The rules of the game: A financial teardown of Games Workshop

Here’s why Games Workshop and the Warhammer franchise may be the best capital compounding business machine you’ve never heard of.

Early in my teens, I was an overweight, dorky gamer nerd. 

My brother and I spent hours of our weekends at Games Workshop outlets; building, painting and playing our favourite tabletop game, Warhammer 40k. 

If you’ve never heard of Warhammer, don’t worry. I’m not offended.

It’s super niche and has a cult-like following amongst mostly middle-aged men – dorks, such as myself. 

Picture a strategy war game where nerds spend thousands of dollars on miniature plastic models, build them, paint them and fight against each other. The rules of the game are set by a series of books which describe how to move these miniatures around the table to simulate combat.

If you still have no idea what I’m talking about, you can watch this video to get up to speed.

I attribute a lot of my work ethic to Warhammer. 

My first jobs mowing lawns and washing dishes in restaurants were simply ways to fuel my expensive hobby. 

Small fortunes were spent building out my army of space Orks. A single miniature would cost up to $110 a pop. 

And that’s just the cost of the figurines. You then spend a bunch more money on craft accessories, paint, brushes, superglue, tabletop sets and so on. Only then can you actually play the game…

For a decent army, you’d need around 50 of these characters to play. I have about 100 of these miniatures collecting dust at my parents house.

Over my lifetime, I reckon I’ve spent over $4,000 on Warhammer, all of it front-loaded as a 

14 year-old. 

If only I had the wisdom to buy shares in the company as well – because I recently discovered the company is an under-the-radar capital compounder.

About Gamesworkshop ($GAW)

Gamesworkshop ($GAW), the publisher and owner of the Warhammer franchise, is publicly traded on the London Stock Exchange. Today, its market cap is over $3 billion – a pretty neat valuation for a niche hobby business.

The origin story of $GAW is akin to the Silicon Valley startup tale in the ‘80s.

A bunch of nerdy roommates, fuelled by their passion for tabletop games, were handmaking wooden boards for Backgammon and Go out of their bedrooms. 

In the pre-internet era, they sent these games directly to customers via mail-order. After a few years as a side hustle, they later got the opportunity to buy the UK distribution rights for the US role-playing game, Dungeons & Dragons

Noticing the success and popularity of D&D amongst their growing audience, they decided to plow the profits into publishing their own war games.

Inspired by their love of the fantasy fiction genre like Lord of the Rings, the founders created their own fantasy universe full of medieval stories and fables, brought to life by miniature models enthusiasts could amass to build their armies and square off against their opponents. They called it Warhammer.

In 1981, Games Workshop established Citadel Miniatures Limited, a manufacturer of these metal miniatures based in Nottinghamshire. 

The game was a hit amongst tabletop nerds. It was distributed through Games Workshop’s own bricks and mortar retail chain, and sold through niche hobby and comic book stores.

In the late ‘90s, the company floated on the London Stock Exchange and today, it exports all over the world. 

Last financial year, the company’s revenue was USD $530 million! 

The business model

The business model of Games Workshop is pretty simple: “To make the best fantasy miniatures in the world, and sell them globally at a profit”.

Importantly, Games Workshop prides itself as a manufacturer, not a retailer. While it’s common for consumer brands to outsource manufacturing, $GAW has retained its roots as an original manufacturer and direct-to-consumer business. 

It has maintained complete control over its supply chain, intellectual property and distribution, developed over the company’s 50 year history.

The distribution model is via three channels:

  1. Online store – Direct via website – Approx 25% of sales
  1. Independent stockists – Trade sales via niche hobby and comic book stores – Approx 55% of sales
  1. Retail stores – A range of company-owned retail outlets that are designed to show customers how to engage with the hobby of collecting, painting and playing with miniatures and games – Approx 20% of sales

On that last point, ecommerce management consultants would call these retail stores – where the business recruits the majority of its new customers – “experience centers”. $GAW have

been doing this throughout their existence. Community is a core pillar of their brand strategy, because without the community, the business would literally be worth nothing.

