Tuesday, August 23, 2005

What's going down at GW?

As many astute gamers and other observers long suspected, GW could not ride high forever on the tide of the LotR sales that were generated by the interest in the Jackson movie trilogy. As of earlier this month this is no longer speculation, with GW reporting a 10% drop in world sales and a 30% drop in profits. GW management reported:
"For the last two years we have been concerned that, for Games workshop, the Lord of the Rings business might create a bubble effect which might not be sustainable, but we have to confess that we underestimated the impact which this would have on our sales and profits in the last quarter of this financial year,"
The upshot of this is that GW is left with a (by all accounts) good game which is an expensive licence whose very terms prevent the company from fully integrating the LotR line into the hobby they have built around their 2 main Warhammer lines. For better or worse the company is committed to the LotR licence, as Jervis Johnson confirmed in a Q&A at GenCon this year:
Q: With Lord of the Rings bubble burst (how long do you have the license for?), and sales dying down, is there any intention to, say, switch it with a Specialist Game?
A: The license lasts until at least 2010, and we may be able to extend that. No, we have no intentions of switching. The core of Games Workshop is Army books and toy soldiers, and they do that quite well, and sell well. They will keep Lord of the Rings as a core system.

Q: Are you obligated to carry Lord of the Rings/have you paid off the license?
A: Keeping it is up to us, I think we've paid the license money back. Lord of the Rings still brings in about 20% of the Games Workshop turnover.
In the face of this and a serious fall in their stock price- precipitous in the spring of 2005 in fact (60% down on its January 2005 value- itself a 5-year highpoint- leaving it at around the level at which the stock value had plateaued from mid-2003 to early 2004) GW management remain sanguine:
"We see this as a temporary reduction in sales for a business which has proven its growth credentials over many years, credentials we expect to re-establish," the report said. "We are therefore not taking short-term actions on our cost base which would prejudice our ability to grow in the long term."
Reading the icv2 article, I would have to imagine that GW's strategy for recovering from this miscalculation will include one or more of:
1. rebuilding LotR sales
2. growing their direct/online sales
3. expanding their US/Canadian retail chains.

How viable these are in strictly economic terms I simply cannot say. But is has to be noted that there is anecdotal evidence from the online GW gamers' community that LotR is unpopular enough amongst the company's loyal WFB and 40K customers to compound the problems the very structure of the LotR licence already creates in integrating the LotR line fully with the flagship Warhammer lines. So if recovery of LotR sales cannot be taken be for granted, apparently nor can be the crossover of customers from the LotR line to GW's own brands.

Noting in passing the possibility that there might turn out to be a contradiction between trying to grow direct/online sales and the GW retail chain simultaneously in the US/Canada, the question also has to be asked whether the strategy that gave GW its huge British retail chain can work in these markets.

The 90's recession in the gaming industry made GW pretty much the only game in town when it was pursuing this domestic hegemony. Paradoxically though, this very success has revived the independent ttg industry by creating a demand for product other than GW's. This is compounded by the more recent revival of the rpg market under the similar market leadership of WotC and its d20 OGL. This suggests the very real possibility that the US/Canadian independent retail sector might not just roll over and die the way the British shops did in the 90's.

I would suggest that the figures here speak for themselves: GW has 81 US and Canadian stores, over and against 798 accounts with which they deal. Even if none of the other ttg producers can stand alone and compete directly with GW, what reason is there to believe that this entire sector of the market will simply collapse essentially overnight? In the simple terms of the consumer demand for their product, my answer would have to be none at all.

This might seem like a very bold statement from an economic ignoramus like myself, but it has to be noted that GW appear increasingly their own worst enemy in this respect. The release of the 4th edition of 40K has been plagued by issues of poor editing and proofing, issues that were ripped wide open by the online 40K community within weeks- if not days- of the new line's release.

And then there is the simple fact that their recent price hikes have shocked even their most dedicated fan base to the core, generating resentment of a kind I, for one, don't remember even from the 25% increase with which we were lamped when they introduced the new lead-free white metal some years back.

Meanwhile, as if one hand didn't know what the other was doing, GW has been unusually generous in other ways this year: a bumper spring sale at the Black Library (BL); the extension of the free postage offer at their online store; and the offer of a free copy of the new LotR rulebook if you buy one of the current LotR boxed sets. Without being snide, it simply has to be said that longstanding GW customers know exactly how rare such largesse has been in recent years.

And as if the gouge, a stock-clearance, pushing the mail order/online sales, and trying to prop up the new 3rd leg of their product line with giveaways weren't startling enough, there has recently come the news that GW UK's direct sales and stores are all to have their opening hours cut next month (the day after the free postage offer expires at direct sales btw). This belt-tightening move has all the hallmarks of desperate measures in the face of the incapacity of the Warhammer lines to make up the shortfall caused by the drop-off in LotR sales.

I wouldn't like to overstate this: but all of this does tend to give the lie to the statement already cited above, that:
"We are therefore not taking short-term actions on our cost base which would prejudice our ability to grow in the long term."
What conclusions do I draw from all of this then? Frankly, I have to be very careful in drawing any particular conclusions at all, so inexperienced am I in these matters. I certainly wouldn't want to start crying wolf with ominous portents. But consider what we have here:
1. self-confessed, erm... fallibility
2. an increasing tendency to alienate loyal customers
3. the possibility of sheer self-deception in the face of it all.

If these are true features of the management responsible for the declining sales, falling profits, and plummeting share values, then I feel I am justified in concluding that something's just got to give, hmm?

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