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The Power of Passion

How Customer Loyalty Drives Long-Term Value

Justin Warton
Justin Warton

Few customers are more passionate and valuable than the dedicated hobbyist. These high, recurring spenders act as a top-of-filter recruitment mechanism for new customers entering their hobby. But this doesn’t mean companies can take these customers for granted, and history shows the missteps of testing customer loyalty at the altar of short-term profit maximisation. Games Workshop is a Quality Franchise that is a good corporate steward of a hugely valuable IP asset who understands the significance of focusing on the customer to generate long-term shareholder value.

When I was younger, I was obsessed with Dungeons & Dragons (D&D). I’d buy every rule book, novel, and associated video game for years - anything I could get my hands on. Playing (or thinking about playing) D&D took up most of my weekends and school holidays. I was a passionate, loyal fan.

In 2008, Wizards of the Coast (WotC), the owner of D&D, released the '4th Edition' without much community playtesting or input. It was a complete overhaul of the game, focusing on a grid-based combat system that practically required players to either purchase models or play the digital version of the game. 

However, the promised platform never delivered as envisioned, and the new format no longer felt like the D&D we knew too well. Nowadays, I still have a collection of twenty-sided dice on my bookshelf, but it's nothing more than a gathering of dust.

A passionate customer base can be a valuable resource driving a firm's Sustainable Competitive Advantage (SCA). However, passion alone cannot sustain this advantage. Even the most dedicated hobbyist can lose interest if the relationship is not properly managed. 

Passion is valuable, yet it is not immutable.

Passion Latches Onto IP

If you wander into any hobby games store, you’ll find a handful of brands that take up the majority of shelf space. These brands have been around for decades, building large and passionate customer bases. Most store managers will tell you that their highest-selling product is Magic: The Gathering (1993) or Warhammer (1983). Combined, these games usually represent >50% of the store’s sales, and when including Dungeons & Dragons (1974) and Pokémon (1996), that number is probably north of 80%.

It’s not a coincidence that these four dominant franchises have been around since before the turn of the century. These are multi-decade stories of customer goodwill accumulation. It takes a long time to scale a customer base, and we see both network effects and winner-takes-most dynamics in these markets. 

Games Workshop (LSE: GAW) owns and distributes Warhammer, a table-top miniature wargame that is by far the most popular game of its kind. Players gather in person and act as generals moving their ‘armies’ of miniatures around the board. The face-to-face nature of the game matters because it means that there is an extra advantage to a scaled player base that can’t be solved digitally. 

Importantly, to play the game, you need to be able to find other people in your area to play with - more players make this easier and make the hobby itself more attractive (network effects). Moreover, this motivates any potential new customer interested in tabletop gaming to take up Warhammer specifically (winner-takes-most).

Passion Must Be Managed

The four franchises identified above benefit from passion-based advantages, and their multi-decade audience-building efforts represent meaningful competitive moats. However, as passionate as these customers are, they still require careful management to keep people within the ecosystem and to attract new players. 

For companies that leverage customer passion for profit, there is often a conflict between maximising the short-term monetisation of a customer and maximising their lifetime value, and companies don’t always get that balancing act quite right.

WotC, a subsidiary of Hasbro, owns and publishes Magic: The Gathering and Dungeons and Dragons (D&D) and has been running into some of these challenges recently. WotC attracted a spate of negative headlines earlier in the year after news leaked that they planned to make several changes to their Open Game License (OGL). 

The OGL, which allows independent parties to publish third-party content in part based on the core D&D ruleset and game information, was to be changed in a way that significantly restricted what was allowed under the license, limited monetisation and would provide WotC with a perpetual and irrevocable right to use third-party content for any purpose. 

The amendments to OGL caused widespread fan backlash, Twitter campaigns, and a wave of cancellations of subscriptions to D&D Beyond - the official digital toolkit for D&D, whose monetisation was the apparent motivation behind the decision to change the OGL. Ultimately, WotC formally apologised to fans and abandoned the attempted changes.

