Games Workshop: The World of Warhammer - [Business Breakdowns, EP.239]

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2:27This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. This is Matt Russell, and today we are breaking down Games Workshop. This episode is another examination of the business of IP. And whether it's Disney, Electronic Arts, Nintendo, there are so many businesses out there built around a core IP franchise. And Games Workshop and its Warhammer franchise may not be as familiar to our North American listeners. But this episode will tell you why that may be changing very soon. Or you can just stay tuned on your Amazon Prime, or search around your local area to see if there are Warhammer retail shops in your location.

3:19My guest is Todd Wenning, President and CIO of K &A Capital. And Todd shares his own personal story on Covering Games Workshop many years ago. He gets into the fun evolution of this business, which ties into the vertical integration that it has today. And he shares what lies ahead as awareness of Warhammer grows and those loyal enthusiasts that have been around for generations welcome more into their world. So please enjoy this episode on Games Workshop. All right, Todd, it is great to have you back. You gave us one of my more enjoyable episodes last year with Echo Lab and some of the unique details about that story.

4:06So anyone who hasn't listened to that episode, I would definitely point you to that. But today, we're here to talk about Games Workshop, a business that I have seen popping up. I actually had someone else reach out, a former guest, interested in doing a breakdown on it. There seems to be growing interest in this name for obvious reasons. It's a fascinating story that we'll get into. But I just wanted to start out with the simple introduction because I think there's IP in here that some may be familiar with, but it is what I would consider kind of in the niche hobbyist category. And you can elaborate on that in terms of what Games Workshop is as a business and what they might be known for.

4:49Matt, thanks for having me back. It's great to be here. I love listening to the show and any way I can contribute, all the better. Games Workshop is, in my opinion, the best company that most North American investors, at least have never heard of. It's a really fascinating story. As you mentioned, it combines intellectual property, there's network effects, there's television show coming out. There's a lot to dig into with Games Workshop. So it's a company I came across in probably 2019. I had heard of it. I used to work in the UK and I'd heard of it rumblings, but I hadn't really know much about it.

5:26Once I started diving into the company, I thought this is really one of those companies I needed to have on my radar. And then once I launched my fund, saw the opportunity to buy some and have been a shareholder since. Very excited to talk about Games Workshop today. Maybe you can get into some of the IP. We have infamous brands associated with IP, Marvel or DC and how they operate as a framing in mind. But what makes up Games Workshop in terms of that special IP and their way that they monetize that, operate it, and nurture over it. So it's probably good to start with the history of Games Workshop.

6:05There is deep lore about Games Workshop's origins and backstory, as well as the narratives of its stories. It's a very beloved IP and a very beloved company, and that's part of what makes it a really special company. In the late 1970s, a group of three men in the UK were building wooden games, Backgammon, Go. Around that time, they caught wind of this new thing that was hitting the US called Dungeons and Dragons. They thought this is really fascinating. And so they had some connection with the owner of Dungeons and Dragons in the US. And so they became the UK distributor for Dungeons & Dragons.

6:46And eventually they saw how this connection between narrative and gameplay was coming together. And they opened their own store, started selling their own games that they were making, started selling Dungeons & Dragons materials through those. In the early 1980s, they decided that we're going to create our own game. The first game that they came out with was called Warhammer. And it was loosely based on the Lord of the Rings kind of era, medieval fantasy role-playing. What they did was instead of doing a tabletop game where people sit around and tell stories, they have miniatures involved. The miniatures are part of the game.

7:25You get these miniatures and they're very ornate. Now they're plastic, but back then they were metal alloy and you could paint them. Each of your characters has different attributes and you roll dice. There's similarities to Dungeons and Dragons. About two years later, they came up with this new concept versus Warhammer, which is more medieval fantasy, and it's called Warhammer 40 ,000. It's basically the Warhammer world 40 ,000 years into the future. So it became this grim, dark, science fiction fantasy world where you have a human race that's fallen. They're fighting against different alien factions across the galaxy.

8:04You can play as a humanoid or you can play as an alien faction and you can pick which one appeals to you the most. I'm not sure if it was part of the plan or not, but when you have a world that takes place 40 ,000 years from now, you can build a lot of backstory behind that to the present. Just endless stories and IP around how things got to where they are. That's created new storylines for the business. So it gets really deep, very intricate. So if you're thinking about the Tolkien world or the Game of Thrones world, where they just keep adding new context to the backstory, it's very similar.

