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

"Ty" wrote
"Ward B." wrote in message
"Ty" wrote...

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 competiors. Seem dubious to assume that these identical products
are somehow inferior if bought from Walmart.

Uh, that's not what I meant. I was thinking more of McDonald's, which has
poor product quality, but a very successful business model. GW's model is
intimately tied to producing the best minis on the market... how they get
them to market is another matter entirely.

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.

Two comments.
First, many local shops are operated by people who aren't competent enough,
despite their obvious incentive for performing. The sad fact is that 80% of
new businesses fail within five years. (This isn't hobby shops, this is
overall.) The most common reasons for doing so are lack of capital or lack
of experience. For a chain store, presumably these aren't issues, which
gives a chain or franchise much better odds. After setting up the first few
stores in a chain, the business model, and capital required should be well
known.
Second, if a chain store fails and the manager is re-assigned instead of
given the boot, that may well be a bad decision by upper management. The
leader is by definition responsible; either he was personally incompetent,
or he assigned key people to positions they weren't qualified to fill.

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.

How big are the hobby stores in your area, then? The ones I've seen (back
when the local stores were still carrying GW) had considerably less than the
full line!

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.

Sure they did. Making good minis and distributing them through local hobby
shops was an effective business model. As I said, "however, they changed it
recently and added a bunch of money sucking retail outlets...". The retail
stores were not part of the original GW business plan! They've been in
business how long? And they added the retail stores when?

As far as the greed angle, good point. For the average retail sale (of
anything, not just gaming stuff), only 10% to 25% of the retail price gets
back to the manufacturer. The rest of it gets spent on distribution,
advertising, warehousing, and all the other things that it takes to get the
product from the factory to the consumer's hands. Obviously, somebody at GW
decided they weren't happy with 25% of the take and wanted it all. However,
by assuming control of the entire distribution net, you also assume the
overhead costs of the entire net, and sometimes that makes neither sense nor
cents. Using your Nabisco example, when was the last time you walked into a
supermarket and they *only* carried Nabisco products? Stupid question, huh?
No retailer worth his salt is going to restrict his selection that much -
supermarkets, by definition, have a very wide array of products.

This brings me to something I think you overlooked: width of the product
line. This is a critical asset for a business, for two reasons. One, if
you have a wide array of products, you attract many more customers, some of
whom will impulse buy items they weren't planning to. Two, the wide line
gives you stability; if one bit of the line fails, there's more still
generating revenue. Three, a wider product line enables you to capture more
money from each customer. For example, look at the local hobby shop. They
carry a bunch of stuff - D&D, GURPS, board games, CCG's, minis, Battletech,
etcetera, and split their overhead among all those lines. They attract all
gamers, whereas a GW store will only attract a smaller set, the minature
wargamers, and has to cover all of its expenses off one product. Therefore,
all other things being equal, the GW store needs a higher concentration of
GW players in the area to be viable. The hobby shop is also likely to get
more revenue off each customer as some of us are *gasp* hooked on more than
one game. That's a big asset, and why some of the local shops survive and
thrive despite the experience and resource advantage enjoyed by the chain
stores.

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.

Yup. They had a monopoly, or nearly so, and then got done in by their own
overconfidence. I've seen quite a few companies do that.

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.

Right, which is why its imperative that the real leaders in a company reward
behavior that benefits the company, and make the reward proportional to the
benefit gained. People don't always do the right thing, but they're much
more likely to do so if the correct course has something in it for them. As
for GW, their retail division is currently rewarding behavior that's less
than optimum, to put it *very* politely. You've already posted many, many
numbers which support that claim.

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.

No argument here. They're too big a brand to simply vanish... there's just
too much demand for the product. In fact, a similar scenario has already
played itself out - look at Dungeons and Dragons. After many years, the
company that developed D&D, TSR, went belly-up. However, there is more D&D
stuff on the shelves now than ever bceause Wizards of the Coast bought the
brand and is marketing the bejeezus out of it. I also note that WotC does
*not* have their own dedicated stores - they sell in hobby shops and,
surprisingly, through mainline bookstores. They are the only game on
display in Barnes & Noble, and the local Borders has a good selection too.

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).

If that's true, then they're screwed beyond belief. Any business which
makes preservation of capital its top priority is already in the
death-spiral. Maybe GW will be able to pull out, and maybe it won't...

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.

LotR sold huge because, well, it was LotR, and its just that popular.
However, there are only three movies so obviously that wasn't going to last.

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.

Taking over full control of a distribution net can be a good idea, in
certain circumstances... If you can get your product to market at
significantly less cost than the existing network can, then it makes sense
to do it all yourself. There are a few companies who have done this and
made a pile of money at it. However, it is a very difficult trick to pull
off as you have to cut out one of the middlemen that everyone else is using.

<combining posts on the same topic here>

Well, I really consider this to be part of 3, though it could also be a
separate category. I don't see any evidence of a general economic slowdown
(compared with 2003-04) in any case.

Oh, there's a slowdown coming, all right! One, the housing market is
overinflated and is heading for a not-so-soft landing, and that's a big
chunk of the economy. Two, demographics. There are about 100 million baby
boomers in the US. The following generation, GenX, only numbers 45 million.
This is the first time in American history that the population has been
inverted (younger generation smaller than the preceding one) and in every
other country where that has happened, it has severely messed with the
economy. Each retiring Boomer is one less person contributing to the
economy, and one more person leeching out of our already strained social
safety net. Have you seen what's happened to pension plans lately? Three,
cost of living has been rising faster than inflation for the past thirty
years, and the recent surge in energy prices makes it worse. There's only
so long that can go on before something breaks. People have been
compensating by using their homes as giant ATM's and refinancing to cash in
on the run-up in house prices. But that's now no longer viable and consumer
debt is at an all time high. Sooner or later, you end up paying for all
financial stupidity, and the average American citizen isn't too bright when
it comes to money.