The fact that Warhammer has retained its die-hard following for more than three decades is a testament to its long-term brand strategy. The community established over this time is the envy of any CEO.

There’s a whole ecosystem of Warhammer influencers on Youtube and Twitch, ranging from expert painting tutorials to live-streamed battles. 

In my downtime, I occasionally watch these videos on YouTube.

It’s both cathartic and nostalgic for me. It scratches that inner nerd itch.

Hammering it out: The financial teardown

$GAW is an under-the radar capital compounder.

Its share price has grown 235% over the past 5 years, representing 27.5% compound annual growth rate (CAGR)!

Check out the P&L:

A few things immediately stand out. 

  • Growing revenue
  • Gross profit margins of ~70%
  • Operating profit margins of 38%+!!

Revenue

The lockdowns of COVID-19 will forever hold a place in most people’s memory. 

Stuck at home and isolated with nothing to do, many folks found themselves reconnecting with old hobbies and passion projects. Wool shops reported a revival in knitting, particularly from teenagers, and gamers went back to video games and streaming platforms. I found myself reconnecting with Warhammer after a decade!

The Warhammer business did spectacularly well. Total sales grew 60% from $333M in FY21 to $524M FY22, primarily attributed to COVID. Amazingly, the business has maintained the same level of sales in FY22, which demonstrates the stickiness of customers.

Gross margins 

Due to its owned and controlled supply chain, gross margins are epic, averaging 70% for the last 10 years. This is an outstanding margin for a manufacturer.

What is equally impressive is that the business has maintained these strong gross margins, particularly over the past few years with volatile shipping costs and rampant inflation. 

All of these factors demonstrate the pricing power of $GAW.

Pricing power

The textbook definition of pricing power is a business’ ability to increase prices without losing customers or market share. It’s one of the most important features of an enduring business.

A business with strong pricing power has the ability to raise prices and maintain sales volume, or even increase it. 

For investors and finance dorks like me, pricing power is an important aspect to consider when evaluating the investment potential of a business. Businesses with strong pricing power are generally more attractive because they have greater control over their pricing and are less susceptible to fluctuations in input costs or competition. 

Increasing prices is hands down the best lever to pull to increase profit. If you can increase prices without reducing demand, all of that extra revenue trickles directly to your bottom line.

$GAW has a unique advantage in the sense that there are minimal direct competitors to Warhammer. They own the brand, the manufacturing supply chain and all the intellectual property. This in itself is a moat, providing them pricing power.

The Emperor protects (intellectual property)

The board of $GAW has worked very hard to tightly control and protect its IP over the last 30 years.

In 2020, it faced controversy and backlash from its fans when it updated its intellectual property guidelines. 

The new guidelines stated that fans of the company’s games, such as Warhammer and Warhammer 40k, could no longer create and distribute their own fan-made content using the company’s intellectual property without approval. This caused uproar among some fans, who felt that Games Workshop was stifling their creativity and stifling the growth of the community.

Some would argue that restricting fan-fiction stifles the ability of $GAW to explore other content which itself could be a separate franchise. For example, the book series ‘Fifty Shades of Grey’, was originally a fanfiction story based on the ‘Twilight’ series by Stephenie Meyer. Fan-fiction can be an economic powerhouse in its own right.

However, it was important for $GAW to enforce these guidelines to protect their intellectual property rights. The company has invested a significant amount of time and money into creating their games and the associated universe. By allowing fan-made content to be distributed without approval, they risked diluting their brand and losing control over their intellectual property.  

Financially speaking, the bottom line may be harmed if fans started producing content that competed with official Games Workshop products. 

In a world where business models, technology and platforms are becoming more open-sourced with the creator economy, $GAW keep tightening their grip on their IP – and it’s worked for them so far.

Ultimately, GamesWorkshop and the Warhammer franchise may be the best capital compounding business machine you’ve never heard of.

Whilst I no longer have the time to spend dozens of hours in my bedroom building and painting models, I continue to be a voyeur of the game via Youtube videos and the odd mobile game.

I might even break my index fund strategy and buy direct shares in the business itself.

As the saying goes: the riches are in the niches.

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