Monday, April 18, 2011

Help! Kirby Is Eating Our Hobby!

by SandWyrm

No, not the lovable Nintendo character. Or the cool blogger from 3++ Is The New Black. No, the Kirby I'm talking about is Tom Kirby. The sometime CEO and current Chairman of the Board of the Games Workshop Group PLC.

What makes me say he's eating the hobby? Well let's look at GW's recent press release on expected earnings for the first quarter of 2011:

For immediate release                                                                  8 April 2011

Games Workshop Group PLC today issues the following interim management statement for the period 29 November 2010 to 3 April 2011.  In the four months to 3 April 2011 the Group has continued to deliver strong gross margins and cost savings. 

The Group announces that pre-tax profits in respect of the year to 29 May 2011 are likely to be ahead of current market expectations. 

Cash generation remains healthy.  As a result, and in line with the Company's dividend policy to distribute to shareholders truly surplus cash (as set out in the Company's 2010 annual report) the board has today declared a dividend of 20p per share. This will be paid on 25 May 2011 for shareholders on the register at 26 April 2011.

And the excerpt from the Guardian article that BoLS put up today:

(Says analyst Charles Hunt)

We are upgrading our 2011 estimate by 25%, as the gross margin and cost reductions are higher than expected and restructuring charges lower than anticipated. In addition, cash balances have risen, and this has enabled the company to accelerate dividend payments. We were previously forecasting a 25p payment for the final dividend – we now expect a total payment of 30p.

Games Workshop has never been in better shape operationally and we should see a return to sales growth. The company has excellent long-term potential, given the global scope of the business, high margins and strong cash generation. The company has committed to returning truly surplus cash to shareholders each year – the 30p dividend would deliver an attractive yield of 8%.

"Yay!" Say most who read that. "GW is bouncing back from the brink!"

But wait, that's not what I see at all. What I see is a company that's generated some short term cash by slashing expenses and raising prices. But are sales (as opposed to profits) increasing? Do they have more customers now than a year ago? Is the hobby they sell products for growing? Nope. Otherwise they'd say so. In fact, what they've done is cut service at their stores to save money. A move that will hurt the long term growth of the GW tabletop games. They've also cut development staff. A move that has slowed their pace of army releases noticeably. Which will also have an impact on long term growth.

But maybe that's ok. There could be a bigger picture. GW has some extra cash now, so what are they going to spend it on? New development? A movie? An internet strategy? A new metal mine or plastic supplier?

Uh no. They're going to give it away in the form of dividends. What?!?!

There's nothing wrong with providing dividends to your shareholders. But why is GW so fixated on them to the exclusion of growing the business? Back in the heady days of 2003 to 2006, when the Lord of the Ring movies were a miniatures goldmine for GW, they were actually BORROWING MONEY to provide higher dividends than they normally could, even with record profits. Which is why they were in so much debt until last year. So what's up with that?

Tom Kirby, that's what.

If you do a little digging into GW's financials, you'll find that Kirby is the 5th largest GW shareholder.  Of the roughly 31 Million shares of GW that are floating around, Kirby owns a little more than 1.9 million of them. Or about 6.1% of the entire company. The next highest number of employee shares belongs to C J Myatt, at 66,500. Or 0.2% of the company. So when GW announces a quarterly dividend of 20p, that translates into a cool £380,000 directly into Kirby's pocket. Or £1.52M annually. His base salary is £392,000. 

What then, is Tom Kirby's interest in GW? At 60 years of age, does he want to put the company's excess cash into investments that will pay off after he retires? Is he going to have a real desire to do any of the following?
1) Implement a proper internet strategy. Including online rules subscriptions, army building, and beta testing software; with integrated data mining features and support for emerging devices like tablet computers, augmented reality, and tabletop graphics displays with touch interfaces.

2) Diversify GW's in-house production into video gaming and other growing entertainment media to offset the overall decline in tabletop wargaming. Much as Marvel and DC have used their recent profit windfalls to finance their own movies and television productions based on their IP.