8:44So it can go very deep. Games Workshop actually owns their own publishing arm called the Black Library that produces a lot of this narrative. They are actually vertically integrated all the way from paint to publishing. They manufacture the miniatures, they make the paint, Citadel, They do the publishing, they do the distribution, they do the stores, they own it top to tail. It's a very fascinating business in terms of how they control all of it and the allure of their IP and how beloved it is with their fans. I'm curious, you don't often hear about the origins being in the distribution and then evolving into the creation of a world and a game and narrative around it.

9:28Were those original founders still very much a part of that storyline into the 80s as they took off with the homegrown IP? Did they play a major role there or was it someone else coming into the fold that helped them evolve that side of things? One of the three decided that he wanted to just go back to what they were doing before, working on wooden games. The other two really got into this fantasy world and narratives and tabletop gaming. They brought in other people. So there was a couple of major outsiders that came in and helped them develop this game. And it spawned into this subculture of people who just really loved the narrative and dove into it and wanted to play it and engage with it and connect with other people, which is a big part of the story today.

10:16You alluded to this. It sounds like the evolution of that story takes place both in publishing, whether it's books, graphic novels, whatever it might be, in addition to the miniatures. Is it fair to call them figurines? Be careful here, Matt. I think the way it's framed is they are miniature war games. They're not figurines. They are tabletop gaming pieces. They are things that we engage with and use to achieve our mission in the game. So we got to be careful what we say. It's an important distinction in terms of how they're used. And I maybe didn't appreciate the definition of figurine to begin with.

10:53So learn something way beyond businesses on this show. In terms of the brick and mortar concepts, there are Warhammer stores. Are they distributing, obviously, Warhammer related IP product? But is there also still third party product that gets distributed through those stores as well? No. So they have their own retail stores, as you mentioned. So they have about 575 around the world and about 55 % of those are in Europe and the UK. About 35 % are in North America and 10 % in Australasia. And you probably don't even know that they have a store in your town. If you live in a semi-major city in the US, you probably have what's called a Warhammer store.

11:39So if you go to Google and type in Warhammer store near me, you probably have one. I don't know this for sure, but we have one in Cincinnati. Might be one in Pittsburgh, might be one in Cleveland. A lot of these stores are run by enthusiasts. About 75 % of their stores are single staff stores. So these are just enthusiasts who thought I get together with my friends anyway to play this game and I might as well have a store and have everything set up there and make some sales and make a little money while I'm doing it. So a lot of them are in strip malls. The stores are fairly small, but they're stacked to the gills with just Games Workshop materials.

12:14They do not distribute any third party. That's about 20 % of the revenue comes from the retail channel. 60 % of the revenue goes through the trade channel, which is the third party. And so that's where they might be in hobby stores, or I'm not sure if they're in Walmart, but they might be in like a Walmart store somewhere. These are all distributed to third party independent sellers. I looked to understand the concept of a Warhammer store and found there was one just a 20 minute try for me. So I can attest to that being the truth. Just to have some context about this market, I think it is very enthusiast driven, but it continuously amazes me.

12:56the level of enthusiasm. I think you can even look at something like Marvel movies and the real appreciation and diehard nature of some of the fans of the origin stories back to the Stan Lee days and what that generated for that IP over time. Do you have any way of contextualizing just the size of this type of market and Games Workshop revenue is one data point, but I'm curious about that? It's a lot bigger than you probably think. There are 790 ,000 people around the world who've signed up for the MyWarhammer emails, free regular emails that go out to people who are interested in Warhammer. About 248 ,000 people are subscribed to Warhammer Plus, which is a$50 a year subscription.

13:44Now, this number is up from 115 ,000 three years ago. It has doubled over the past three years in terms of people who are willing to not only subscribe to the emails, but also pay for the unique interactions they have with the company. So this is bigger than you might expect and growing very rapidly. When you mentioned the origins, was there demographic concentration or geographical concentration where this was really material in Europe first before expanding outwards. How key is Europe to the story? You mentioned the 55 % number earlier, but I'm curious about that as well. It started in the UK.

14:26It feels like a very British company. They're based in Nottingham. The World of Warhammer, the big showcase store is next to their headquarters in Nottingham. They're actually building a new World of Warhammer in Washington, D.C. that comes out in 2027. So that's another part of the story. But it's a big cultural thing in the UK. A lot of young men in particular, it's not always men, but it tends to trend towards young men who get really into this game. Henry Cavill, who I'm sure we'll talk about in a minute because he's producing the Warhammer series for Amazon. He's a big fan, so he'll get on talk shows and talk about it.

