The European Toy Market – Large But Fragmented!
The European market might appear exotic and potentially lucrative at first glance. With the 2nd and 3rd biggest retailers in the world based in Europe (Carrefour & Tesco), with a population of c. 730m and a combined economy ranked by the IMF as the largest in the world, it is an opportunity too big to ignore.
Those wandering over there bright eyed with $$$ signs in their eyes however, should beware, because while Europe combined is huge commercially speaking, it’s also highly fragmented, and very easy to bite off more than you can chew. There is a large degree of homogeneity (in practical terms) about the US market for instance, but Europe doesn’t work like that.
While Europe may be of a similar(ish!) size geographically speaking to the USA, there are 44 sovereign states with their capitals in Europe, and 50 who have some territory within Europe. And for every one of those there are local customs, laws, retail differences, and in general bucketloads of cultural, legal and commercial diversity.
Furthermore, there’s a very significant language barrier to doing business, with 23 official languages of the European Union, and a mind blowing 230 languages and dialects in total. An English only speaker can’t always easily operate in every market as a sales person. To illustrate this – imagine you want to sell to retail in France or Spain, but you don’t speak French or Spanish. What can you do? You can dial head office anyway and speak English, but as we all know, it’s often fruitless calling retail switchboards in markets where you can speak the language, it doesn’t get any easier when they don’t speak the same language as you!
You can engage a distributor, which generally would be recommended to begin with, but there are market dynamics at play which complicate matters. For instance, if you sell to 2 distributors, with one in France, and one in Benelux (Belgium, Holland and Luxembourg), then their retailers might overlap territories, and generally pricing is lower in Benelux, so grey market shipment by retailers could destroy your French business and leave you with an irate, alienated distributor.
Of course product localisations are needed, with some markets needing 3 languages per product or more, and in the same way as a typo would look outrageous on English language packaging, so an error in any one of those 23 official languages will also.
Our journey to securing European distribution has yet another hurdle to over come yet, in terms of customs regulations and movement of goods. Now the good thing is thanks to the European Union, trading is harmonised across EU member states, with a mostly effective ‘free’ market in operation. The challenge comes when trying to ship in Europe outside of the European Union, which at the time of writing means Iceland, Liechtenstein, Norway and Switzerland (the EFTA countries – don’t ask!), Russia, the Ukraine, Croatia, Bosnia, Macedonia, Turkey & Belarus. Now frankly, the majority of the opportunity is within the EU countries, especially UK, France, Germany, Spain & Italy, but every extra roadblock laid reduces the low hanging fruit.
As if this wasn’t all complicated enough so far, currency is another major factor. The UK has the £pound, the other EU states mostly have the €Euro, stock is bought from China in $USD, and there are a litany of other local currencies to boot (most notably in Sweden, Denmark, Poland and Switzerland)! Currency management is a vital part of trading in Europe, if you don’t want to deal with that complexity, you’d be wise to trade $USD FOB only!
Staffing is even more complicated with different employment laws in each country, as well as European wide legislation which tends to be more employee friendly than in North America. Commercial agents have guaranteed residual commissions owing to them across the European Union, so beware on that front. And if you considered hiring staff in France, my advice would be don’t do it lightly without due diligence. There is a disgusting but perhaps not inaccurate saying that it’s easier to chop off your own hand than to fire a French employee!
There are numerous other significant barriers to doing business which I don’t have space to go into here, but nevertheless, we can clearly see that while the opportunity is large in Europe, it’s not that straightforward, and ‘gung ho’ megalomania should be tempered with a harsh dose of practical reality!
Having emphasised the difficulties, there are some clear forward paths we can look at now. The first and most prevalent of which is to utilise distributors, at least in the first instance, who understand the local nuances, have the retail relationships and take legal responsibility for trading in each market. This may not be a long term strategy you are very comfortable with, but it took even the Hasbros & Mattels of this world decades to set up an office in every decent sized market in Europe.
The second option is the ‘beach head’ strategy, whereby you pick one market to trade direct to retail in, thus establishing your beach head and branch out from there over time. For English speaking companies e.g. from North America or Australia, in most instances the beach head market would be the UK, as we tea drinkers speak (nearly!) the same language, the Licenses tend to convert as well here as anywhere (although we don’t play the same kind of football, so sports doesn’t tend to cut it), and this is one of the three biggest individual toy markets in Europe. Latin American companies may head to Spain first as their beach head market due to language similarities.
The third option is to sell to distributors and retailers on an FOB basis meaning only outlaying the cost of two sets of air fares and hotels at risk, versus everything that comes with setting up offices.
And in case you’re already established in one or more EU markets, here’s my rough list of priority for your distribution efforts and why (although this will depend to some degree on your product category, as category strength per market varies, it’s not a bad starting point):
The UK, as mentioned is one of the three biggest markets. France of similar size as a toy market, although with significant local challenges & diversity factors. Germany would be next on my list, it’s a large market, but very decentralised, and retail is massively fragmented – in fact Germany is home to the largest specialty market in Europe, plus the product mix tends to differ in Germany versus many other markets. Spain would be next, although expect to TV advertise everything, closely followed by Italy. Then the next tier would include the Nordic countries, Holland, Poland, the Czech Republic and other markets East of Germany!
Rolling out all those markets would keep most businesses busy for a decade or more, so I’ll write another article in 2022 with some suggestions on where to go to next!