by PHILIP HUTCHINSON
Games Workshop Group plc (“GAW” or “GW”) – which trades in London under the ticker “GAW” – is by far and away the dominant publisher of tabletop wargames and designer, producer and retailer of miniatures used in those wargames. The company itself would describe its business as the design, production and sale of model soldiers that serve the “hobby” of collecting, modelling, painting and gaming with model soldiers. This is strictly true, but does not do justice to the company’s products. This is because the “model soldiers” are based on the belligerents in the company’s two major fantasy settings, Warhammer Age of Sigmar (fantasy) and Warhammer 40,000 (science fiction).
It’s easiest to demonstrate this visually, with a photo of one of the miniatures from Games Workshop’s range:
This miniature is a Primaris Space Marine. Space Marines are GW’s single most iconic creations – armies of elite, genetically engineered superhumans wearing power armour and dedicated to defending humanity in a hostile galaxy filled with forces bent on humanity’s destruction. The full GW model range is simply vast though, which you can get an idea of by visiting the company’s web pages at www.games-workshop.com, www.warhammer-community.com and www.forgeworld.com. The key point here is that GW’s “model soldiers” have much more in common with the kind of thing you’d find in a sci-fi franchise like Star Trek, Star Wars, or Alien, than they do with real life.
You should understand that if you went and bought the model above (or any of GW’s range), they would come unassembled and unpainted. (The model above was assembled and painted by a member of GW’s design studio.) Assembling and painting the models are key parts of the hobby. The other key part is using those models in tabletop wargames for which GW publishes and maintains rulesets.
GW earns revenue from selling models (such as those above – though its full range is absolutely vast), modelling tools, paints, boxed games, rules books and rules supplements, gaming accessories such as dice and templates, and scenery, all for games set in its two main fantasy settings. Sales are made through GW’s network of company stores, independent stockists, and online. GW also licences its IP to third parties to earn royalty income. The main source of royalty income is for video games set in GW’s fantasy settings. In addition, GW has a publishing arm that earns revenue from publishing novels and other fiction set in the Warhammer and Warhammer 40k universes.
The key thing to understand is that GW services the all-encompassing hobby of collecting, assembling, painting and then wargaming with miniature soldiers. There are no direct quoted peers. This is because GW is by far the biggest company in its industry. It dominates the industry the same way Tandy Leather Factory dominates leathercrafting (arguably more so, as GW is a global business). There are some peer companies out there – companies like Privateer, Battlefront, and Mantic. But they’re much, much smaller than GW and also (this is a crucial difference) unlike GW they do not have a large network of company owned stores. We’ll go into further detail about GW’s business (including its scale relative to competitors) below. But, if you’re unfamiliar with it, think of the company as a bit like a video game publisher but whose games are tangible, rather than digital, and where most of the profit comes not from the sale of the game (which, in GW’s case, is often a boxed set containing rules, dice, other accessories and a starter set of models for two opposing factions) but from additional books, miniatures and accessories that hobbyists use to build armies and expand their collections. Really – the best peer (not competitor, but useful as a comparison to aid understanding) is probably Nintendo. Nintendo’s IP has a very different feel – GW’s is much darker, more violent and more sinister. But GW is selling a closed system of miniature wargames based on proprietary IP, just as Nintendo sells a closed system of video games based on proprietary IP. (In the same vein, an indirect peer might be something like Disney. This is relevant because GW has a large back catalogue, of miniatures, books and games systems.) And, incidentally, the close link between GW and video games publishers is illustrated by the fact that one of the company’s founders, Ian Livingstone, went on to found his own video game publisher which ended up becoming part of EIDOS Interactive (now owned by Square Enix), publisher of videogames such as Tomb Raider.
GW is absolutely dominant in its industry. It’s also one of the oldest companies in the industry. It was founded in 1975 in London and shortly thereafter moved its HQ to Nottingham, England, where it remains to this day. Initially it was a retailer of board games published or produced by other companies – things like backgammon and mancala – and got started down the road to its current business model by becoming a UK distributor for Dungeons and Dragons. In this period the company also started its monthly magazine, White Dwarf (still published today), and gradually started moving towards being a publisher of its own games (and manufacturer of accompanying miniatures) rather than a distributor, as well as starting to establish the first stores in what has become a very significant company owned store network, particularly in its home market in the UK. Eventually, GW transitioned fully to only publishing its own games and selling its own miniatures, set in its two key settings of Warhammer (fantasy) and Warhammer 40,000 (science fiction).
For our analysis, we can split GW’s history into a few different eras:
1975 – 1991: the early years in which the company’s strategy gradually shifted towards the closed system
1992 – 1994: the first years of the closed system, culminating in going public in 1994
1994 – 2004: the “early Kirby era” – fast growth phase
2005 – 2016: the “late Kirby era” – losing its way post the Lord of the Rings bubble
2017 onwards: the “post Kirby era” – more customer-focused company again on the path of growth?
The first two periods are of marginal interest in assessing the business today. We should really concentrate on the period from 1994 – 2004, the struggles from 2005 – 2016, and the company’s significant recovery in the last two years.