15:01And a lot of people grew up playing Warhammer. Maybe a similar way to you and I might have collected baseball cards and gone to baseball card shows. So it's a very hobby-driven type of business. Management talks about the hobby gene, that a lot of customers have the hobby gene. Not everybody has that. That's a big part of the people who buy it. In terms of age, it tends to be young men between the ages of 10 and say 18. And then a lot of times they fall away from the hobby because it's an expensive hobby. The starter box that I bought was about$70 to give you an idea. So it's roughly video game type level, and it can go much, much higher.

15:40So you can get individual units that cost hundreds of dollars, if not more, depending on what you're doing. So it's a very expensive hobby. And so a lot of times young players are supported by their parents when it comes to buying Christmas gifts, birthday gifts, things like this. A lot of times what happens is they discover the opposite sex or they discover someone they would be able to partner with and they just get distracted for 10 years or so. then in their 30s and maybe in their 40s, they come back to it. That tends to be the trend of the ages and the interest in Warhammer. Once you lose access to the rental funds too, it becomes more focused on the budget until you get back out of that hole.

16:21But it is interesting when you have the demographic evolution where as they come back to the hobby, they might also have their own children to help break into the hobby. And I can imagine that happens quite a bit. I think you've laid out who in theory would be the competition, but I'm always very curious when it comes to having the hobby gene, what attracts people to Magic the Gathering versus Dungeons and Dragons versus Warhammer? Are those the right competitors to think about when you think about where competition exists for the business? In some ways, yes. I think a lot of it comes down to what your friends are playing.

17:02Warhammer is a lot about community and having something to do with your friends. In an increasingly digital world, it's a great way to come together in a physical world and enjoy time together. one of the things that separates warhammer from say dungeons and dragons or magic the gathering is that you can latch onto various parts of warhammer you might really enjoy the gaming or you might really enjoy the collecting or you might really enjoy the painting i don't want to go too deep in myself into this world because otherwise i start mixing up investing in the narrative of the business but i did get a starter set and you paint these figures and you have to do multiple layers sometimes to get them right.

17:44And so you spend hours of your time putting these things together. And so if you can get really into painting them, some people actually paint them if they're really good at them and sell them. You can latch onto various parts of the hobby without having it compete with Dungeons and Dragons or Magic the Gathering. It could be that you really like collecting these space figurines or these medieval fantasy. They actually produced the Lord of the Rings official tabletop games. If you want to collect armies of orcs fighting elves in the Lord of the Rings, you can do that by buying Games Workshop products.

18:18Yeah, it's always interesting to me in terms of the symbolism of when you see something that is a niche hobby evolve. And one of the key moments, I think, is when you see the resale with customization. There's just something that represents there's a market above this market that now exists. And that is representative of an ecosystem and people willing to spend the time to create a business around the original IP is usually telling in terms of the level of enthusiasm there. The other question I had was vertical integration seems like it can be very impactful for Games Wormshop, particularly because of that community element that you mentioned.

18:58If you have a traditional hobbyist store. They might have a Magic the Gathering monthly event. They might not, but I'm sure that pretty much all Warhammer stores have these events. Is that normal in the industry based on what you've seen? So Games Workshop does put on a lot of competitions and events. The attendance numbers are much larger, again, than you would probably expect. It's very much a bonding type of business. One of the things I like about this business is there's hidden network effects. If one friend starts to play, another friend starts to play, and it starts building, and the community that you build around you gets stronger, which makes Games Workshop stronger, and the entire value of the whole ecosystem gets stronger.

19:39We think about network effects in Google, Facebook, and eBay, but really thinking about in a physical gaming world, you don't really think about it, but Games Workshop has it. You gave us some sense of the revenue breakout with retail and trade. I'd be curious what the other 20 % is. So maybe we could start off there. So the other 20%, 15 % comes from online and 5 % from licensing. The online can just be people who order from warhammer.com. It can be the subscriptions that I talked about earlier. I think they do. My estimate is that their annual run rate on that number of subscribers is about 12 million pounds.

20:18It's rising, but still a small part of their business. And then the licensing business is the remaining 5%. And that can be cyclical. They might have a big licensing deal come in with a video game. So if you go onto the Switch marketplace or a PlayStation, you'll be able to see Warhammer games. And so they license their IP to the video game producers. That business is really high margin. So it's well over 90 % in a typical year. 90, 95 % is what I have in mind. As a firm, their gross margins are about 70%. It is almost like a luxury product when you think about those margins. And they have significant pricing power.