However, this isn’t the only controversy WotC has faced, with the company also causing a stir around releasing the commemorative Magic 30th Anniversary set late last year. Marked as a way for the community to celebrate their hobby but priced at US$999, the release came after a series of poorly received Mythic and VIP Edition Booster Boxes, criticised by hobbyists who felt a sense of disenfranchisement at being ‘priced out' of their hobby.

These examples highlight the risk of losing focus on satisfying your customers. Hobbyists suitably turned off by a corporate drama will often not return. Short-term profit motives must be tempered by actively cultivating a healthy community environment.

The (Old) And The New Games Workshop

Over its history, Games Workshop has also had periods where its relationship with its customers was strained. For the decade to 2016, Games Workshop struggled to grow its revenues as the business had lost touch with, and the faith of, its core base of passionate hobbyists. When releasing new editions, management pulled the price lever too hard, leading to negative community reactions, which saw large cohorts of players leaving the hobby.

In 2016, Kevin Roundtree was appointed CEO and brought the necessary strategic change to accelerate top-line growth. The company’s mission statement was rewritten to include the clause “to engage and inspire our customers”, players were re-engaged through myriad social media channels, genuine discounts were introduced in the form of Starter Boxes to attract new players into the hobby, and new editions were released with collaboration from the hobbyist base. 

These changes marked a significantly new strategic direction, and in press releases, the company even referred to themselves as ‘The New Games Workshop’. Management had demonstrated that they understood that better customer relationships would strengthen their customer base, helping drive repeat business and positive word-of-mouth marketing. After a decade of stagnant growth, the company has seen a ~20% Compound Annual Growth Rate (CAGR) of revenues over the last five years.

A clear example of The New Games Workshop comes from their strategic approach to international store rollout. The business sells its product through company-owned retail stores, trade partners, and online. Retail stores are particularly important to the business model because they are a key channel for engaging with the player base and introducing new players to the game. Store managers are themselves passionate hobbyists who, in effect, act as leaders of both their stores and their local Warhammer communities - highly influential brand activists.

Games Workshop is significantly under-penetrated internationally, with 135 retail stores in the UK and (only) 165 in North America. At ECP, our research has consistently found that when a new retail store is opened, it generates revenue within 12 months, and trade accounts in the catchment area also increase their sales of Warhammer products. 

Games Workshop benefits from community network amplification when opening a new retail store. There is, in effect, a reverse cannibalisation rate of the trade network - a powerful attribute of passion-based competitive advantage.  

The 'reverse cannibalisation effect' is a testament to the remarkable competitive position of Warhammer. While some companies view this as an opportunity to rapidly open new stores, Games Workshop has taken a different approach. In 2022, the company only opened four net new North American stores, managing its network growth to ensure it can deliver on its customer engagement strategies.

For Games Workshop, the limitation is not finding locations but finding the right store managers, who mostly operate single-employee stores. Because the store manager plays an important role in growing the local customer base, Games Workshop is extremely hesitant to put the wrong person in a location and risk ‘poisoning the pool’.

Management clearly focuses on their customers - engaging, satisfying, and keeping them in the hobby. There is an active sacrifice of near-term sales to build out locations and customers in the right way - the way that maximises long-term value creation.

Managed Passion Is A Sustainable Competitive Advantage

At ECP, we look for companies with Sustainable Competitive Advantages. For us, a passionate customer base can be a valuable, rare and inimitable resource that underpins an SCA. However, identifying these passionate and loyal customers is only one piece of the puzzle, and holistic customer engagement is the Dynamic Capability required to sustain a competitive advantage over the long term. 

The article has been prepared by ECP Asset Management Pty Ltd (ECP). ECP is a funds management firm based in Sydney, Australia. For further information, visit This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for financial advice. ECP and the author own shares in Games Workshop Group PLC. ABN 26 158 827 582, AFSL 421704, CAR 44198.

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