Although the announced sale of Asmodee by Eurazeo on Friday is likely to have greater repercussions, given the strength of the board game market and the importance of Asmodee, last week’s announcement by Wizards of the Coast that it would end its direct sales program at the end of August will likely have more immediate repercussions, at least for the next six months to a year, especially in terms of profitability of their products as the company also announced a reduction in gross margin of their products by about 2%, increasing the cost of a booster box of Magic: The Gathering by about $1.50 or so. Here’s how I see these changes affecting the game industry, insofar as it relates to sales of WOTC's physical products:
WOTC
By ending a program the company views as "anachronistic," while at the same time increasing its gross margin, the company cuts costs, increases profits somewhat and implements a more efficient distribution structure. Shipping out comparatively small orders of a few hundred dollars (parent company Hasbro requires minimum orders at the 4 figure level) costs the company a lot, in terms of both time and money. Turning the process over to the distribution tier, which operates much more efficiently today than it did in the 1990s, allows WOTC to focus on making and promoting their product lines, while distribution focuses on getting them to stores and ultimately consumers. WOTC has also mentioned stores getting dedicated sales representatives, so we may see more outreach by WOTC to retailers, similar to the sales representatives Asmodee NA has in place through Alliance.
Distribution
This is the segment of the channel that will see the most benefit from the shuttering of WOTC direct sales. I have already received a number of email blasts from assorted distributors soliciting the business of those retailers that dealt extensively with WOTC. A substantial number of retailers placed direct orders with WOTC, both because of the slightly greater discount and because WOTC would often have product in stock that distribution did not. Those retailers will now have to shift their business to distribution or drop WOTC’s lines and that won’t happen. The increased costs of WOTC products means distribution will have to pay more for their products but it is far easier for them to pass along the increased costs to their customers than it is retailers.
Retailers
This tier will see the greatest negative change, at least in the immediate future. Those who purchased much of their WOTC product directly will now have to find another source (happily, there are lots of distributors out there willing to be that source). Profit per item on WOTC products will drop and 1) since WOTC products are essentially commodities and 2) have an MSRP, retailers will find it hard to pass along price increases to their customers, meaning stores will have to absorb the drop in gross margin. Will this cause any stores to drop WOTC products? No, but it certainly won’t help those stores with Magic as a major component of their product mix. I do expect to see an increase in price on Magic and other related products at mass market stores, as they are much less reliant on WOTC product and thus more willing to pass along price increases to their customers.
Consumers
As noted above, if they buy WOTC products from mass market stores such as Walmart and Target, they will likely see a price increase as WOTC products are much less important to the company’s bottom line. Customers that purchase from specialty game stores will likely see no change in pricing or availability as competitive forces will keep those stores at MSRP or even lower, in order to maintain market share.
So overall, good for WOTC and distribution, neutral for consumers and slightly negative for retailers. WOTC has cut its margins before and retail weathered it. However, next time WOTC, instead of cutting margins, how about raising MSRP?
The opinions expressed in this column are solely those of the writer, and do not necessarily reflect the views of the editorial staff of ICv2.com.