21:00So if you think about their retail stores, my guess is they do about 80 % to 85 % gross margins in those stores where they control the process. Online is probably similar. Their costs there being logistics and distribution. And with trade, I think their gross margins, my guess, they don't disclose this, but it's probably 50, 55 % thereabouts when they sell to the wholesale. So it's a very strong model from an economic standpoint. Their EBITDA margins are over 40%. It's a very cash generative business. The licensing point, I still remember reading, there's all this lure about Ralph Lauren, but if you go back into the early biographies, it was a failing business really under a lot of stress until he licensed a fragrance.

21:44And that was like a huge profit driver and cash generator. It always made licensing in my head a completely different concept. But nonetheless, even if that sits atop the chain, 50%, 70 % gross margins are quite impressive. On those buckets, would you point to any single bucket being a large growth driver going forward? As you think about expansion, DC store seems like that can make a big leap into the US and having a prime show. seems like they're doing things with the IP that are sensible from both an attention and awareness standpoint. But what would you point to just kind of from a growth perspective?

22:22So if you think about the network effects that I mentioned with the TV show coming out, I think it'll appeal to a lot of people who have never even heard of Warhammer. They might go check out their local store. All of a sudden, you got a new node in the network. They introduce their friends and so on and so forth. If you look at what's happened with the Mario movie, for example. When the Mario movie came out, Nintendo management said we were surprised. We had high expectations, but we were surprised by even how much that drove what we wanted them to do, which was buy Nintendo video games. And when The Witcher, which is also starring Henry Cavill back in Netflix, came out, that was sort of a stagnant video game series and the sales went through the roof.

23:04People, they see IP, whether it's Lord of the rings or whatever. And they want to continue to engage with that IP. They want to stay with it. My investment thesis is that this will lead to stronger sales in the higher margin categories. It'll certainly drive interest in trade. People might go to a hobby store instead of knowing there's a Warhammer nearby, or maybe they don't have a Warhammer nearby and they go to the hobby store, in which case it's lower gross margin. But I think that will increase some of the licensing revenue that they have, which is 90 % gross margin. The online business, which I think is 80, 85 % gross margin and certainly drive traffic into the Warhammer stores, which is again, about 80, 85%.

23:46And that's where management wants you to start your experience in a Warhammer store. When I went to go buy my Warhammer starter kit, Warhammer 40 ,000 to be specific, I walk in with my kids and there's probably six or seven 30 year old men sitting around tables playing this game. And they all kind of look up at me to see like, hey, is this guy one of us? I started asking questions and they were talking to my kids. And I think it's just a great way to get a feel for what Warhammer is, what they offer, how the game is played, what sort of social events are around it. It's a great introduction to the experience and to the community.

24:21It's a very interesting thing that we're starting to see more of. You mentioned the Mario movie, which I can tell you, this is the first movie I got my son to watch in full. That meant something to me in terms of the nostalgia of playing the game growing up. But also on another extreme, F1, Drive to Survive. And I think a lot of people are trying to use that as a blueprint. So you can see how that drives additional interest and entryways and potentially for a certain type of buyer as well. So that's quite interesting. On the licensing, I'm just curious. You mentioned it can fluctuate quite a bit.

24:54How does that work? Is it just the sense of if you're licensing a video game, you're going to have that initial bump in year one, but until you release a new game, you're going to have that natural decline curve. Most of their licensing historically has come from the video game partnerships. And so it depends on when consoles are launched, when games are developed. And so it can be a little lumpy. When it hits, it goes right to the bottom line. Pretty much. There's very little operating expense related to that. It really just falls to the bottom line. So I'm thinking that as the movie comes out, that will lead to more licensing deals, whether directly from Amazon or from new partners.

25:29video games, etc. So I think that will remain a very cash generative part of the business for a long time. Just in terms of being UK operated, did the tariff volatility end up impacting them at all? And it's just one of those questions that comes to mind, as you mentioned, origin and having that strong footprint there in the UK. How caught up in all of that activity did it get and how much does it actually impact the business? So that was some of the concern earlier in 2025, the stock sold off or was stagnant a little bit. The concern was that management said after their annual report came out, they work on a different schedule in terms of their reporting schedule.

26:11But when the May report came out, they said, we're concerned about tariffs and what the impact might be to our gross margins. And then the stock had a nice jump a couple of weeks ago because they said in their November report that actually it didn't impact us as much as we expected. And then we saw this week, so we're talking on January 22nd, we saw when there were concerns about new tariffs, the stock sold off a little bit again. They are impacted by it. But again, this is why the vertical integration helps quite a bit. Not only does it help protect them from IP theft, which is one of their biggest concerns, but also it helps them control their supply and they have complete control of their supply at all times.