The Brick & Mortar that Could

When my business partner first put this shareholder letter / annual report on my desk, I thought he was crazy. Having a quick look at the report, I could see that this company focused primarily on brick and mortar retail shops as their growth strategy, and had absolutely zero ambitions for acquiring companies, selling any of their own, or doing anything outside of keeping it alive for “forever”. It’s no secret that there’s been a growing graveyard of bankrupt storefront retailers. If you look at the figures, consumers spent ~$517 billion online with US merchants alone in just the last year, and some of our favourite brands have fallen by the wayside as a result of it (see below).

Source: CB Insights

Further, it didn’t look like this company was trying at all to compete in this area. When visiting the actual Games Workshop website(s), it’s clear that very little capital was invested in things you’d typically find with companies fighting for their lives, like natural language processing (NLP) for improved search or near-perfect recommendation engines.

But when you look at their performance, regardless of a brick and mortar strategy, Games Workshop has hit their 3rd year of record highs, generating over $400 million (CAD) in revenue and a 23% increase in their price-per-share from last year; which, by the way, includes dividends that are paid entirely out by surplus cash – no debt. On top of this, though they operate primarily from Nottingham (England), 75% of their sales come from outside the UK, which indicates a calibrated global focus. And within the UK, they’re collaborating with hard-to-get partners like middle-school STEM associations and the UK Scouts (Boy Scouts), where they’ve sponsored a ‘Model Maker Activity Badge’, that gives kids across the country special activity packs to “begin their Warhammer journeys”.

So, what makes this organization different from (RIP) Sears, Nine West, and Diesel? Do they have some secret sauce we don’t know about? What’s their focus? To begin with, let’s look at their business model.

The Business Model

Manufacturing Tabletop Games & Accessories

Games Workshop is a manufacturing company that makes and sells tabletop wargames and accessories. They have a design studio in Nottingham that they’ve invested $17 million (CAD) into, with an additional $5.3 million invested in tooling equipment — used for molding their plastic miniatures.

As an aside, if you’re not familiar with tabletop gaming (skip this paragraph if you are), it’s intensely cultural. Customers get lost in different fantasy worlds, scenarios, and campaigns. To help you better understand, a ‘campaign’ is an evolving storyline found in role-playing games (‘RPGs’), that involves the players’ characters (in this case, marked by plastic figures or ‘miniatures’) experiencing changing environments (boards & accessories) and circumstances (storylines), given the actions the players took in previous stages of play. It’s actually a ton of fun and if the gaming companies time out releases of their expansions and campaigns just right, they can get their customers anxiously waiting and speculating as to when they can get their hands on them.

Source: Games Workshop

A majority of Games Workshop’s products revolve around 3 brands; each with a unique storyline, over three decades of characters, and plastic miniatures & accessories:

  • Warhammer: Age of Sigmar
  • Warhammer 40,000
  • Horus Heresy

Though this company seems to be a full-blown manufacturer, since they’ve dedicated so much of their focus and capital towards their 228 employee design studio and production facilities, they still have their own branded retail stores that exclusively sell Games Workshop products and are manned by direct employees of the company. This is where it starts to get confusing. Are they planning to take over the world one retail shop at a time, which means they should be focusing on online sales of their products, or are they planning to focus on manufacturing, where they should normally rely on other businesses footing the ‘sales & marketing’ bill? First, let’s understand how manufacturing itself traditionally works.

How Typical Manufacturing Works

Manufacturing businesses create or collect components, parts, or raw materials so that they can sell them either directly to consumers (with a ‘wholesale’ type of approach) or businesses (distributors / retailers) that then sell the completed product to consumers.

At its core, all manufacturing businesses care about the supply and demand question: how much of our product do customers want (demand) so that we know how much of it to make (supply)? The first half of the question is a typical responsibility for the distributor. They’re the ones that get to see and talk to the customers directly and have a better idea of their needs. A big obstacle that manufacturers face is developing a collaborative relationship with their distributors and retailers since they need to find out how customers respond to their products so that they can continue to innovate and iterate production. Distributors and retailers may also take on general sales, shipping, procurement, and exporting; again leaving the manufacturer to focus primarily on product quality.

How Games Workshop Does It

Games Workshop has an interesting approach where they split it somewhat down the middle. They own and operate retail stores, while at the same time distributing their products to independent retailers around the world.

Company-Owned Stores

Because of the massive library of products that they offer (remember the ‘expansions’ play in the gaming world?), each of their company-owned stores only holds new releases and a selection of high-demand products. To keep inventory manageable and store footprints low, they have web store terminals in each store to give customers direct access to their full selection so that they don’t close off sales of their entire range. This approach makes sense since a repeating theme in their shareholder letter is using these storefronts as a mechanism for “customer recruitment”. For Games Workshop, sales representatives in retail stores provide the primary opportunity to educate potential customers and assist them in culturally integrating through face-to-face guidance.

Partner Programs

It appears that Games Workshop is taking a page out of old school cigarette ad playbooks with the whole “get ’em while they’re young” approach. As we mentioned above, they’ve gotten themselves a badge in the UK Scouts and are partnering with schools to bring the world of Warhammer to children across the country. This demonstrates just how much they believe in the culture of Warhammer.

Independent Retailers

When it comes to their external retailers, it gets a bit interesting. Traditionally, manufacturers love the idea of getting their products on the shelves of big-box stores since this indicates reaching more people at once. However, Games Workshop specifically targets independent retailers. They don’t explicitly tell us why, but they often talk about how much IP control they’re able to enforce through the terms and conditions of each contract; which leads me to believe that this is a probably an IP protection play. However, why do they want to do this? I thought the name of the game was money, just like any other business? Don’t they understand the risks of dreaming about world domination and of using strong-arming techniques as their primary form of protection?