Well, most GW gamers I know can never have too many miniatures. Certainly,
the complaints about price seem to imply that the demand is there.

Guilty. :-)

Worse, some of the Codexes are unbalanced or ineffective, and that has a
direct effect on sales of the army in question. For example, who
actually buys Orks these days? Who'd buy Orks if they had a 50/50 chance
of winning?

Yes, I am convinced that crappy rules are a much more serious problem for
GW than many assume.

It isn't just Orks, of course. I can't speak for WFB since I don't play it,
but there's plenty of room for improvement in 40K. For starters, Necrons
and Dark Eldar are in dire need of a makeover to make them viable and/or
fun. There are too many f'ing Marine or equivalent armies, and the current
40K rulebook would have been much nicer if the rules were organized in
coherent fashion.


Or of gamers going to collectible card games, D&D or the like.
Interestingly, the new D&D is much more heavily oriented toward a map and
miniatures than the old version was. Wonder how many sales that's cost
GW?

Not many, if my own experience is typical. RPGs simply don't require
anything like the quantity of miniatures as GW games do.

You miss my point. I'm talking about people playing D&D or whatnot
*instead* of a miniatures oriented game. Especially for kids on a tight
gaming budget, every CCG or D&D supplement purchased is that much less money
that goes to minis.

Online retailing is big already, and heading toward colossal.

I don't think that the evidence bears this out. GW's internet sales have
remained relatively constant in total dollars over the last few years. The
only reason the percentage has increased is that total sales volume is
down. In any case, the percentage increase is hardly overwhelming.

I beg to differ. GW has missed the boat on the internet, but that doesn't
mean that everyone else has. Amazon, and a few other internet sites, are
running a lot of volume, and the percentage growth of e-commerce is *much*
higher than that of the economy as a whole. For example, last year the
overall economy in the US grew 3%. However, internet sales were up 24%.

Certainly, the continued existence of brick and mortar stores is some
indication that not everyone wants to purchase over the internet.

Of course. There's a trade off involved, and not everyone will be willing
to make the trade. The internet eliminates geographic boundaries, its very
convenient, and often less expensive. However, its also impersonal, and
there's less information available. Personally, I do about 2/3 of my weekly
shopping online - very significant money savings, I get the stuff shipped to
my door, and I don't have to fight traffic or wait in line at the checkout.
That said, I don't buy everything online, nor do I plan to... can't try on
clothes, for example. For some items its not worth it. Forrester research
predicts that e-commerce will ultimately be about 50% of the total economy.
And, much of the traffic is already from brick and mortar stores who either
have their own website or have an affiliate program with an internet
retailer. The brick and mortar stores will indeed stay, but I bet they'll
have websites too. GW's flat internet market sales is another good
indicator that GW's marketing is poorly thought out. Everyone else is
increasing their internet volume significantly.

I've never argued that internet sales should be ignored -- just not
overstated.

Actually, most folks tend to understate them.

It is significant that Amazon's revenue is increasingly coming from its
technical operations -- it runs Barnes and Noble's website, for instance.

They're making a bunch of money off affiliate programs, too.

Internet retailers have never had much problem with volume -- their
problem is typically with profit. See, I can generate as much volume as I
want by simply selling dollar bills for 95 cents. The problem is that I'll
need to be willing to lose a lot of money in the process. I notice that
the geometric sales growth flattened considerably once Amazon ran out of
money.

There's a difference between gross sales and net sales. Amazon's gross is
very impressive, but their net sales have been quite poor. Much of the
problem is that internet retailers lack the infrastructure (the warehouses,
fleets of trucks, and workers that actually get the product to the customer)
that the old brick and mortar stores already have.

When I see a company that is dramatically increasing sales, but with
profits that are flat, I see a company that is selling dollar bills for 95
cents.

You've just described my day job. :-(

And the continued health of brick and mortar retailers indicates to me
that there are a finite number of people who will choose internet
retailers over brick and mortar stores. Of course, that number increases
the price discount increases. But there's a rather strict limit to those
discounts. Amazon discounts its product about 15-20%. Assuming it pays 60%
for a book, another 5% discount will wipe out 25% of its remaining profit.

As I said, the internet's projected to get half the US market, not all of
it. However, online sales make it far easier to deal factory direct and
elminate some of the middlemen. This can make it possible for internet
sales to have inherently lower overhead than a conventional store. That
means Amazon and the like can get away with offering _some_ discounts
indefinitely, and that means some people will buy there because they want
the lower price. The internet is a new option - some people will use it,
some won't.

To implement a new plastic boxed set, GW has to make a mold, which is an
extremely expensive proposition, even with the new technologies. IIRC,
Tamiya molds cost a half a million dollars each (and they have all the
tools to make them as well). GW does not have the cash for many such
expenditures.

I'm pretty sure you need to seriously adjust that number.

If I bought the company (and had the cash to fund a restructuring), the
first thing I'd do after eliminating the retail division would be to move
as much production to plastic as possible. That would pay rich dividends
in the long run.

Agreed, and to give GW some credit, they are at least trying to go in that
direction.

Later,
--
- Ward
wardcb at earthlink dot net

All of us could take a lesson from the weather. It pays no attention to
criticism.


.

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