APPENDIX

Chairman's preamble from the 2002 annual report
Many people find it difficult to grasp what Games Workshop Group does for a living. I regularly meet investors, both professional and amateur, who have developed a view of our business based on only part of the story. This means, simply, that we have not explained ourselves properly; so I am going to take this opportunity to start that process.

In any business there is a model (how the business works) and a story (why it works that way). The vast majority of our income and profits come from Games Workshop - a business that designs, manufactures, distributes and sells everything an enthusiast needs to play tabletop wargames in the fantasy world of Warhammer.

In short the model is that of a niche business and the story is that it appeals to a relatively small number of people devoted to the Games Workshop Hobby.

Niche businesses are not widely understood. They do not, generally, follow accepted business norms. Much of what is written about business is written about varieties of mass-market activities; most of the day to day experiences we have are with mass-market companies. A niche business is a tightly focussed activity that knows that what it does is not for everyone, but for a narrow group of individuals. It knows that quality is more important than price, and that respect for the customer is paramount. It knows that massmarket advertising is expensive and for niche businesses ineffective compared to the power of word of mouth. These are a few examples of the differences, there are many others.

This is what Games Workshop does; we create materials of the highest quality that appeal to a minority of the population. The challenge for us is not to try to get everybody to buy our products but to reach out and find the people who want them, anywhere in the world. In order to do so we sell wherever we can. We have our own Hobby stores that serve to introduce people to the Hobby - our marketing if you will. We work with independent retailers of many types. And we sell direct both on the internet and by mail order. These channels should work in harmony together, each providing a different, but complementary, service. Understanding this addresses many of the misconceptions which exist about the Company.

Firstly, Games Workshop is not a retailer. To characterise it in that way is to misunderstand completely the way the business model works. Games Workshop stores promote the Hobby. They introduce people to the Hobby and they provide a venue for experienced gamers to meet and play. A retailer buys product in, adds a mark up, and sells it on. We teach gaming and modelling and painting.

Secondly, our future growth is dependent above all on maintaining product quality, continuing to introduce more people to the Hobby, and keeping people in the Hobby longer. We do not need 'hit' lines, nor innovative packaging, nor cut-throat pricing.

Thirdly, we are a global business. The search for new Hobbyists is not finished in the UK. As you can see from these results, it is one of our strongest growth territories. That search has, however, led us to look overseas with such success that the majority of our sales and profits come from the rest of the world. So those who visit their local Games Workshop store in order to understand fully what we do are seeing only a very narrow part of our business.

Our customers are special and unusual people. They, like us, love their Hobby. Their main concern is with quality and integrity. So our biggest challenge is to ensure we constantly provide a level of detail and service that is appropriate to and respectful of the devotion of our customers.

The casual observer finds it hard to see why anyone would want to spend so much time and money collecting hundreds of miniatures, painting them and then playing wargames with them. Surely we should make the rules simpler, sell pre-painted models, reduce quality and sell cheaper. This is not our business. We are interested in our devoted customers and in providing what they want - the best products and outstanding service.

These are the keys to understanding Games Workshop: niche marketing and selling to a pre-selected, quality obsessed, narrow customer base.

This year we acquired a sister company for Games Workshop, Sabertooth Games Inc. Sabertooth makes collectible card games. Different model. Same story.

It is important that the model is different. We are looking to increase our sales, not to cannibalise them. Card games are collected by and played by a new and different group of gamers. They buy their cards in specialist stores. So for the Group this will be a new source of revenue.

It is equally important that the story is the same. Sabertooth is a niche business. It sells on quality rather than price into a customer base that is a small minority of the population as a whole. Our managerial skill sets are therefore an ideal match.

As a Group we understand niche markets, providing excellent products and service to devoted gamers. That is what we are good at, and that will continue to be our obsession.

Chairman's preamble from the 2003 annual report
Niche markets
Last year I wrote about how our business works. That piece is reprinted at the appendix to this annual report. This 'niche markets' section is a précis of it.

In any business there is a model (how the business works) and a story (why it works that way). Games Workshop is a business that designs, manufactures, distributes and sells everything an enthusiast needs to play tabletop wargames in the fantasy world of Warhammer.