Games Workshop’s True North:
We da best forever.

Games Workshop is the best fantasy miniatures company in the world and the whole team is very proud of that. We are doing everything we can to ensure we remain the best, forever.

It might not sound sexy to the high-growth firms that seem to take over the business headlines, but at the end of the day, Games Workshop has “no intention to acquire other companies, nor to dispose of any of those [they] own”. That’s right, they not only want the business to take on a life of its own, but they’re explicitly ensuring this is part of the culture; which, by the way, is a culture that has a revolving door of board members that they actively try to “refresh” and cycle out.

After some ‘reading between the lines’ and getting a feel for what they tend to focus on in their reporting, it appears that, in addition to figuring out how to have this company live on forever, they’re largely steered by a focus on increasing shareholder value and providing some sexy dividends.

Shareholder Value

It’s true that all companies are (or should be) focused on shareholder value, but this company seems to highlight this as their driving force in reporting. With no liquidity event in sight, how else could they possibly show this focus? With repeating language surrounding dividends. Throughout the document, important items are highlighted and in some cases visualized with tables, but every visual graph included in this piece was surrounding shareholder value. Further, to keep dividends for those shareholders a primary focus, the company adopts strong efforts around profitability; which is the reason why they’re able to fund significant dividend payments through surplus cash.

This approach overall is a tricky one. It’s difficult to keep up with today’s fast-moving e-commerce trends and keep independent storefronts from selling your products in ways that might damage the brand. Well, Games Workshop has thought through the risks and has boiled it down to two major initiatives: boost niche interest and boost global reach.

Boosting Niche Value with the
Risks of Brick & Mortar

Games Workshop is in a unique position to do something that not many other companies have the opportunity to do: aggressively and organically increase the size of the overall market (for a very long time). Games Workshop has an opportunity to increase market size through the organic growth of a gaming culture.

However, again, it’s such a surprise that a company is pushing so aggressively towards the retail storefront approach. The risk of de-emphasizing e-commerce is immense so it’s hard to make sense of their why. However, they eliminate this risk by focusing on growing their niche using one style of engagement only: the in-person immersive experience.

The Immersive Experience

The idea of “recruiting customers” through company-owned stores is not only confirmed by the fact that each store looks to give a customer-centric experience, but by their very design. In addition to each store having an online terminal, ready for full product range browsing, they also have tables to play games and a full paint line available (which is constantly being improved) for customers to add colour to each of their miniatures. They seemed to have taken the ‘immersive experience’ model to the next level since they want customers and prospects to feel comfortable in freely exploring gameplay in-store.

Retail Stores & Downsizing

I know this company appears to be all fun & games, but when it comes down to retail profitability, they’re pretty damn ruthless (and it’s awesome). Their stores are either classified as one-man (ehem, woman) stores or multi-man stores; and in both cases they aggressively monitor profitability. If a multi-store is deemed unprofitable (at the proper threshold they’ve identified) then that store is downsized to a one-man store or eliminated. This is easily done since they’ve made it a rule to always have less company-owned stores than they do independent retailers.

Boosting Global Reach with Partners & IP

Another major initiative of Games Workshop, which has been outlined by their focus on independent retailers, is their global reach. The idea is to get into locations that would have otherwise been unfeasible, by partnering up with independent storefronts and supporting their sales. However, a key to this play is ensuring that they don’t alter the brand or ruin the culture that the company has worked so hard to develop.

IP as a Form of Both Growth and Protection

Games Workshop uses their culture, and IP, as a mechanism for growth through an immersive experience that’s often realized with in-person activities. However, it’s apparent (though, not explicitly apparent through their report) that this doubles as a form of protection as well.

With a financial performance like the one they’ve had for the last few years, online giants would probably love to take a bite out of Games Workshop, and if they can’t, I’m sure they’re trying to topple them over just the same through their online power. However, they’ve underestimated Games Workshop’s most powerful weapon: the insane quality of their IP. This company has put significant dedication into the fantasy worlds that engulf their customers’ imaginations and there’s no sign of slowing it down.

A Vision with a Life of Its Own

Aside from going against the status quo by choosing storefronts over e-commerce, Games Workshop’s corporate culture is differentiated by its unapologetic focus on having the brand live on ‘forever’. We see this through their business model, their governance, and in how they’ve successfully maintained protecting themselves against the competition. I’ve been known to talk a lot of crap about companies that fail to stay in tune with the writings on the wall when it comes to retail, but I’m wrong on this one. They have maintained a north star of sexy dividends, which seems very soul-less, by maintaining a relentless focus on just the opposite: the Games Workshop’s brand — its soul.

This company proves that you can maintain a competitive edge in an evolving market by focusing on ruthless profitability while strengthening a product vision through the traditional values of a niche culture.

I guess Games Workshop teaches us that you really can have it all.

North Star Performance£256.6 million (C$417.7 million) Revenue
£81.2 million (C$132.2 million) Operating Profit
Initiatives• Increase Niche Size
• Expand Globally
• Increase Shareholder Value
• Surplus Cash Dividends
ActivitiesCompany-Owned Retail Stores
• In-store gaming
• In store miniatures painting
• In-store web terminals for full product access

External Independent Retailers
• Youth partner programming
• IP Protections
Let the Product Live ForeverEach part of the company focuses efforts towards ensuring the product lives forever on its own. This is seen through the revolving door of board memberships, the lacking of a liquidity event, and a focus on a product culture that ensure maximized staying power
Culture-FocusedCompany IP is at the forefront of all efforts. Capital is significantly invested into building new stories and publications, designing new game accessories, and on creating an experience that delights customer imagination.

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