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

"Ward B." <wardcb@xxxxxxxxxxxxxxxxxxx> wrote in message news:gvBDg.3250
"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.

Well, let's note that McDonald's is really a manufacturer-retailer, not a
retailer reseller like Walmart. McDonald's makes their products from raw
materials and resells them to the public at their factories. The exceptions
are tertiary products -- condiments, plasticware, packaging, etc. But the
food is cooked at the restaurant.

With that in mind, I guess that I am struggling with the concept that
McDonald's has poor product quality. While admittedly a subjective
assessment, I don't think that the facts bear this out. Certainly the
billions of burgers sold imply that they are considered acceptible to those
who buy them. I happen to have some personal knowledge of McDonald's
operations -- a close friend was president of a large bakery corporation
that made McDonald's bread products. These products were made to McDonald's
exact specifications and contained a more expensive ingredient mix than the
bakery's retail buns. In addition, McDonald's audited the bakery often to
ensure quality and consistency. And I, for one, adore their chocolate shakes
and McDonaldland cookies. It also takes a sophisticated operation to attain
nearly identical product consistency anywhere in the world. I've had Big
Macs in Pennsylvania, Florida, Texas, Louisiana, Germany and Austria. They
tasted the same. That's an impressive acheivement when you consider that the
food is prepared in each restaurant.

There's also the point that "quality" yields diminishing returns, yet often
costs geometrically higher prices. I'd submit that most products have a
"sweet spot" where quality is high, yet price reasonable. I think that
McDonald's products are in that sweet spot. Another example would be
domestic wines. Dramatic improvement in production techniques have made
inexpensive US wines, particularly California wines, almost univesally high
quality. While you can spend 2-5 times more for (say) a Chardonnay, you will
not get 2-5 times the quality. Indeed, I've conducted blind tests with
myself and found that I cannot distinguish expensive and less expensive
wines. While this may say more about my limited palette, I note that US
wines have been very successful in blind competitions with far more
expensive French wines.

Now, it is true that Walmart and McDonald's have low prices. But retail
pricing can be affected by a great many factors besides product quality. The
most important variable is the volume that the items can be purchased in.
Large volume usually produces huge price discounts, for a variety of
reasons. Same product and quality, far different prices.

In addition, the amount of labor and time spent on a product does not
necessarily correlate to quality. A high quality machine tool can turn out
hundreds of precision parts in the time it would take a craftsman to produce
1 part. And the quality would be better in many cases. Management techniques
have a profound effect on quality and productivity. Functioning legal
systems make it far less costly to do businessness. Excellent roads and rail
systems make it cheaper to deliver product. And so on... This is why
American workers can often compete effectively with third world workers
making 1/20 the wage -- the synergistic effects of technology, cultural work
ethic, legal systems, and management culture result in the American worker
being more than 20 times as effective.

Anyhow, I think that we need to bear some things in mind when assuming that
GW produces the "best" miniatures. While I do think that they are "top
quality", I am not willing to credit them with being the "best". While GW
deserves credit for single-handedly pushing the quality envelope, they are
not the only company makign high quality stuff.

1. Pewter. Their pewter minis have excellent detail, as a rule. Castings are
typically clean, with minimal flash and seam lines. Fit of multipart
castings leaves much to be desired, but this is a problem with the
technology -- hot casting, flexible molds. That said, I'll stack Reaper (for
instance) up against GW anytime. I find Reaper's stuff to be just as well
detailed, just as "paintable" and their multipart stuff seems to go together
better. And if detail is the standard, I call your attention to GHQ, which
produces 1/285 and 1/2400 scale miniatures of breathtaking detail. They
leave Reaper and GW in the dust.