In short the model is that of a niche business and the story is that it appeals to a relatively small number of people devoted to the Games Workshop Hobby.

Niche businesses have natural strengths . . . :

• They are naturally protected from macro economic factors
• Their customers are dedicated and loyal
• They are relatively price insensitive

. . . and consequences:

• They demand high quality products and services
• They need focus and specialisation for success

As a Group we understand niche markets, providing excellent products and service to devoted gamers. That is what we are good at, and that will continue to be our obsession.

Marketing and advertising
The business model all our businesses follow is that of the niche marketer. Niches have some wonderful natural advantages. They are largely protected from macro economic factors, their customers are dedicated and loyal, and price isn't the number one consideration. To retain those advantages it is vital to have high quality products and services, and vital that the business should keep its focus and specialisation. The tabletop fantasy wargames niche that we have built at Games Workshop over the years has these advantages, and we do work very hard to provide the right products, the right services and to retain management's focus on our specialised offer.

Just as a niche marketer knows that quality is more important than price, and that respect for the customer is paramount, it also knows that mass-market advertising is expensive and ineffective compared to the power of word of mouth.

I think it is worthwhile going over our advertising policy as it offers some interesting insights to the nature of our businesses.

We have a simple rule of thumb: no advertising.

Rules of thumb are best if they are short, unequivocal, and absolute. That means they are usually broken all the time. In that time honoured tradition this is a rule we break all the time, but never, I hope, in spirit. So why do we have the rule, why do we break the rule, and why don't I care (much)?

We have the rule because there is a common assumption in business life that if you want people to know what you are doing you advertise. In our business, as in other niche businesses, the best way for us to get known is by word of mouth. Nothing is more likely to generate interest than the recommendation of a friend. So our prime advertising task is to generate as many enthusiasts for our products and services as we can. We do that by providing the right products and services in as many places as we can, and we do that by opening more Games Workshop Hobby stores and by encouraging more independent retailers to carry our lines properly. We need to be out there to talk to people to see if our hobby is the one they are interested in. In that sense the staff in our Hobby stores and in our retail partners are our advertising. In turn that means our Hobby stores and our independent retail partners - particularly the better ones - are our marketing.

The question this model begs is: wouldn't it work even better if you got more people in your Hobby stores by mass advertising? I have to agree that mass advertising would get more people in our Hobby stores. But simply having more people wouldn't do us any good. We are not selling ice cream, we are encouraging those predisposed to do so to love the hobby of collecting, painting and wargaming with fantasy themed miniatures. Each person that comes in has to be introduced to what we do. We are already busy at peak times doing that, we certainly don't need hundreds more casually interested people clogging up the system. What we do need is more places to introduce people to the Hobby. So we open more Hobby stores and try to work with more independent retailers.

Word of mouth is a wonderful way to market. It is extremely effective and it is free. We simply do not need to spend the huge sums required to advertise.

We break the rule about not advertising in two ways. Firstly, as we distinguish between mass advertising aimed at the public at large and local promotional advertising to announce the opening of a new Hobby store, or club, or event. Secondly, we occasionally get involved with organisations whose business is geared around a mass advertising model to market their own products. We are quite happy to ride along with the upswing in business which that may bring. But we are forever vigilant. Such upswings may bring about a step change in the way our business in that territory operates or they may be a cruel bubble that will burst the minute the advertisements cease. A good example of this is DeAgostini, our licensee, producing a serialised gaming supplement based upon our Lord of the Rings tabletop battle game. It's never possible to tell until too late which of the two phenomena is occurring. On the whole we have, in the past, been able to keep most of the upside. (We are all touching wood hoping the same is true of the surge we have had in the UK business this second half.)

I said at the beginning of this statement that I didn't care (much) that we break our 'no advertising' rule. Now you can see why: either we break it for sensible small scale promotional activities or we only apparently break it. All the times you have seen the words Games Workshop in the recent TV advertisements someone else has been paying for them. Nevertheless I do care a bit - and that care is a function of the focus and specialisation we must bring to what we do. We at Games Workshop must all in our hearts hate mass advertising so we are never tempted into the destructive downward spiral a dependence upon it would bring.

