Games Workshop (GAW)

“We have a simple strategy at Games Workshop. We make the best fantasy miniatures in the world, to engage and inspire our customers, and to sell our products globally at a profit. We intend to do this forever. Our decisions are focused on long-term success, not short term gains.”

Kevin Rountree, CEO

Games Workshop (GAW) is the owner of the Warhammer intellectual property, a fantasy-inspired board game where orcs, monsters, elves and dwarves fight all kinds of battles. GAW's business model mainly focuses on designing and manufacturing miniatures that players buy, paint and collect. Along with miniatures, all kinds of accessories are also offered – paint sets, books, magazines, board games or cards, among others. It is a niche, vertically integrated company that does not rely on any key supplier (it designs, manufactures and distributes from its own facilities in Nottingham) and it enjoys a return on invested capital of 176%. If you are wondering how this is possible, the answer is quite simple: GAW has no direct competitors, since it is the exclusive owner of its intellectual property, which has been steadily gaining popularity. In addition, the current management team knows how to take good care of this IP and make the most out of it. FCF per share has grown by a CAGR of 14% over the past 20 years and by 30.5% over the past 10. It may be hard to believe that the British manufacturer of miniatures and board games (which has EBIT margins much higher than those of Apple, Alphabet or LVMH) can improve its return on invested capital or margins even more, but everything suggests that the next few years could be stellar (more on this later).

Without direct competition, GAW can focus on what it does best: explore how to enrich its intellectual property, find new ways to improve product quality and carefully control its distribution and sales channel. But no company achieves EBIT margins of almost 40% just by controlling every detail of the value chain. The real reason behind these numbers is that the company has managed to sell plastic miniatures that cost pennies to produce for tens or even hundreds of pounds. GAW is an asset-light business, with hardly any maintenance or growth capex needs. It enjoys a strong competitive position and benefits from fairly inelastic demand, which allows the company to maintain robust pricing power, since people interested in collecting fantasy miniatures are willing to pay what the company says they are worth and not what it actually costs to produce them. Traditionally, the games have always been played between people who share the same space (a store, a coffee shop or a private room), so they are quite social games despite their niche nature. This encourages the creation of a community of sorts around the hobby, which is something very interesting from a sales point of view. The stores and players themselves act as Warhammer ambassadors and help spread the word about the game and attract new players. The intellectual property is based on a science fiction and fantasy universe and not on specific historical events, so there is endless room for innovation, the development of new stories or continuing the existing ones. In addition, new products are launched with relative frequency, not only to counteract the lack of recurrence of the business or the fact that buying miniatures is considered discretionary spending, but also to expand the universe and enrich its intellectual property. A key aspect of businesses that have strong intellectual property is that they have the ability to bring back products that seemed forgotten and adapt them relatively quickly with little to no incremental cost. GAW can revive characters created over 30 years ago to contribute to organic growth. As an example, the first Piscean Warrior was released for 70p in 1987 and is still sold today with an improved aesthetic, but otherwise identical to its original miniature. The similarities with Nintendo are many, but GAW's IP might offer something that the Japanese company cannot. A somewhat childish IP may no longer be attractive for longtime consumers who have now become adults (unless they have children of their own to share their childhood memories with). The average Warhammer player, however, does not stop playing after their teenage years, but keeps cultivating this hobby well past that time. The typical Warhammer player is an adult, with a stable income and relative financial independence in that they do not depend on other adults' money to fulfill their entertainment needs. This is relevant because collecting, assembling, building and painting miniatures can be as rewarding for a player as it is expensive. The price of miniatures has historically risen above inflation, and so has the price of paints, board games, comic books, etc. GAW designs and manufactures miniatures under two brands: Citadel and Forge World. Forge World's figures are much more detailed and of superior quality, but both brands have spectacular gross margins. The Thunderhawk Gunship model, an aircraft that crosses the atmosphere to deploy Space Marine forces, is made mainly of resin and is barely 25 cm high and 50 cm wide, but the few units that GAW releases for £1,000 sell out quickly. The company is very clear about their target audience and they are aware that, for their customers, quality is more important than price and know how to make the most out of it. In a way, people identify with their favourite hobbies and everything around them, and Warhammer collectors are no different. What was once a hobby for a small group of geeks who enjoyed it in solitude, has now become quite popular and increasingly accepted by the general public. The more players relate to the Warhammer universe and the stronger the social bonds created between them, the more willing they will be to spend a portion of their monthly savings on original miniatures and paints. The larger the group membership, the higher the average spend per customer, and this, combined with recurring and regular new product releases, is a winning combination for GAW and its shareholders.

The company’s major brands are Warhammer 40,000, Warhammer Age of Sigmar and Horus Heresy, although it also holds the license to produce and market board games and miniatures based on The Lord of the Rings and The Hobbit. Products are sold online, through 550 company-owned retail stores in over 20 developed countries and through 7,000 independent stores in the rest of the world. The company-owned retail channel, which accounts for 24% of total sales, has the lowest operating margin and is growing the least (around 50% less than independent retail stores). It might come off as a surprise that GAW’s management team, known for its frugality and cost-consciousness, deliberately chooses this channel when both online and trade have operating margins 3-4 times higher. However, company-owned stores are key strategic assets. Most of them are one-person shops that only sell Warhammer items, but don't offer a full range of products (they mainly focus on starter sets or the occasional new release). So what's the logic behind maintaining these stores and opening 20-30 new ones every year when online sales have an operating margin of over 60%? Stores are there to engage with collectors and potential new players. The staff are very familiar with the Warhammer universe (many of them were collectors themselves back when they were teenagers) and they are aware that their main goal is not actually to sell products (although they also do), but rather to recruit new players. They are more of a marketing channel than a sales channel. There are tables in the shops where games and tournaments are organized, attracting new players and keeping the Warhammer community somehow physically connected. If you want to learn about everything Warhammer, shops provide a different introductory experience than social media can offer, especially since they often provide free miniatures to learn to paint and play with, as well as personalized services. Recruiting the right staff is essential to indirectly boost organic growth and, above all, to improve recurring sales by building fan loyalty. Stores offer a local and, to a certain extent, unreplicable service because they help build customer bases that would be impossible to build otherwise.

GAW is perhaps the most relevant and successful miniatures company in the world, and although it began its modest journey in the United Kingdom, today more than two thirds of sales come from international markets. Warhammer is a huge success – but that has not always been the case.