Thursday, July 28, 2011

Games Workshop Financials: Whats in the numbers? Price Rise and Embargo

We already had a quick note about the Games Workshop annual report but I am interested in digging a little deeper to see if we can get a better understanding of some of the issues with GW recently. This post will be slightly more technical and math related since I like Math (hence the Math Hulk series).

The first thing we need to understand about GW is that they divide their company into essentially 3 parts: Sales group which covers both retail, online, and trade sales; Production and Supply which designs and makes the products; and a Support Group which Logistics, Admin, Corporate which is really all overhead. The first thing we note is that production and supply sold 57 M pounds of stuff to the sales division which converted it to like 115 M in revenue when the 8 M of other stuff is removed Black Library and Forge World. So a quick look would make you think that GW retail doubles the price of what they get to sell but this is not going to be the case. GW has both retail and trade sales so those have to be accounted for seperately.

GW used to publish the break down of those two channels but stopped I would guess since the numbers did not look the way they wanted to. Globally last time they showed them (2008 report) it was 60% retail and 40% trade so it would appear that more than half of people get their kits from GW directly but you have to remember that these numbers are based on revenue not volume. A sale at a full GW store nets them MSRP while a sale at a RT store nets them probably 60% MSRP on average (trade discount varies and might be as high as 50%). So with those numbers you actually get GW sells 47 percent of the kits and the independent 53%. In someplace like the US where the split is probably closer to 50:50 in revenue now then the volume split is 38%:62%. So given that the US only has like 100 GW stores and over 500 RT we can see GW stores do move a lot of volume for their limited number but are not the primary channel for the customers in the US or worldwide.

So lets see if we can figure out what production is charging retail for the kits. Assuming the Sales pays the same price to production regardless of the final sale channel we can get that sales pays about 40% of MSRP to production with 30M associated with sales to independents and 27M for sales through their stores to generate the 115M in sales with the 60:40 retail:trade division. So GW stores pay 40% MSRP for kits and charge 100% and are often not profitable while independents are often paying 60% and selling at 80% while trying to be profitable which can be hard. Interesting to not that even at selling the products at 40% of MSRP to sales the product group brings in 57M and lists its operating expenses as only 9M. So if that is an indication of the incremental cost of production (cost for next unit as long as below full capacity) the production cost for the kit is like 6% of MSRP on average. So that means that at a GW store 94% of what you are playing is going to pay for them selling it to you, corporate overhead, and profit. even if we include the 4 million for design and development the cost is still about 10% of MSRP. Now some of the corporate overhead is because of the production but remember that design and production has like 250 employees and sales has 1250 so organizing them and their work environments represents most of the overhead costs. Remeber this 10% cost the next time GW talks about how things are getting more expensive to make so they raised the price another 10%. It really translates into things are getting more expensive to sell not to make since that is where all their costs are.

The next point to look at is the embargo. Now we can clearly see why they decided to do the southern hemisphere embargo. Profit down under went from 600K on 10.6M sales to -400K on 10.4M in sales. So profit went down 1M but sales only dropped by 200K. How does that happen? First thing to remember is these numbers are in pounds. The cost of the business in Australia is in their dollars which moved up about 10% on average over the year. So if you look at their costs in pounds they went up by 10% but their sales actually went down 10% since they generated the same number of pounds even thought their dollars were worth more.

Now this loss of sales could have been offset partially if they paid for their kits in pounds from corporate since the kits would have also gone down in cost by like 10% but I think that corporate has them pay in dollars and then does the conversion on their side which means they made that extra money from that 10% of currency. But remember that is a long going issue and GW uses about a .4 AU dollar to UK pound on its product which is now at 66% of the true exchange rate. Assuming UK and Au both pay 40% of their MSRP to production, production is get 67% more for each kit sold to Australia . Using a 66% GW retail vs 34% RT for Au taken back when it was part of the pacific group, we get about a 5M product cost level which if it was reduce by the 40% that they are overpaying to corporate to be a fair price with their new currency value they would have made a 1.5M profit last year. GW still made that profit but it is getting credited to Production and Supply not AU Sales division even though they lost 10% of their sales. Now we will see if the embargo will work with a significant boost to GW AU sales or if it will just take a bite out of UK trade and AU will be flat still eventhough they saw another price increase.


