The GW Death Spiral

Quite a lot of gleeful nattering has been going on in the far corners of the internet with the news that Games Workshop’s stock price dropped 24% is a single day after disappointing sales results.

GW price drop

The folks at Masterminis also followed up a few days later with news of GW firing the staff and closing regional GW HQs, like GW Germany, and also starting to look at the performance of their retail outlets.

This is a pretty standard reaction for the Games Workshop management. They have been slowly paring the company down for more than a decade now and it was inevitable that they would inevitably get to the point where they had no games to cut and instead starting slicing away at the meat of the company.

In 2010 a fellow named Michael Mace wrote an article describing what he saw as the inevitable death of RIM. His article is an interesting read in and of itself but it is particularly interesting in light of GW’s stock and sales decline as in it he talks about revenue over time and the loss of customers in an adoption curve.

What you don’t realize at this point is that you’re not “reaching the mainstream,” you’re actually consuming the late adopters. Unfortunately, it’s very difficult to tell when you’re selling to the late adopters. They don’t wear signs. Companies tend to assume that because the adoption curve is drawn as a smooth-sided bell, your demand will tail off at the end as gradually as it built up in the beginning. But that isn’t how it works. At the start, you are slowly building up momentum from a base of nothing. That takes years. But by the time you saturate the market you have built up huge sales momentum. You have a strong brand, you have advertising, you have a big distribution channel. You’ll gulp through the late adopters really rapidly. The result is that sales continue to grow until they drop suddenly, like a sprinter running off the edge of a cliff.

Now where it appears the computer companies he talks about and GW differ is that the hardware manufacturers tend to try to get more mainstream customers by selling cheaper products. GW is clearly not in the business of selling cheap products. But Games Workshop has done that very things, that appeal to mainstream consumers, with its first Lord of the Rings games.

Those figures were sold in a wider array of stores, were priced much cheaper than GW’s core products and were intended to get a more mainstream audience to play 40K and WFB. It didn’t work and GW eventually started raising the prices of the LoTR range and then pretty much dropped it.

Lets look at two more quotes from the article.

Until you get close to the end, your revenue keeps rising, enabling you to tell yourself that the business is still in good shape. But eventually you reach the dregs of the market, and sales will flatten out, or maybe even start to drop. You cut prices again, but this time they don’t increase demand because there are no latent customers left. All the cuts do is reduce further the revenue you get from selling upgrades to your installed base.

In Games Workshop’s case the cuts aren’t in prices but in their provided ranges. Over the years GW cut Specialist Games, Warhammer Historical, their RPG line, the LoTR range and then worked on creating the Finecast range to remove metal prices from their bottom line. The company pulled their employees away from smaller, but still profitable, endeavours and either fired them or moved them to games like 40K that have a larger ROI.

The combination of price cuts and declining sales produces a surprisingly rapid drop in revenue and profits. If you want to make a profit (which your investors demand), your only choice is to make massive cuts in expenses. Those cuts usually end up eliminating the risky new product ideas that are your only hope of re-igniting demand.

And this is where I think we see GW now. They can’t cut their two core games so their only choice is to start to cut away at their own infrastructure. People have, for years, been talking about price elasticity and how it was going to eventually come to haunt Games Workshop. I think that their constantly increasing prices did drive away gamers. It just didn’t do it at the rate people thought it would and it didn’t dissuade new gamers from coming into the games.

All Games Workshop had to do was make sure that the number of new gamers coming in helped prop up the sales they lost. Sadly I don’t think the issue was just losing sales to gamers leaving the “GW Hobby” and was also the loss of sales to their existing customers. This decline has, I think, finally caught up with them. The price of entry to their two core games is now high enough that I think it actively dissuades new gamers or people thinking about returning to the hobby.

Making forceasts about Games Workshop is always problematic because the company doesn’t break down sales by game and also doesn’t post a lot of information about the size of their audience. It is also an audience that appears to be abnormally loyal to their game of choice. GW has done a lot of work over the decades to create a very vibrant universe for their 40K games and, to a much lesser degree, Warhammer Fantasy and also to create some very good figures that are unique in the tabletop industry. They have created a very subtle form of lock-in for their customers and this has paid them some very heavy dividends over the years.

I think though that even the GW management realise that they are at a critical point. Even with their price increases and stream of 40K expansions they have not been able to keep their sales and profits steady. This might be a blip but I suspect that news of GW closing foreign offices and laying off staff is a sign that it is perhaps not.

Unless Games Workshop can do something to move their sales and profits back up I suspect that they, like RIM, are in the midst of a death spiral and it will be interesting to see what the company can do to pull themselves out. I suspect that there is nothing they can do because I don’t think very highly of the current management of the company. Their answers to the problems of the past decade has been to chop the company down to the point where it has no fat left to trim.