aka_mythos wrote:
The fact margin on existing products needs "improving" only shows how much more markup their newer products have and it also shows something about their practices or accounting are screwed up. For every product there is some threshold where the distributed costs of product development and tooling are paid off and the per piece margin goes up. Existing products should have hit that point and received a significant bump in margin as a consequence. Either they have and GW's newer products are just priced at even crazier markups than we imagined or GW's actual development costs are much much lower or GW needs to hire a process engineer to rethink their production work flow.
One of the issues is that the cost of goods sold is actually pretty high for
GW even after the initial capital investment is paid off. The tooling and up front design is certainly paid off on older products, but when you look at the actual tooling costs in the report they're actually low. Like 3 million pounds a year or something. So even if they recalculated the margin on the older products to no longer include their design and tooling costs, the actual production, packing, distribution, marketing and administration costs is what's causing them to want more money per unit sold on existing stock.
And the mark up on the newer releases has been pretty crazy. Some 10 miniature boxes are 15 pounds but many new ones are 25 or 30 pounds at retail.
GW seems to approach this with the mind set the "sooner we get there the sooner we get a greater profit", but they don't have any interest in pricing to get there sooner. They would rather sell 10,000 units for full price then 20,000 units at 90% the price, or 30,000 units at 80% the price. Taking it to a hyperbolic extreme GW's pricing mentality is a race to the fewest customers; they would rather sell 1 model for $40k than 40,000 models for $2 a piece. Part of this is perception control and not wanting to be seen as a disposable or lower value product, but it isn't as if we see how they come to set their prices anyways and most would continue having this perception if they held prices where they're at. We just see what they've made before, what those things cost, and what the new things costs.
There's definitely a disconnect between having your business built around injection moulded plastic where the marginal cost of the next sprue is both tiny and always decreasing on average and premium pricing. When
GW is growing thanks to their internet marketing and dealing well with trade accounts, the demand can totally deal with the high prices. But as
GW showed for a decade, when you aren't growing, their pricing model destroys demand rapidly. Those years where they were jacking up prices across the board 10%+ a year and sales were stagnant and even declining meant their actual volume of kits sold and some combination of the number of customers and how much they each bought were all declining rapidly. I'd say over the last half decade of Kirby,
GW could have easily lost a full half of their customers, perhaps more. If you basically double your price and have flat revenue, you're selling half as much.
There is some price where the units sold times the price gives the greatest possible revenue. I think that number is outside the bracket
GW has set because of their margin goals. It's entirely possible that their revenue and profit would be maximised at margins they ran with during the
LOTR years. However, that would result in drastically lower return on capital and make them very vulnerable to any sudden change in volume. And since trade sales are making up the bulk of their new growth and trade sales are products that might not yet be in customer hands, the growth could stop at any moment.
GW even acknowledges this in their report with Rountree saying he can't in any way guarantee that growth will continue in the next reporting period.
I think a lot of the high pricing comes from their very apparent inability to estimate demand and necessary quantities. GW really doesn't like to keep more than a minimal amount of stock on hand.
In a way, they shunted this onto other retailers. Trade is the fastest growing and the largest sales channel, but each sale there isn't directly to a customer. At any moment stores could go "actually my shelves are pretty full, so I'll just take a couple of each new release this order" and the growth vanishes. There's probably a massive amount of
GW inventory out there that's already been counted as sold in terms of
GW's financials but hasn't yet made it's way to customers. And as some portion of those products are true dogs, shelves can eventually fill up with the worst product. One store local to me still has 3 copies of speed freaks on the shelves and an entire unopened case in the back. I don't know if
GW has a buy-back policy.
They estimate low, sell out of products, and they do so frequently. They would rather underestimate than overestimate their needs. That means they lose out on sales, and end up with a lot of revenue opportunity uncaptured. So they never even see the opportunity of capturing margin with higher volumes. GW's mindset requires them to shoot for a perfect estimate, where if they think the consumers want 10,000 of something at GW's price, GW only makes 10,000. Most companies do not want their products to sell out; selling out means odd are a company has failed to meet its customer's needs and promotes piracy. Most companies expect there to be left over product that will be marked down and sold to the more price sensitive customers; the way GW is, that doesn't really factor into it.
GW definitely manages their risk. It's why they are so focused on margins. They would rather reliably sell out a new release at a higher price and lose some potential sales on volume than risk losing actual money on narrowing margins. The money they leave on the table only happens when they are already succeeding and have sold out a production run. That only translates into real losses if you also have narrow margins and the money you could have made would make the difference between profits and losses. The break even point for
GW in terms of units sold is far lower than for a product priced for volume of sales. A badly selling product (like Speedfreaks) may have still sold enough that they broke even on the thing thanks to their aggressive protection of margins.
And then add in that they are operating at capacity. They simply can't actually take advantage of the declining marginal costs of injection moulded plastic if their machines are operating non stop and they are making as many products as they can while getting the electical grid upgraded and another building built. What would lower prices to increase volumes accomplish at this point? The same sales (the maximum they can produce) but less money for the same amount of product. You can only take advantage of volume increases like that when you have the capacity.