Our business model is robust and well proven over time. To attract more customers we must open more Hobby stores, work with more good independent partners; then we must provide customers with an experience they will enjoy for life. So far we have been successful in this: we aim to continue.

Shareholders
It has been my pleasure over the years as a director of Games Workshop to meet an astonishingly wide variety of individuals and institutions that either own shares or are interested in owning shares. The variety is not limited to their personalities but includes their reasons for wanting our shares. Those reasons, if they lead them to buy shares, affect their attitude to how we run this company. Let me tell you what that attitude is.

We are running this business for the very long term. (I use the term 'we' carefully; I am now speaking on behalf of the entire management team.) We expect it to be there so it can pay into our children's pensions. We will never do anything in order to improve our share price that is not in the long-term interests of the business. Not only do we believe this is the best way to build a business, we also believe it is the best way to enhance shareholder value over time.

Shareholders who want to buy shares that grow in value over time are true investors, they truly think like owners. Those who are seeking sudden, rapid increases in share price so they can realise a quick gain are gamblers. They are taking bets on our company. I think you will guess that we sympathise with our owners.

When I am asked about the future value of the shares I always explain that we believe this business can continue to deliver linear sales and profit growth (not compound, for that way madness lies). Over time I expect the share price to reflect fairly the value of the business we are building. More than that I cannot say. I don't have a crystal ball.

Our owners, quite rightly, ask from time to time what we intend to do with their cash. All the cash we generate belongs to our shareholders. Our attitude to that cash is as owners. Simply put: if we can't use it to generate better returns than the average over the long-term then we should hand it over. As it happens most years we generate more cash than is needed for the sensible investment in the business and the payment of the dividends. In those years we plan to return that money to our owners by buying back our shares. We believe it is the best way of returning the value to those shareholders who act like owners. Obviously as this is a policy designed to return owners' money to them it will never include borrowing to buy back shares.

Independent directors
I have learnt over the years just how valuable good independent directors (NEDs) can be. We are very lucky here to have three excellent NEDs, all of whom work very hard on your behalf. Chris Myatt is our senior NED. An accountant by training, a businessman by experience, he is a practical man by nature. Chris chairs our business committee in which the detailed performance of the business is raked over each month, and our remuneration and nomination committee. He never lets a detail go unexplained, and if I find that irritating from time to time you should find it very comforting. Alan Stewart was a senior merchant banker and more recently has been a very successful CEO of Thomas Cook. He chairs our audit committee. He is keenly (even aggressively) interested in ensuring shareowners get their due. Nick Donaldson is a senior corporate financier. A barrister by training he brings his forensic skills to chairing our City committee. This committee monitors the Company's interaction with the investment community. It also checks every word that the executives release to the world, in our half year and full year statements and at other times.

What impresses me most about these people, and what should give you great comfort, is their independence of mind. This is something all NEDs should have, but no list of rules will ever guarantee it.

The Games Workshop community
At last year's AGM we had a very welcome attendee. Laurie Stewart, president of the Gaming Club Network in the UK, is one of the very many unsung heroes of the Games Workshop community. Every day unpaid volunteers run clubs and organise events for the benefit of gamers. Without these people our community of enthusiastic gamers would be very much the poorer. I like to think the relationship is mutually beneficial, but nevertheless I tip my hat to these heroes and I trust that all Games Workshop's shareholders will join me in a heart felt thank you.

Chairman's preamble from the 2004 annual report
In my various guises (chairman, chief executive, school governor, parent, visiting professor, beer drinker) I am regularly asked: how's work, or how's Games Workshop doing? I usually just shrug and say we're trucking along like normal. Good, steady linear growth; no surprises, no problems. That's how it feels. The actuality is, of course, very different. During any year - and this last has been no exception - there are crises, major and minor; local restructurings; plans for new buildings; development strategies; plans for new markets and all the other fun stuff that everyone in business meets all the time.

The reason it feels so smooth and effortless to me is because of the truly remarkable staff we have. This isn't just me talking, it's everyone who takes the time to come and visit us and walk around to meet these people.