  1. Very nice breakdown, a couple years ago a friend of mine and long time GW employee told me kit production costs where targeted to be only around 5% of retail, I couldn't believe that at the time but looks like your and that analysis were spot on. I'm interest in wrapping my head around the potential embargo effects and that last paragraph is losing me, maybe some elaboration? thanks

  2. The key point about the embargo right now is that:

    We can see clearly why they are doing since their local revenue went down like 10% in a year. Down under is not suffering economically like we have so their is really no economic reason for the drop in sales. They therefore assume that those lost sales are being channeled through the UK online resellers. I am guessing that they make GW AU pay them in AU dollars for the products and those AU dollars are worth more and more to them so the online sellers are not just undercutting the profit of GW AU but also cutting into this extra mark up they are getting.

    One of the problems with GW AU is that I do not think they really have control of their pricing. As a retail business you want to get your product as cheaply as you can and then sell it at the proper price to optimize through put. I do not think they are getting to take advantage of their appreciation in currency since their cost for the GW kits should have been going down substantially (like 40%) which should make their margins better at the same cost or allowed them to lower cost to increase through put, but GW Corp has them raise prices.

    Au dollars hit like .67 pounds today compared to the .37 value GW uses so we at the point where paying 100% retail price in the UK is better than what the RT stories pay for the products. The RT stores should be up in arms about this to get a better rate not to close down the internet sales.

  3. Great analysis, good to see those percentages worked out as to how much they're creaming off the exchange rate at the moment. It's doubly annoying as when it really was .37 they were quick to cut Games Day and just about all community events to save money down here.

    You don't hear much about Australian independants in regards to pricing because there are almost none near the big population centres. Living in Sydney I have nine GW's withing an hour or so's drive, yet to get to a hobby store with a good selection rather than a token stock level would take at least an hour. There's almost a 50/50 split in NSW between GW and indies, with most of the serious indies out in the wilds where GW fears to tread. IF you want an illustration go to the GW website and set to Australia and look at the Store Finder for NSW.
    A lot of places 'stock' GW, but I know for a fact that a great many of them don't have any playing space and are more like comic shops or RC hobby places. One of the places listed isn't even open half the time it's meant to be and is based out of a glorified garage...

    GW's sales are probably down here due to the prices - if you are a 15 year old kid would you rather pay $62aus (42 pound, $68usd) for a squad of tactical marines or save up the $110 for a xbox360 game (yeah, we get screwed on those too - but you don't need paints or glue or any of that)?
    Plus 360 games can go on sale or be pre-owned for cheaper, so GW here is really pricing itself out of the market.

    If you're thinking veteran players, there aren't that many. I've been with 40k for 20 years, and am one of the very few people I've met who has been around that long. Most of the player base is young and new. The older players are also often fairly new, Dawn of War recruits or from when GW stores started opening up everywhere from around 2000 onwards.

    Despite the Australian economy doing well people are still spooked by financial troubles (our housing market is stupidly inflated amongst other things) so retail all over is in a slump. For players with real world bills to pay GW is getting to pricey.
    I can get a Wasp War Walker kit, complete with regular WW, teh resin parts and a weapon sprue - shipped from the UK - for less than it would cost me to go into my local GW and buy a WW kit by itself.

    I'm going to be very interested in seeing what happens to the figures by next year, I don't think it's going to be pretty.

  4. I do not think they will recapture that review. Very hard to put that genie back in the bottle. They do have a chance since the lack of independents limits players options but I expect them to take a bath this fiscal year due to poor customer will.

    I personal do not pay more than $20 new for an 360 game but I am behind the curve so I am playing games that came out a few years ago like GOW 2 and Halo ODST.