2. Plastic. GW has few gaming competitors in this area, due to the fact that
injection molding requires a huge capital investment compared to pewter.
However, I've been a plastic model builder for decades, so I have a basis to
compare GW's kits. GW compares well, in most cases, to plastic model
manufacturers. This comparison is tricky because plastic model companies
still produce some kits from 40+ year old molds and these kits tend to be
crude by modern standards. But even when compared to recent kits, GW kits
have comparable detail and fit. I like GW kits more because they are simpler
to assemble and usually more rugged -- a function of the fact that GW kits
are designed to be played with. However, GW kits are generally not superior
*in detail* to the newest kits from high end manufacturers like Tamiya. As
an aside, I think that the move to plastic is a Good Thing, though I
personally assembling 28mm individual models. Plastic is a much cheaper raw
material than pewter, it can be molded to far higher tolerances (making a
much better assembly experience), it takes to a variety of solvents and
glues, it's easier to sand and modify and its lighter to transport. Detail
is at least as good as pewter. The only problem is that injection molding
limits require that complex figures be molded as kits.

3. Marketing/Merchandising. GW wins this hands down. No game company has
done a better job of marketing its products than GW. Their stuff has that
undefinable trait of "cool". Their packaging is attractive, eye-catching and
well designed. They wrote the book on how to display painted miniatures. The
exception to this are their rules. They are mediocre at best IMHO.

The important point to remember, though, is that the high quality of GW
products are unrelated to its retail operations. They are the result of
excellent manufacturing and marketing operations, not retail operations.

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.

The same economics and performance statistics apply to chain stores. The
difference is that chains can often afford to lose money longer than the
local store owner. But that fact should have little positive effect on the
competence of the chain store's operations. In fact, I'd submit that it has
the exact opposite effect -- by mitigating the consequences of failure, you
also mitigate the key incentive to not fail...

And in the GW retail store context, it is a *fact* that GW's products
were -- and are -- being sold very effectively by local retailers. The GW
stores were not necessary to increase the market. Indeed, in many cases, the
GW stores merely appropriated an existing market. Again, GW spent a huge
amount of capital to take profits that they were ALREADY GETTING.

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, this is my point; perhaps I haven't made it very well. GW's management
made a catastrophic error in allocating massive resources into their retail
operations. In economic terms, they spent $10 to generate 50 cents a year in
net profit. But in doing so, they eliminated 50 cents in net profit that
they were already getting. And, they infuriated at least half of their
distribution chain in the bargain. This boondoggle also drained so much cash
that GW had to raise prices by at least 10% every year for the last six
years. They didn't do this because of "greed" -- their net profits were
unremarkable. They did this because they *had* to to stay in business. And
this need is a result of their ill-conceived retail operations.

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!

Well, you should bear in mind that GW has created numerous incentives for
local retailers to *not* stock their product:

1. 45% retail discount vs 50-54% with other game distributors. No additional
discounts for larger orders or for faster payment.

2. Unreasonably high minimum order requirements (they've backed off this in
the last year).

3. Poor responsiveness and clumsy ordering system. (Responsiveness is much
better now, though ordering is still a joke). Dealers cannot access a
website and place orders. Rather, they have to call orders in. They can
email or fax them, but mistakes are more common -- apparently GW employees
re-enter the orders.

4. Inadequate return policies, especially when a product is superceded by a
new edition.

5. Certain promotions available only to GW stores or GW mail order. The WHFB
deal -- you buy the old version and get the new version cheap -- is only
available through GW.

6. Until last week, local retailers could not order out of print and bitz
items. Now they can, but at only a 35% discount.

So a lack of resources may not be the problem here.

A local hobby store just decided to stock the entire WH40K and WHFB line +
paints. The total store cost for this will be about $16K. Retail value is
about $29K. Even smallish hobby stores will have total inventory levels 5-10
times higher than this. So I don't think that small GW inventories are
necessarily due to limited resources.

In the Dallas area, I can think of at least 2 local retailers that have as
much inventory as the GW store.

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?

I was trying to remember that. I seem to recall first hearing about them in
the early 1990s. Anyone know when this started in earnest?

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.

How purportedly intelligent GW executives could have missed this point is
beyond me. Did Microsoft not sell Excel in Great Britain?

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.

Yep.

This brings me to something I think you overlooked: width of the product
line.