Good staff. Every organisation should have them. But how do we get them?

Firstly you can't have good staff if the working environment is poor. Either physically poor or emotionally poor. The physical environment is relatively easy to get right. The emotional environment is tougher. Nowadays we refer to this environment as the culture of the business. I would like to tell you why I think Games Workshop has a healthy culture.

We set high standards. That seems so obvious that it shouldn't need saying, but we actually mean it. We set ourselves high standards willingly and enthusiastically and we take them seriously.

In our internal handbook I wrote this about our corporate culture:

“I believe the culture of the business is founded on these things:

  • A determination to be cheerful and confident and passionate about this, the best of all possible jobs
  • An absolute commitment to the quality of our products and services
  • An absolute commitment to the niche market business model that requires that quality, that requires intense specialisation and that delivers our subscription model of profits and cash
  • An absolute belief that it is better to do what is right rather than what is easy
  • A problem solving ethic based on our belief that we can do anything
  • An ego-free environment, especially at senior levels; this leads to
    - Management who put the business first
    - Management who do not have private agendas
    - Management who welcome newcomers that bring skills we need with open arms
    - Management who are willing constantly to be self-critical but who are rightly proud of their achievements
    - Management who are willing constantly to criticise the business but who are rightly proud of its achievements
  • No fear”

It's important to say what you believe in. Until you do you cannot have ambition or agreement. At Games Workshop the vast majority of our managers agree that these things are worthy ambitions.

Recruitment, as you would expect, has to be done carefully. The more senior the recruit the more careful we have to be. If we are to maintain our healthy emotional environment we need to recruit more attitude rather than skill. We need the skills, of course we do, but we have to see skills as a given rather than decisive, and recruit for attitude. The attitudes we are looking for above all others are:

Honesty, Courage and Humility

The honesty to face up to reality, to know who you are, and to admit to your weaknesses. Without any of these you cannot learn or grow. This takes courage, as does much else in life. The humility is not self-abasement but the understanding that although we all stand proud as remarkable individuals the good of Games Workshop has to come before self-interest. When you join this company leave your overblown ego at the door.

When I give this speech to the various people to whom I am asked to give speeches, I am invariably asked about recruitment. Recruitment can be hard. At most levels within the organisation our staff are getting pretty good at it, but we still find difficulty finding the right kind of senior staff. It isn't just that we ask for high standards, we don't know of a foolproof way of finding the right people. We rely, instead, on a long-winded process that involves candidates spending time with us until they've met most, if not all, of the senior staff, and as many of our spiritual leaders as possible. It's a wearisome process for the candidates.

The reaction I often get when trying to explain these things is sceptical. No organisation can be that good. Of course it can't. We don't say we are all these things, what we say is that we aspire to them. These are our ambitions. This is how we would like to be, both as people and as employees. Aspiration is good for you. Both physically and metaphysically.

My role here is as chief aspirant. If I don't work hard to learn and improve, why should anyone else? But I am really only chief aspirant. The serious day to day work is all done by the great management and staff we have. This is why I don't like publicity, especially photographs - it's not because, as Rick Priestley keeps reminding me, I am a seriously ugly man, or because I am shy - it's that it gives the wrong impression to the world. Games Workshop is a true gestalt. It has value and credibility and a life that far transcends any one of us. It's simply my turn to be caretaker.

Chairman's preamble from the 2005 annual report
When reading results like these the owners of a business have to ask themselves: to what extent is this a trading cycle slowing for a while and to what extent is it due to bad management? If this is a trading cycle, what are the underlying trends in sales of core product? If this is bad management, what has been the effect on gross margin, net margin and cash? I hope that the rest of this document will give you the same confidence I have. Management is good and, yes, sales are simply reflecting the down side of a trading cycle.

Over the last two years Mark Wells, who took over the Games Workshop Hobby division in March 2004, and Paul Thomas, who is MD of our Manufacturing and Supply division, have begun to make their presence felt. Without the operational control over detail these men bring, a trading downturn like the one we have seen over the last few months would have had far more serious consequences for our profits.

