have set a course and they will not be deviated. Ultimately, shareholders who question it come up against the mission statement. Games Workshop exists to make models, because that’s what it does well. Potentially lucrative income from licences granted to video games producers like the much anticipated and soon to be released Total War Warhammer will always be incidental because video gamers do not become modellers, and Games Workshop doesn’t know how to make good video games.

Niche businesses are often very profitable and the hard decisions they take is what makes them different, but they’re also vulnerable if unforeseen events reduce the attractiveness of the niche. That’s why most niche companies try to expand their niches, or develop related niches. Having defined itself so tightly, perhaps the only way Games Workshop can grow is geographically, which explains the emphasis on North America and Europe (where it already has a sizeable presences). It has a small team in China, sussing out the Asian market.

Sigmar sounds like a good product, and I think maybe I should buy it for Joe for Christmas. But as I walk back along a tow-path to the railway station the spell wears off.

He just wants to play. He’s not an anointed one. He doesn’t have Warhammer DNA. I don’t think he’ll ever walk into a Warhammer store because he wants to paint a Stormcast Eternal.

Maybe we’ll get him X-Wing instead.

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