I didn't overlook it; I just didn't include it since my original analysis
focused on how GW merely managed to replace income they were already
getting. In my attempt to make apples vs apples comparisons, I limited the
discussion to an admittedly fictional construct -- the "GW-only" local
retailer.

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.

I agree that this is a significant advantage that locals have over GW
stores. The odd thing, though, is that this advantage is not usually enjoyed
by locals who compete with large chain stores -- if they are truly competing
in the same market. My local hardware store, for instance, cannot hope to
compete with Home Depot on product selection. GW's inept management missed
this crucial point. They failed to understand that (unlike Home Depot) they
didn't have a wide enough product range to give GW stores a significant
advantage over local 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.

It's a dark day when their advantage is no longer able to compensate for bad
management.

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.

<shrug>

It's a hobby. Besides, when I put together an investment group to buy the
company some day, you can say "I knew that guy...I thought he was crazy at
the time..." :-)

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.

Seems like WOTC tried their own stores, then quickly figured out that it was
a boondoggle.

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...

This is why so many companies find themselves unable to reverse a clearly
bad business plan. To do that requires the cooperation of hundreds, maybe
thousands of people who don't have the same agenda. The president of the
retail division is unlikely to be enthusiastic about a move that will
eliminate his job...no matter how good such a move is for the rest of the
country. This is sometimes why "golden parachutes" exist -- they let the
executive support such a move because he knows he'll be alright at the end
of the day.

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.

In the case of GW, there was no evidence of huge inefficiencies in
distribution. Indeed, until the last few years, there were several
distributors out there in competition. This would have *increased*
efficience. GW's management were guilty of the same arrogance and
incompetence of the Marxists who thought that they could control the economy
more efficiently than the market could. And GW may share the same fate...

<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.

<snip of economic prognostication>

Well, the great thing about predicting a bad economy is that you'll be right
at some point. If I knew what the economy was gong to do, I'd be retired on
Aruba right now, being served drinks with umbrellas in them by former
lingerie models.

My point is that there's no strong evidence that a general economic slowdown
is responsible for GW's current woes.

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.

Help is on the way. FFB begins serious playtesting next week.

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.

Well, I think that there is significant overlap there, but the same is true
of computer games. An economist would predict that GW will lose market share
as its prices increase, all else being equal. Of course, all else is never
equal, but if the cost of GW stuff rises faster than competing diversions
(RPGs, CCGs, computer games), then demand for GW products should decrease.
Hey...that's happening now, isn't it?

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.

Well, I am talking about GW, not everyone else.

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%.

In economics, growth in new areas is typically far higher (as a percentage)
than in older areas. This does not mean that the new areas will ultimately
exceed the old ones. For instance, third world economies often grow (if they
grow at all) faster -- as a percentage of GDP -- than industrialized ones.
But no one would say that this indicates that Kenya will probably overtake
the US or Great Britain. At comparable times in their economic development,
the US and Great Britain grew at similarly high rates (probably even
higher).

Distorting this model has been the past willingness of internet retailers to
lose money to grow market share -- selling dollar bills for 95 cents. This
strategy will work only if the market is retained when internet prices are
raised to a profitable level. The jury is still *way* out on that question.
Understand - internet retailing is here to stay. And it makes the economy
more efficient. But I do not think that the evidence shows that internet
retailing will dominate bricks and mortar retailers. Unless we find a way to
teleport the goods to the buyer.

...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.

Well, I am not sure that this is GW's fault. Any "impulse-buy" item should
sell far better in brick and mortar stores. If -- as I believe -- GW
products tend to be "impulse buy" items, then their unremarkable internet
sales is exactly what I'd expect.

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.

If you mean "gross sales" and "net profit", then I agree. All the difference
in the world...

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. :-(

Well, as long as you don't think that you can make a profit on volume...

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,

I would be very surprised if it got that high. I think that we'd have to see
a quantum decrease in shipping costs, so that I could get my order tomorrow
without paying a huge premium.

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.

I'm certain that the numbers were valid some years ago. I have a client in
the plastic injection molding business; I'll ask him.

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.

Yep. I like their manufacturing operations.

--Ty


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