What I’ve termed the early Kirby era is essentially the first half of Tom Kirby’s stewardship of the business. Kirby is a very important figure in GW’s history. He was a key part of the MBO that led to the company going public in 1994. He became a very significant shareholder in the company. And he was chairman and / or CEO for many years. The early Kirby era was one of fast growth. From 1994 to 2004, revenue grew from £24.5m to £151.6m, i.e. a CAGR of just under 20%. And this was profitable growth. GW didn’t routinely disclose same store sales, but this growth came from expansion of the store network in the UK, international expansion, growing the mail order business, and same store sales growth. The later years, from 2001 – 2004, also benefitted from GW producing under licence Lord of the Rings games and miniatures to coincide with the Lord of the Rings film releases.
The late Kirby era, 2005 – 2016, saw the business lose its way. Sales in 2016 were £118m – over 20% below the 2004 peak. The business did remain cash generative, and paid a dividend, in most of those years. But it was clearly struggling. Gross margin remained stable, never dropping below 66%, but operating margins ranged from an operating loss to a high of 15.8%. The period was (unsurprisingly) accompanied by management changes – Kirby stepping down as CEO to become Chairman, and then unexpectedly returning as CEO while remaining Chairman – and changes of operational structure. It was also a period of increasingly narrow product focus, creative entropy and intense frustration among the customer base.
2017 onwards represents the post Kirby era. Tom Kirby has now ceased to have board or managerial input. He remains a significant shareholder, though he has recently sold a lot of shares. The business is now run by long time GW veteran Kevin Rountree. And the upturn in its fortunes has been remarkable. Sales grew by 34% in 2017, and then by another 39% in 2018. Gross margin was over 70% in both years, and operating margin ballooned to previously unheard-of levels, reaching 34% in 2018. This demonstrates the significant latent operational gearing in the business, as sales increased markedly on a relatively fixed cost base, that had in any case been cut during a store rationalisation and cost reduction programme. This financial growth was accompanied by significant creative growth, with a faster pace of new product releases, very significant narrative developments to the two main fictional settings, and releases of new (and remade versions of old) games.
This highlights the key investment question for Games Workshop stock. Is the recent sales growth a temporary flare, similar to the early 2000s Lord of the Rings-induced growth? Or, is it a return to trend as the company re-engages with its customer base following a lost decade? If it’s the former, the stock will do badly from here. And if it’s the latter, it should do ok even at relatively pedestrian growth of say 4 – 5%, and will do really well at anything above that.
The business of selling miniature wargaming products is a durable one. Miniature wargaming itself (as distinct from highly abstract games like chess, or board games like Monopoly or Settlers of Catan) has a history going back well over 100 years. The miniature wargaming industry, comprised of companies such as GW, Battlefront, Privateer Press and Mantic, is much younger. But even then, the markets for both fantasy and historical wargames and miniatures is several decades old.
Over the last 25 or so years, there have often been questions about whether video games will supplant miniature wargaming, or turn it into an even smaller niche, as potential (and current) customers dedicate their time exclusively to video games. In reality, there appears to be little likelihood of this. That is despite there being numerous games that are squarely within the same niches – in terms of content – as GW’s games. Obvious examples would be games like Halo, World of Warcraft, and Call of Duty.
GW’s customers definitely play video games. Maybe if there weren’t any video games, they’d buy more GW product. But it’s not possible to find any obvious effect on GW from the increasing popularity of video games – either now or in the past. The likely reason is that GW (and miniature wargaming in general) is sufficiently distinct from video gaming that neither is a true substitute for the other. The two categories do compete for the time, attention and money of potential customers. But only in the sense that TV and video also compete for that time, attention and money.
There are aspects of miniature wargaming that video gaming cannot really recreate (and the converse is, of course, also true). First – the tangible nature of the product. This is inherently appealing but also provides an outlet for creativity in imagining, building and then painting miniatures. Miniature wargaming has essentially infinite possibilities even within the bounds of GW’s own settings. Secondly, the game playing experience using physical, tangible models and playing opponents “in the flesh”. This gives an entirely different (not necessarily better or worse) competitive experience. For similar reasons, board games remain popular in the video game era. Third (and this is relevant for Moat and Quality) the existence of a large, distinct community (both gaming and modelling) for competition, peer aid and feedback, discussion, and socialising.
Finally, there is the fact that GW has some really unique IP. This is subjective. But, the Warhammer 40,000 setting, in particular, is one of the richest, most distinctive, recognisable and iconic sci-fi backdrops there is. In a similar way to Star Trek or Star Wars, a huge fictional history has built up over the decades. (And like both of those franchises, the individual quality of each novel, story, piece of artwork, plot, etc, is hugely variable. A lot of it is, frankly, awful. But the best 40k is, in my view, as good as or better than the best Star Trek and Star Wars. And the average quality probably isn’t any worse either.) There’s a good argument that the 40K IP is under-exploited commercially, and that that should change over the medium to long term. So, even if there is a secular downturn in miniature wargaming, it seems to me that GW is well placed – certainly much better placed than its competitors – to survive and find new ways to exploit its IP.
Overall, GW has above average durability.
GW is one of the widest moat businesses I’ve ever come across. There are multiple aspects of GW’s business that work together to create this moat. But, really, much of it comes down to the fact that GW’s products are addictive. That’s figurative. Obviously they’re not addictive in a medical sense. But they are addictive in the sense that long-time GW customers have very, very deep attachment to the product, aren’t really price sensitive, and will always buy more product if the product is good and the price is not really excessive.
Getting into more detail, there are a number of factors that all operate together to give GW a really, really wide moat. They can be put into two broad categories. First, relative scale. And secondly, immersive IP.
GW’s relative scale is quite extreme.
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