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The issue with the Brexit tariff theory is GW use regional pricing. The tariffs only affect imports to the EU so they’d just up the price in the EU. It wouldn’t affect the rest of the world, or ir the tariffs raised the price too much they just wouldn’t sell it in the EU but again wouldn’t affect the rest of the world 

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NOTE: this obviously is not a real investment memo and I have no insider information on GW.  What I do have is 20+ years of experience in the investment community and thus tracking ERP implementations and thus 20+ years observing ERP implantation going wrong short-term.  So I thought it would be fun to mock up a memo as if I was explaining to the investment committee what had jus happened.

InvesmentCommittee@tga.com

RE: Cursed City & GW’s New ERP System

Since several members of the committee have forwarded me articles highlighting the poor roll out of GW’s new product Warhammer Quest: Cursed City (hereafter CC) I thought it was worth putting together a quick memo updating you on the status of our investment thesis.  As you will recall we believed CC would be a key sales driver in the second half.  Good news on that front… it sold out.  The bad news?  It looks like demand far exceeded supply and thus there was a missed opportunity here.  What we do not know yet is whether actual supply was less than intended by GW or whether demand just far exceeded their estimates.  Unfortunately we have been unable to contact GW’s investor relations to gain further insight into this.

Based on our channel checks and other inquiries though we believe the core culprit was issues related to the implementation of the company’s new enterprise resource planning (ERP) system.  While we have highlighted the long-term benefits of the ERP for the company as the product lines have dramatically over recent years we also warned that in our experience most ERP implementations have “hiccups”.  Everybody knows this but we also know that where these “hiccups” will actually show up is unpredictable.

In hindsight, CC looks like it was particularly vulnerable to such problems.  As a one off boxed game that incorporates products both from their Nottingham facility AND from China (particularly in the written materials) it required above average coordination across the ERP system.  We also know that Brexit has complicated imports making this issue even more difficult to address.  

We have heard suggestions that orders placed well in advanced were incorrect leading to too much of certain parts of the set and too little of others which were not identified until it was time to bring the box set together, by which time it was too late to address.  We have certainly seen such issues arise in past ERP implementations.  Alternatively others have pointed to an error in the order system which led retailers to believe that they would receive more box sets than should have been allocatable.  Again this is not uncommon with new ERP systems.

At least a couple of you have reached out asking me why they either didn’t learn from the Indomitus box set and/or follow the same made to order approach that followed a similar problem last year?  As we have highlighted in previous memos COVID 19 has had several major impacts on GW.  To the positive it appears to have dramatically increased demand for products.  Negatively their factories, warehouses and stores all experienced shut downs.  Broadly this has created shortages of “evergreen products” (those supposed to be available for order on a consistent basis) as our checks of availability issues on the website has regularly highlighted.  More particular to this issue though is that it has also severely impacted the new release schedule.  When Indomitus came out GW had taken steps to slow its release schedule which we believe had created an opportunistic production window for Indomitus made to order.

In contrast, this year GW had been attempting to return to a more normal release schedule leading up to CC.  Specifically AoS has been working through the Broken Realms series, which has included multiple special box sets and new models, as it leads up to a new edition.  In 40k the roll out of 9e continues , for example with the new Drukhari codex and continued releases in the very popular Sisters of Battle line.  While the CC problem has been followed by another “pause” in the release schedule simply put we don’t believe that there was any opportunistic window for a made to order follow up.

We believe the current pause is to ensure that any ERP issues surfaced by CC do not impact the AoS 3.0 release this Summer.  From a business perspective we believe this to be the best decision.  While boxed sets are an important part of the business, both in bringing new players into the game and taking more wallet share from existing customers we do not believe the profit margins on one off sets such as CC are as high as start collecting sets which have far less written materials and tend to have fewer models ( or put another way tend to have smaller discounts to the products when sold separately).  Given this, if the choice was whether to sell more CC now or risk delaying or worse, selling fewer AoS 3.0 sets this Summer we believe the decision was clear.

The outstanding question though is whether this has a long-term impact on customer or 3rd party retailer relations?  A consistent complaint has been GW’s lack of communication as orders were cancelled and supporting material was removed from the website.  Cynically one could argue that this will only increase customer’s tendency to preorder direct to improve their chances of receiving limited edition orders.  Of course the concern is that it turns customers away.  Here we do think it being a one off is helpful, again, supporting the decision to focus on the 3.0 roll out.  If that goes well even if it is not “forgiven” we believe it will largely be “forgotten”.

At least by customers.  The 3rd party channel response  may be more problematic.  We cannot be sure yet how they will respond but we are reaching out to store managers with surveys that we hope to have responses to be next week.  We will forward the collated data to the committee.

In a conclusion, while we are closely monitoring the ERP situation net-net better for it to have hit CC than 3.0.  The latter is key to avoiding a significant sales drop off as we annualized the 9e 40k rollout and the COVID 19 sales boost.  Our primary concern then remains the risk of a sales drop off in the 21/22 fiscal year as the benefit of new editions and quarantine demand fade.

As always, if investment committee members have follow up Qs please respond to this email.

Thanks,

B&P

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4 hours ago, Joseph Mackay said:

The issue with the Brexit tariff theory is GW use regional pricing. The tariffs only affect imports to the EU so they’d just up the price in the EU. It wouldn’t affect the rest of the world, or ir the tariffs raised the price too much they just wouldn’t sell it in the EU but again wouldn’t affect the rest of the world 

There are various trade agreements in place that prevent GW from picking and choosing where they sell products.  It also covers that (almost*) every single plastic product needs to be made available to third parties, even limited edition ones.

* This excludes store exclusives such as the birthday minis which are only available in store and not online

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