I read these results with a certain amount of frustration: they are not good. Meanwhile, they could have been much worse. Most importantly, our underlying business is sound and seriously well invested.

When I returned to the business five years ago, one of the first decisions I had to make was: should we take a licence from the producers of the film The Lord of the Rings? It was touch and go. The arguments for doing so were: acquiring more hobbyists, acquiring more independent trade accounts, stopping someone else doing it, and going with the general feeling throughout the Company that we had to do this. It was the last that was most important in my decision to say yes, closely followed by the third. The first two I was more nervous about. Yes, we would get more, but for how long? Would it be permanent and, if so, at what level?

I should have been more optimistic. Not only was the product much more successful than I ever dreamed it would be (thank you Rick Priestley for a great game design), it has given us a valuable third product line to support Warhammer and Warhammer 40,000. Lord of the Rings product sales have declined faster than we anticipated after the unsustainable levels of the last two years, but we still see them contributing to our sales and expect them to do so far into the future.

I expect to be criticised when the Company does not do as well as is should. Earlier this year, we were obliged to announce that we did not think that the stock market's profit expectations for Games Workshop would be met. As a consequence our share price fell significantly. Amongst the comments made, one in particular struck me as interesting. I was asked what events I was going to engineer to make the share price go back up again. My position on this is quite clear. I, together with the management team, run the business - and the stock market decides what the share price should be. Both do their best to get it right but neither should try to do the other's job. Whether you are thinking of buying shares or thinking of selling them, rest assured I will do nothing other than run this business the best I can for the very long term.

I read recently a report on Games Workshop which represents a new and independent approach to analysis. I applaud this development. The existence of truly independent analysis is necessary for both companies and shareholders. The process whereby research is based upon what the Company says (inasmuch as it is allowed to) about its own future prospects - both in meetings and in 'analysis' - is, in my view, fundamentally unfair. Firstly, because it is us talking about our own future: whether wittingly or not we are going to produce information with the Company flavour. Secondly, it is information that is not available to all our shareholders equally. We make our presentations to the financial community available on our web site, but we do not visit in person every shareholder. We only visit a select few institutions, and most of those institutions do not in turn brief the shareholders they represent. The emergence of this kind of analysis I therefore welcome. Even so it has, as with most things, to be taken with a pinch of salt.

Soon, many UK companies are going to be obliged to make quarterly statements. It will double the burden in terms of executive time spent and costs incurred by the company and encourage even shorter term views rather than the longer term views we need. Combine that with the bias and selectivity of City briefings, I can see a time coming when we will no longer want to give any guidance at all.

What then of next year and the many years after that?

Later in this document you will see a graph showing our sales performance ever since I led a buy-out of the business in 1991. Not only does it illustrate well the recent over-performance of the business, it also shows that we have performed consistently well for a long time. This is what we should be measured on - long-term consistency. Back in 1991 I knew the venture capitalists that backed me were taking more than their fair share in both dividends and equity; but I was also confident that the business had a longer and richer future than they could imagine, and a little temporary pain was worth it. This is where we are today - a little temporary pain. All owners must form their own views but this owner is in it for the long term.

Chairman's preamble from the 2006 annual report
I've never done anything that's quite as much fun1 as running a public company. The intellectual challenges and emotional rewards, even in a year of declining sales, are always there.

This year has seen both sales and profits decline. The decline in sales was expected, but it has been hard to project accurately the amount. Most of the decline is due to the trading cycles I spoke about last year - partly product cycles and partly channel problems. Some of it, though, is our own fault. During the good times, when life is easy, it's possible to forget the good habits that earned those good times. All of us forgot some of those good habits, and some of us forgot all of them. This is something I have been working at all year (and much of the previous year) to put right. I believe there is now evidence that we are putting it right. The standards of service which built this company are returning.

Profits are down as well. With declining profits we had a duty to look at our costs. The key question we asked ourselves was: is this still a growth business? The answer was a clear 'yes' and so it would have been crazy to take out the facilities we had just built or those temporarily unprofitable Hobby stores. We never intended cutting costs so deeply that the infrastructure of the business that we need for our future growth would be damaged. Nevertheless the fact that profits aren't even lower than they are is due to Paul Thomas (Manufacturing and Supply division) and Mark Wells (Hobby division) who have managed the reductions in costs superbly, and far better and further than your chairman would have.

