This research has been produced by the Motley Fool’s Special Projects team, as part of our premium investing team’s recent exploration of the UK small-cap sector. Led by the Head of UK investing, this team is dedicated to providing our premium members with the best investment ideas. We hope you enjoy this free research!
Tesco (LSE: TSCO) customers have proven to be rather disloyal of late, with swathes defecting to hunt for bargains at the increasingly popular discounters.
Games Workshop (LSE: GAW), on the other hand, is the leader of the UK table-top war-gaming market. In the past, its customers have been fiercely loyal. They often playing these game systems for years because of the company’s impressive and irreplaceable intellectual property.
Unrivalled Escapism
Games Workshop has been building the fictional worlds of Warhammer since 1975. Hundreds of novels, thousands of short stories and a range of stunning miniatures culminates in a level of immersion not offered by competitors.
Games Workshop also boasts an impressive network of retail stores across the UK and the US that act as social hubs and recruit the next generation of gamers.
This unique offering has afforded Games Workshop a level of pricing power unmatched by Tesco because gamers are willing to pay up that little bit more each year — you can’t do the same with groceries because competition is rife.
These traits should see Games Workshop grow at a steady pace, but recently the company’s figures have disappointed. Digging a little deeper, it seems that all might not be as management’s bullish commentary implies. In fact, I believe management could be heading down a dangerous path.
Management Matters More Than You Think
Games Workshop had a torrid 2014, with revenues and profits falling by 8.25% and 50% respectively. Company commentary claims these issues are all short term. I’m not sure I agree.
You see, the majority of the company’s stores have downsized and are now operated by one employee! This lone guy or gal is expected to host games nights, play demo games with would-be customers and look after the entire shop. I don’t know about you, but it’s not a list of responsibilities I envy.
The real worry for me is that one or more of these key aspects could fall by the wayside.
What if the shop is busy? The child waiting for a demo game gets bored and leaves. The company has lost a future customer.
The manager is ill? Games night cancelled. Store closed. And so on.
In theory, this cost-cutting should boost margins, but it hasn’t yet.
Furthermore, a quick internet search reveals other worrying developments. Gamers claim that the price of some box sets have increased by over 50% in the last five years, or an annual compounded hike of 8.45%! If this is true, they might be overreaching their pricing power.
Fans have also accused the management of editing game rules to drive sales – if so, it clearly isn’t working. In my view, none of this seems conducive to growing a passionate fan base. Worse still, there are murmurs of new games systems stealing market share. In short, this is a great business, but I’m not quite sold on management. It must be said, however, that new CEO Kevin Rountree has not been with the business long. I still live in hope that he will change things up. However, I won’t invest on “hope” alone.
Drastic Dave?
Tesco’s new CEO, “Drastic” David Lewis, has certainly lived up to his nickname. His plans could cut up to 10,000 jobs. He has ditched side-project BlinkBox and reduced the excessive product lines, allowing key items to be bought at greater scale. As my fellow analyst Mark Stones often says, how many types of mayonnaise do you really need to choose from anyway? I think “Decisive Dave” suits the new man better. He could be the remedy for Tesco’s ailing business.
It is also worth noting that, while Games Workshop might have a more defensible customer base, Tesco has some incredible advantages, too. With all the talk of its missteps, people seem to forget that it has a store in every postcode in the UK!
In the long term, I’d prefer to own a niche-market leader than a company in a hyper-competitive sector, but Games Workshop’s success story could be derailed by bad decisions while Dave Lewis seems to be making all the right decisions.
I could be wrong about Games Workshop, however, so I’m eagerly awaiting its next set of results to better gauge their strategy and will make a final decision then.
