THE CRITICAL ROLE OF ACQUISITIONS IN TOY COMPANY GROWTH

Mattel purchased Mega Bloks for approximately $460m USD back in 2014. Hasbro acquired Power Rangers for $522million USD in 2018 and E1 (including Peppa Pig) for around $4billion USD in 2019. But it isn’t just recently that these long-established behemoths of the toy business have been on the acquisition trail, the history of both companies is littered with acquisitions.


Looking at other companies – MGA Entertainment acquired Little Tikes back in 2006 and of course Spin Master have made numerous purchases over the last decade or so with Rubiks being among the most notable of those.


Here’s why acquisition is always a big part of growth strategies for toy companies – it takes years, if not decades to build strong toy brands. Once a toy company gets to the size where they can access more advanced financing options, it often makes more sense to buy another brand or company than it does to proceed with a risky new launch in a category not previously entered.


For those building companies and brands with a desire to eventually sell up and cash out, there are many companies out there looking to buy ready made opportunities. If you’ve only recently started, you would need something quite special to get a quick sale most probably, but anything is possible!

Did you know we offer an acquisition Consultancy and agency service? For established businesses with something to offer that companies will want to buy we can potentially help. For more information, or to get in touch: www.KidsBrandInsight.com

WHAT ELECTRONIC ARTS DITCHING FIFA CAN TEACH US ABOUT BRAND LICENSING…

FIFA has been a massively successful video games franchise for decades now for Electronic Arts. In fact, your author once interviewed to manage the brand, back in the early noughties, coming a close second to the winning candidate!


FIFA delivered $1.6bn in revenues to EA in the financial year ending March 2021. That’s a big chunk of their revenues, and so to make such a fundamental change, and to drop the FIFA name has to be seen as a major financial risk. However, FIFA were reportedly demanding to double their receipts from the game to a whopping $1billion.


Needless to say, there have no doubt been all kind of conversations behind closed doors to try to get a deal done that worked for both sides, but in the end, EA have decided to go it alone. This seems to offer a big lesson on brand licensing, which could be that Licensors can kill their own golden goose if they are not careful. EA already reportedly have deals with the major national leagues & with UEFA for the Champions League, and so the question is what is the value of the FIFA brand & IP? Football is a massively tribal sport, and fans care first about their teams and star players, and the video games player cares about that plus perhaps the glamour and kudos of the top players in the world. In the end, there may not actually be that much value in the FIFA name, or at least not enough to merit $1bn.

That is not to say that EA won’t face risks with their new ‘EA SPORTS FC’ title. For those old enough to remember, FIFA (the game) once had major competition from International Super Star Soccer, which morphed into Pro-Evolution. Looking back in time, Pro-Evo was a far better game, but they didn’t have the license or the star players, which FIFA did, and over time EA fixed the gameplay to make it as good as Pro-Evolution, and maybe better. The key thing to note here is that a worse game with branding and star players won a head-to-head battle.


The key question going forward will be whether the star players, national leagues & UEFA champions league will be enough to propel EA to ongoing success versus whatever official FIFA versions EA’s competitors are willing to pay to produce.


In the end, FIFA can’t fail but to lose out though, because at the very least the effect of these changes will be to split up the video console football (soccer!) revenues between multiple titles. And it seems unlikely any other company would stump up $1bn, when EA will be directly competing. The Golden Goose may be about to downsize, and in that should be a lesson for Licensors in general, a lucrative bird in the hand, is often the best option.

THE GLOBAL TOY MARKET STRUGGLES TO BEAT INFLATION IN THE FIRST THIRD OF 2022

NPD Group’s star analyst in Europe, Frédérique Tutt, recently posted a blog post looking at what has happened in the toy business in the first part of 2022. Following some good years for the toy industry during the Covid pandemic, Tutt reports that global sales were up just 1% year on year for the months January to April 2022.

https://www.npd.com/news/blog/2022/the-compelling-value-of-the-global-toy-market/


While a performance which is more or less flat year on year would not normally be seen as a negative thing, especially when the previous few years were so positive. The issue of course at the time of writing is that we are seeing high inflation rates – 8.3% year on year for the USA & around the same for the UK. These official interest rates tend to significantly underplay reality, as the list of items which are tracked to monitor inflation often exclude items with high inflation. In the UK currently for instance, household energy bills have soared massively in excess of the official figures, as have fuel prices at the pumps for fossil fuel powered vehicles. The true inflation figures I suspect could be as much as double what is being reported by governments.


The issue then for the toy business is that when inflation is so high, an increase of market value of 1% is in fact a decrease of at least 7%, if not twice as much as that in ‘real terms’ taking account of inflation and the devaluing of consumer disposable income.

I am known for being an eternal optimist, with some of the more cynical souls in our industry rejecting our content output for being overly optimistic. Bearing in mind my natural propensity for optimism about the prospects for the toy business, I am concerned for the first time in more than 20 years in the toy business that we could see the first significant market reduction in all that time. Our industry which is so famously resilient to tough times, made it through the dot com bust of the turn of the millennium, the global financial crisis and the Covid pandemic. However, we have not seen such high inflation since the 1970s, and when consumers are struggling to find the funds to fuel their vehicles, struggling to heat their homes and struggling to pay for food and other costs which are in an upward inflationary cycle, the prospects for toy sales must surely be lower.


We know that toy pricing has gone up & will go up more, but I don’t see that as a fundamental problem, because our retail pricepoints have been kept artificially low for years by price pressure from big box shifting retailers. On a comparable basis, toys & games, even at higher pricing represent good value for consumers versus other product categories and their comparative price inflation over time. The issue is more one of Maslow’s hierarchy of needs. Quickly explained, Abraham Maslow modelled human needs, with the more basal needs coming first, and then moving upwards to less physical, rudimentary needs. The issue we have now in the toy industry is that if consumers are pushed further back down the hierarchy of needs by inflationary pressures on their household finances, then it could have a negative impact on demand.

I sincerely hope that I am wrong, in fact I will be delighted if I have got this wrong, but it looks like to me like 2022 could be a tough year for the toy business, and we may be in for a couple of tougher years than we have experienced in my couple of decades in the toy business. It could be time for toy companies to batten down the hatches and ride the stormy waves ahead…