Why I don’t think sizable increases in effectiveness are good business?

Why I don’t think sizable increases in effectiveness are good business?

First let me say this is all my views from the sidelines. It has been a while since I read an equity analyst reports on GW as I completely lost faith in Kirby and didn’t trust the LoTR decision so stopped entertaining investing in the company. I have no access to customer demographic data or management accounts that actually give you an idea of what is happening (their full year accounts are Investor Relations spin 101).

From my perspective it seemed like the biggest problem with GW’s recent abysmal performance was the balance in their customer base got significantly distorted. Their growth from the late 80’s was based on the platform supplied by a group of customers who were:

- brand loyal and hence limited threat of substitution
- advocates of the product and hence a free sales force
- relatively price inelastic and hence able to rise prices out of line with inflation

Then as the company sought growth it started to add this core base (strangely enough when Kirby had venture capitalist partners come in) a level of “churn” customer’s who were:
- relatively new games so interested in generic start up sets
- not brand loyal and hence open to substitutes (wether that be other miniatures or other hobbies)
- not the key decision maker for spending and hence more elastic level of demand

As they started to penetrate this significantly larger, but substantially less brand loyal and more price sensitive, segment sales started to grow significantly.

Now this isn’t a bad model. Most businesses run on having a stable core customer base with limited capacity for growth and augment that with a less “sticky” customer base which offers them opportunities to grow revenue.

The challenge however is to find the right balance for your objectives, the more you focus on the churn business the more volatile your cash flows, the more you focus on the brand loyal the lower your growth opportunities.

Now in the Kirby LoTR blunder he significantly increased the number of churn customers and got a short term shot in the arm from growth however this churn increase was always going to be temporary so the strategy should have been focused on growing the core customer base in order to keep the balance between stability and growth. Unfortunately the agreement GW entered into actually did the opposite.

Now with the current power sprint you have a strategy being employed where by the idea is to get army upscalling and generate churn but this time they are trying to get it from their existing customers. Now this is fantastic if you can keep it going however miniatures aren’t exactly fast moving consumer goods like razors or batteries it is difficult to up sell you core customer base continually when you are talking a grand or so every time.

So they are assuming they can ramp up the level of spend from the core customer base, that is a relatively stable purchaser during what the UK chancellor describes as the worst economic conditions for 60 years. To me that seems like an exceptionally risky ploy that could potential damage and erode the one attribute that the past three of four years have shown that you need to foster, brand loyalty.

Of course it is always possible (perhaps probable) that in the same vein as the child like FAQs and rules sets that another strategy was intended but was simply executed poorly.

It will be interesting to see what happens in the coming years as much of this design strategy is likely to be from the Kirby School of Business (from the course of how to fail in a discretionary consumer spending sector during an unprecedented economic golden age). I look forward to seeing what Wells does in the CEO seat once he moves pas the restructuring focus.