Re: GW Stores Are A Boondoggle [was Re: GW sales down]

"Ward B." <wardcb@xxxxxxxxxxxxxxxxxxx> wrote in message
news:BUjCg.1636$Sn3.364@xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
"Ty" wrote...

Comparing quality of GW minis to the competition was one of the major
reasons I objected to you labeling them a Wal-Mart model. [Admittedly,
I'm probably biased on this topic given my own business experience.]

I was talking about the business model, not the specific products.

Are you sure you can separate those two? Product quality is often
intimately tied to the business model.

Yes, I can. Besides, Walmart carries a great many products that are sold by
its competors. Seem dubious to assume that these identical products are
somehow inferior if bought from Walmart.

Besides the ability to discount prices, a corporate owned game store will
have no economic advantage over a comparably funded and managed hobby
store. Indeed, it will be at a serious disadvantage in all likelihood for
reasons I stated earlier.

This assumes the local hobby store is actually run by people who are
competent in business.

I find that assumption to be at least as reasonable as assuming that a GW
store is run by a competent manager. In general, I find that accountability
leads to competence. The local store owner will lose his livelihood if his
store fails. The typical chain retail store manager will often be
re-assigned.

Selection is not an issue in this context; GW's catalog contains fewer
than 1200 items. A hobby store can stock one of every GW product for
about $17,200. Even stocking 2 of each blister raises the price to only
about 24,000.

Those products occupy considerable shelf space that could be occupied by
other items. A game store only has so much room - profit margin and rate
of sale are at least as important in adding to the bottom line. However,
as you've pointed out, GW has effectively slashed the profit margin to the
bone, and some of those blisters won't move quickly at all. The
consequences of that should be obvious.

Well, my point is that product selection should not be a GW store advantage,
since the entire GW product line can be stocked at a relatively small cost.

Well, about the only thing that the "proven model" shows is that GW
cannot run retail operations profitably. The retail performance is
embarrassing by any objective measure.

Ah, please allow me to clarify. *If* a big franchise knows what the heck
its doing in the first place, then the proven model is a significant
asset. GW *had* a proven model years ago. However, they changed it
recently and added a bunch of money sucking retail outlets... I certainly
didn't mean to imply that their current model was proven!

That's where we disagree. I do not think that GW ever had a "proven model".
All they really did was spend lots of money to (in effect) replace profits
that they were already getting. They failed to recognize that vertically
integrated businesses are seldom very efficient in market economies. There's
a reason that Nabisco (for instance) does not own a retail chain devoted to
the sale of Nabisco products. The costs paid by distributors and local
retailers would have to be paid by GW stores. So unless GW had some gigantic
edge in sales expertise, this was doomed from the start. Arrogance and greed
drove the diversions of staggering amounts of capital into retail division.
And in a really obvious case of what philosophers call "poetic justice", the
retail division will likely prevent them from recovering.

Personally, I think that GW's management embodied the Peter Principal pretty
early on. Their gross incompetence was effectively concealed by a superb
product (and a near-complete lack of competition) and overwhelming demand.
While they still have a superb product and little competition, their pricing
has dramatically reduced demand.

This is in clear contrast to the manufacturing and marketing divisions,
which are superb. The problem is that retail operations require far more
people -- including at corporate headquarters. Those who would hold the
retail division accountable are greatly outnumbered by those with a
vested interest in retail's continued survival. So, retail continues to
drag the company down.

Yes, this is one way a well established company can go belly up.
Individual managers try to improve their own situation at cost of the
company, and then wonder why the company (and therefore their job) is in
jeopardy! Brilliant, just freaking brilliant.

Yep. Individuals respond to the incentives that exist around them. To the
extent that these incentives reward company success, their efforts will be
expended to achieve that goal. To the extent that these incentives reward
personal success, the same is true.

It *is* a very costly blunder. GW's management squandered ~$80m and
enraged more than half its distribution network to create a bunch of
inefficient, barely profitable retail stores that, in many cases, only
replaced profit GW was already earning. Such monumental stupidity
deserves recognition...

Oh, it'll be recognized all right - by makers of fine, red ink everywhere.
:-)

Well, it is certainly deserving of such. It would make a very good business
school case study.

Maybe, but GW has created serious disincentives for local retailers to
push its product. And since GW stores are currently losing money, their
"model" seems unlikely to survive.

A store that consistently loses money *can't* survive. GW is a very big
company by gaming standards - look at how many countries they do business
in - but that doesn't make them exempt from the rules. They have to adapt
or die, just like everyone else.

I predict death, followed by rebirth. GW's intellectual property is
valuable, as is their manufacturing operation. Someone will pay serious
money for that.

This boondoggle is also the reason for the near-constant price increases.
To fund this cash draining leech, GW has had to constantly increase
prices. But as any economist would predict, they appear to have gone past
their customer base's willingness to pay.

Raise prices too much, and profits go down because the drop in sales
volume outweighs the per-item profit. I am amazed that GW, for all its
size and experience, has overlooked such a basic point.

They had no choice. By the time it became inarguable that the retail
division was an albatross, prices had to be continually raised to keep the
stock price propped up. Too many executives and board members have their
credibility staked on that division, so they couldn't eliminate the division
(the obvious solution).

The LOTR license bought them a couple of years. And since anything can
happen, it's often a viable strategy just to buy time and stay in business.

I wonder how much more successful GW would have been had they poured that
$80m+ into marketing and dealer support? At the very minimum, prices
could be 40% lower than now -- and GW would make at least the same profit
as they did in 2004. Surely that would dramatically increase sales, which
would drive profits higher.

Cost cutting is often *much* less effective at raising revenue than you
might expect.

Obviously, you can sell things too cheaply -- dollar bills for 95 cents. But
lowering prices increases demand (all else equal). Ideally, prices should be
set at the point that the demand is exactly the same as the amount of
product that can be supplied.

And the fact is that GW could have made far more money had it stayed with
manufacturing and provided its product at lower prices.

That said, almost anything would be an improvement over the current model.
A modest price cut, plus expanded marketing and dealer support, probably
would have worked very well indeed. But, evidently someone at GW wanted
direct control over their entire distribution net. Pity they didn't use
that control effectively.

They couldn't, nor was there any reason to do so. Usually, it's economically
desirable to vertically integrate is only when there is no market for the
products. Even then, the market can usually be developed by letting others
distribute the product. The problem with GW was that the market already
existed. In many cases, they spent lots of money to put a local store out of
business and replace it with a GW store that produced the same or less net
profit. Idiots.

--Ty


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