Games Workshop – To the Precipice and Beyond

What is wrong with Games Workshop?  And what do they need to do to get back in the driver’s seat?

The huge 25% drop in Games Workshop stock this week lead to some big questions that have been asked many times over the past couple years.  The most important being:  “What the hell are they thinking?”
Let’s cover some facts first.  Games Workshop’s 6 month financials were released this week and were BAD.  Yes, they are still making money, but compared to the 12 months previous they are down big.

Revenue          £60.5m (2013)    £67.5m (2012)

Pre-tax profit   £7.7m (2013)     £11.1m  (2012) 

That means that sales were down about 12% and profit down about 30%.  Those are huge numbers – especally for a public company beholden to the shareholders.  What is notable is that the profit is down so much despite major GW efforts to reduce costs and restructure their retail.  And their gross revenue is down despite the past two years of price increases, an increase in the velocity of releases and new product, and significant sales growth in the Black Library and Forge World divisions.

So what is the problem?

This is so easy.  Unit sales are down.  GW specifically notes that their trade sales are down as well.  Basically, people are buying less plastic crack.  And why?  Pretty simple, prices are TOO HIGH.

This is not news.  Last year I did a poll on the Apocalypse40K Facebook page.  I asked how the price increase was affecting people’s buying habits.  With over 100 responses, 75% of the people said they were BUYING LESS.
From 5th to 6th editions, a Land Raider increased 50%!   The basic intro set, increased from $ 50 to $ 100.   I have had one of the top GW managers in the country tell me that GW was cutting its own throat by doing that to the intro kit.  And he told me that GW expects $ 800 in sales the first year after someone buys an intro kit.  So why screw them up front and make that $ 800 less likely?
This market will simply not take these price increases.  People are not buying new models and they are definitely not starting new armies.   Three of the top retailers in the US, all of whom are contributors to BoLS, agree, saying sales are down, and people aren’t buying GW like they used to.
Why does GW not get this?
I think it comes down to one word, stubbornness.  Games Workshop was used to being the only game in town for decades.  They were used to people not having easy alternatives.  But now there is the Internet, Kickstarter and competitors like Privateer Press (Warmachine),  Battlefront (Flames of War) , FFG (X-Wing) and a hundred other smaller game companies growing like weeds.  Yes, GW still makes the best models, but that doesn’t mean people will pay a king’s ransom for them.
And this all falls at the feet of the Chairman of the Board, and now is the acting-CEO until they find a new one.  He is making all the big decisions.  He is the guy who took the company public.  He carries the company’s glories and also must shoulder it’s failings.

The Chairman thinks he knows this business.  But statement after statement tells me he’s losing the Midas Touch.  Mark Wells, the GW CEO who left early last year, was a good CEO.  A retail specialist, who had previously worked at Boots, the English chain store, the company did well under Wells. But despite his leadership, they made one big mistake, they increased prices to the bleeding edge, then one step beyond where the majority of the customerbase could afford it.  And in an economy that was difficult to begin with, that meant trouble.  They were able to hide that trouble for a bit through internal cost-cutting, but now  with the company lean and cut down to the bone, they are facing big problems. 
And worse for GW shareholders, the whole idea of selling the company at peak value is now seriously in danger. GW proudly touts that they don’t do discounting – unless of course you’re looking to pick up an English toy soldier company at a 25% markdown.  Because if you have deep enough pockets you just got a great deal this week.  

So what do you do?

You lower prices.  You get used to the fact that your business isn’t what it used to be and you can’t keep raising prices forever.  You’re not Ferrari, but maybe you can be Mercedes.  You also either get the company sold or you take it private, because this company cannot sustain the growth needed to be a public company, where growth is everything.

If you don’t lower prices, then you really do have a serious problem. These types of situations often lead companies into the vicious-cycle of an ever shrinking customerbase feeding into the need for ever-higher prices and down the drain it all goes.

No need to get more complicated.  That is what needs to be done.  But I have my doubts the Chairman will do what is needed.  He is holding on too tight.


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