3) Put the R&D cash into finding a way to offer low cost pre-painted miniatures that don't suck. So that the tabletop hobby can grow again.

4) Start the R&D required to adapt GW's business model to the future reality of cheap, accessible 3D scanning and printing - in color. It's coming.
No, he's not going to willingly do any of that. Because his incentives are clear. Cut costs, raise prices,  and sacrifice growth to put as much cash into paying out dividends as he thinks he can get away with. At least until he retires with a golden parachute a few months before GW collapses into bankruptcy and is sold off for parts.

That's my opinion. Sure, it's GW's right to do all of this. But it's bad business and bad for the hobby we all love.


  1. Nobody would read it if I put that schmuck's face on the article. :)

  2. This is true. Now if only Nintendo wouldn't sue me...

  3. Please tell me you sent this to GWS investor relations

  4. Round here fantasy seems to have drawn in a ton more players. The local store is a scrum and a lot of people can't even get games. The overflow has really boosted numbers at our club.

    GW's refusal to entertain new ideas for their business is bull-headed but the player count seems stronger than ever.

    If this payout really did hurt the business the shareholders would feel it the hardest. If taking an extra 20% this quarter means the company takes a nosedive then that means less money next quarter and every quarter after that. You've got to hope the CEO of the company is a bit smarter than that... which I accept totally begs the question but still...

  5. @Korona

    If the 40K player base were growing, GW would crow about it the same way Apple shouts about every point of market share they gain. Unit sales would also be up. They're not, so we must look to possible reasons why.

    There are cities with strong 40k gaming communities and growing public playerbases (Indy is one of these). But remember that 90+% of all 40K players never leave the basement for the FLGS. That is likely where most of the losses are occuring. Amongst the casual at-home players.

    And even amongst the public players, I've seen many of these drift into Warmachine after the shine wore off of the new IG codex. Warmachine now has as many players as 40K does at the North Store, and about 40% as much retail space. That's a huge gain in just the last 2 years.

  6. @Euclid

    I wouldn't be telling them anything they don't already know, or that management wants to hear.

  7. @Sandwyrn Since you brought up Apple. Jobs himself says that if you've got good numbers you are going to show them off. Bad numbers you don't speak of…

    It's a sad reminder that publicly traded companies only exists to increase shareholder value:( Short term never the less! At least PP is privately held. Maybe we should all start saving for when GW goes bust and buy the whole thing ourselves :)

  8. I think that Executive stock options and grants will one day be thought of as one of the worst, if not the worst, ideas to ever to appear in business. Because they turn productive managers into gnawing parasites who only care about the next quarter's numbers.

    Managers should not have the same incentives as shareholders. Shareholders, by and large, desire only short term results. Managers have to be the grownups who balance short-term shareholder desires with a long term outlook.

    If Kirby were simply drawing a £1.5M paycheck from GW every year, his focus would be on the long term health of the business, where it should be.

  9. I think that is reasonably likely that in the event of a company collapse that a third party would buy the IP at a discount and start printing money. Developing the franchise is a relative no brainer, but I think the issue in this case is management culture. It appears that management copmensation is tied directly to dividend payout. It's a pretty common conflict of interest between shareholders and managers that results from flawed compensation structures.

  10. @Sandwyrm I would have to disagree with the point that investors are only interested in short term dividend payouts. Smart investors look for growth in both share value and in dividend payout. Taking on debt to pay dividends would be a flag to dump a stock in my opinion.I wont bore every one with the math, but stock value can be simply modeled by taking the present value of a firm's free cash flows divided by its weighted average cost of capital. Taking on excess debt that is not being used profitably raises the weighted avg cost of capital without increasing its free cash flows.

  11. Agreed Ironweevil. But smart investors aren't in the majority.

    GW's stock went up 12% with this announcement, based on it's supposedly "good" news. Very few investors will look beyond that at the real state of the company, it's history, and it's long term prospects.