In a bad year the management and staff of Games Workshop have taken the opportunity to re-establish a lean and efficient company, one that will reward owners richly as growth returns and profit and cash start flowing again.

Hard times reveal the quality in a business and I'm proud to be associated with the people who run this one.

During the year I have been taken to task by some owners - both individual and corporate - over our (my) refusal to do 'something' about the share price. I believe I do 'something' about the share price all day every day and that 'something' is to run this company the best way I know how for long-term success. By long-term I mean 20 years or more. Leaving aside the dubious morality of trying to manipulate the share price on a daily basis (and my inevitable insanity) it is simply not practicable. Owners who share my view that I should focus all my energy on the long-term growth of the business will be pleased to hear that I will do nothing that is designed to engineer a short-term change in the share price. Owners who are disappointed by that news may wish to reconsider their investment positions.

On the 'investor relations' section of our corporate web site (which has all our annual reports since 2001, and the institutional presentations we make) there is a place where people can post questions for me to answer. Mostly they are about what new models we are planning (read White Dwarf), or why we haven't got a store in Omaha, Nebraska (yet), or why we put our prices up all the time (we don't) but every now and then I get one that touches on something that needs to be explained. Blair Svendson from Missouri asked '[why am I] seeing my favorite independent hobby stores going out of business?'. He was referring to the United States, and so is my response. This is a question that concerns all of us at Games Workshop - staff, managers, customers and owners. I'm not certain I know THE answer, but I have an explanation that fits the facts. Most of these small owner-manager hobby stores have thrived over the last 20 years or so on role play games, collectible card games (CCGs) and niche merchandise from fantasy movie imagery. Role play games and movie merchandise are in decline; CCGs can now be bought in mass market outlets which hurts hobby store sales. Many of these stores carry our products very successfully, but they are not enough to support the whole store. Additionally many of these stores are run as lifestyle enterprises rather than as for profit businesses; when times get hard they sometimes respond slowly and weakly which can be, and has been in many cases, disastrous.

I have written in the past about the basics of the Games Workshop business model and mentioned in passing that it is predicated upon the desire to own (lots of) miniatures. I shouldn't just mention it in passing because feeding this desire is the fundamental thing that we do. What causes these characteristics in people I don't know, but I do know that out there in the world is the gene that makes certain people (usually male) want to own hundreds of miniatures. We simply fill that need - it's not new (we didn't create it). What we do is make wonderful miniatures in a timeless and culturally independent way and sell them at a profit. Everything else we make and do is geared around that end. The games and stories provide the context for the miniatures, our stores are recruitment centres that simply give an opportunity to innate miniatures lovers to know themselves. Alan Merrett2 and I were sitting ruminating about this basic truth last week. I was reflecting on how it was sometimes hard for potential owners to understand the basics of the business and why it was so long term and resilient. He reminded me how many of the people who work here forget it. There is so much stuff going on: so many army lists, so many designs, so many kits, so many campaigns, so many events, so many new stores, so many independent stockists, so many management issues that even the people who work here can forget from time to time that all we are doing, every day, is selling more toy soldiers, at a profit, to people who are truly grateful.

At last year's staff meeting (which we hold annually to discuss the year’s results with staff) I was asked what interest 'the City' took in our environmental and community programmes. I said 'not much' which, given the number of questions I had had on the topic from institutional investors on the road show, was an exaggeration. On reflection I think this was a pretty poor answer. Firstly, I had forgotten the thousands of owners who do not benefit from a corporate road show who might care very much indeed and, secondly, I was dismissing way too lightly the enormous amounts of effort put into these schemes by Games Workshop staff. Later in this report you'll be able to read about these programmes. They are important to us for two reasons. Firstly, they are important because the good habits they demand usually result in better practices, which in turn lead (you've guessed it) to more profit. Secondly, and this is the bigger reason, they are important because they are the right things to do.

 

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