  12. I'm curious to see how the upcoming Hobbit movies and game tie-ins are treated by GW. Another boon for stockholders? Probably. R and D? Probably not.

  13. as soon as kirby retires im putting my life savings into as many armies as i can befor gw goes boom: unlike other stores when near bankrupcy GW will never lower prices.

  14. This is shocking. I'm amazed that not more is made of this.

  15. Cant we just just shoot the bastard (Jokes).
    It's a shame whats happening.

    1. Referring to the four suggestions made at the end of the article about how Games Workshop could diversify, why would they go for any of them? If we look at the four suggestions, they seem to be putting forward counter-intuitive strategies for the type of business Games Workshop is. While the first suggestion has some merit, in that it hints at involving the wider community in rules testing, it goes on to suggest spending large amounts of money in developing techniques that move testing away from the tabletop, which is where it should be taking place.

      As to the other three suggestions, again they seem the wrong step for a company like Games Workshop. Given the success they've had with Relic and THQ, why would Games Workshop suddenly change pitch and start make computer games themselves, when they've had success with third parties such as the aforementioned companies and no experience of making computer games themselves? At the same time in the context of selling computer games, as well as pre-painted miniatures or 3D printing, why would they ever do something that detracts from selling multi-part, convertible, highly detailed products that can be painted in a colour scheme of the customer's choosing?

      If they did this, then there would be no more citadel paints, no more brushes, no point in Golden Demons or conversions and with 3D printing, eventually no point in stores. Added up this would destroy most of Games Workshop's annual income and eliminate them as a market leader. What business is ever going to do that?

    2. I don't think we're suggesting that GW stop doing what they have been doing and go all-in for pre-paints.
      Pre-paints would be a great addition to GW's current line.
      GW could still sell a lot of models for conversion, and Paints, brushes, etc.

      As far as Comp games... it's not hard to set up or buy a current shop to handle comp games. The upside is that GW would own ALL of the games, not just receive a little royalty from them. This programming house could also be used to improve the online GW Army Builder, and other activities to bring GW more fully into the digital age.

      I don't think doing these things will destroy GW. Not adapting to future trends will kill GW. Stagnancy will kill GW.

    3. Why would GW go for those suggestions?

      1) To compete and not lose customers to companies that do. Such as Battlefront, Privateer, Wyrd, Mantic, and FFG.

      2) To monetize their IP and expand their activities out of a shrinking market segment (wargaming). Marvel still sells comics (also a shrinking market), but there's no growth left there. Those characters are great in movies and video games though. Notice how many direct-to-DVD products they're putting out too?

      3) To offer something that (minimally) allows paint/assembly challenged players to play. Look at the traction Dust:Warfare is getting. A large part of that is the ability to buy a model, pop it out of the box, and play with it right away.

      4) To survive. Ask the big offset-press print shops how they're doing these days after 20+ years of desktop publishing. The profits have all moved to the neighborhood insta-print shops like Kinkos or the print counters at the office supply stores. In the future, you'll print out your custom models at the counter in the back of the game store. Then those printers will be everywhere, including your home. GW had better figure out how to make money in that environment.

      As for video games, GW should have bought THQ or relic a long time ago. If you make the product in-house, you reap all of the profits. Again, look at what Marvel did. They partnered with Sony and other studios, made some money, and then moved their movie business in-house. Which means that they kept a MUCH larger chunk of the profits from Iron Man, Captain America, and the Avengers.

      Yes, shifting to digital will force GW and the hobby to change. But you can no more hold that back than Kodak (now bankrupt) could ignore digital and just keep selling the film 'experience'.

    4. As if they would listen to any of us at this point in time.

      Though, they COULD buy the original Dawn of War, and sell that at their stores, bringing it into the digital age more and more.

  16. More doom and gloom from Sandwyrm...


    1. Necro-post much?

      Hard to call it 'more' when the article is over 2 years old now.


out dang bot!

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