Innovation Versus Following The Formula In The Toy Biz...

Innovation Versus Following The Formula In The Toy Biz...

We talk about ‘Innovation’ often in the toy industry. The need to innovate to compete is supposedly paramount - when between 50% and 75% of all toy SKUs are new each and every year, there is indisputably a need for a relentless product development or product sourcing pipeline. Yet we often confuse the terms ‘innovation’, ‘blue sky’ and ‘ground breaking’ as being exactly the same as ‘new’.

The reality is new products are not always that original. I have been unable to find a robust analysis of what percentage of products in market are completely fresh and original versus following an already proven formula, but experienced toy people tend to have seen the ‘same old thing’ work time and time again. And so then the question becomes why would we ever originate something fresh with all the inherent risk involved, when we can follow the ‘me too’ approach?

When we look at the consumer lifecycle in the toy business, this becomes even more of a salient question – because we are dealing with children at a particular time/age in their lives, they come into our product ranges, and then comparatively quickly versus other industries they move on. This leads us to a new generation of toy consumers. This cycle occurs every 3 or so years, meaning that the new generation of kids experiences our brands and product ranges for the first time in their lives. So why would we ever bother to create completely ‘new’, when we can rehash the ‘new’ from a few years back and continue to sell our products?

The most striking counter argument here is that hit product often provides the impetus for growth in the toy industry, and those companies with massive hits on their hands can experience a huge sales uplift, or at least see gaps in their business filled by the all new innovations. So clearly there is a place for the kind of brilliant innovation which brought us new inventions such as Furby or Connect 4. In the case of Furby, we have recently seen a new generation of consumers introduced to the brand anew, with the product itself being hugely enhanced by new technology. This shows that yesterday’s completely new news can become tomorrow’s perennial brand (with updates and tweaks) in an industry where known brands are the pillars of long term stability for toy companies.

There is clearly a downside to chasing the hits though – that being the high level of investment including: R&D/royalty costs, inventory risk, marketing expense, opportunity cost and risk to retail goodwill if products fail. We operate in a classic ‘hit or miss’ industry, and alas the misses will nearly always significantly outnumber the hits over a period of time. So if you are in that business, be prepared for a roller coaster ride, and ensure you have the capital to place multiple bets on new product lines in order to increase the odds in your favour over a number of product launches. Nevertheless, if you choose to play that game, you are only ever as good as your last hit, so be prepared for a bumpy ride!

One fact I have seen proven over and over again in my time in this business is that those companies which ONLY play the ‘hit or miss’ game are the companies who see the wildest swings between success and misfortune or as Frank Sinatra put it “You’re riding high in April, shot down in May.”. The companies that secure a significant proportion of their sales (to at least cover their overhead) on proven product formulae, while placing a few carefully considered bets to chase the hits are normally the companies enjoying most longevity.

So overall, while we often speak of innovation in our industry, we should be clear about the part this plays, and also be clear about what is innovative in reality. Fundamentally we should be clear what the goal of innovation is – otherwise we may be safer (in business terms) replicating a known formula. Perennial themes such as monsters, dinosaurs, zombies, ponies and horses, good versus evil, super heroes and villains – all of these known perennials can be seen as safer bets, as they have been proven time and time again. Of course, execution is still key, and if you can follow part safe formula and part innovation by adding technology or functionality/positioning value, then you can seek the right balance for ongoing success.

We run a Consultancy business helping toy & games companies get ahead. For more information, check out www.KidsBrandInsight.com/services

We also run a Strategic Sourcing Consultancy advising toy & game companies around the world on their Sourcing strategies, reviewing their vendor base & suggesting improvements. To date our Sourcing services have saved our clients $tens of millions. For more information on how we can help, just go to: www.ToyTeamAsia.com

Prudent Licensing For Toy Companies

Prudent Licensing For Toy Companies

In our industry, where achieving retail listings can be so difficult, and where over stocks can literally kill a company, there is often a tendency towards ever increasing reliance on licenses to ensure products are a). listed and b). then sell through retail. Retailers prefer proven brands, as experience shows that consumers often prefer to buy brands they know, trust and love versus purely generic product. Retail is a hard trade, and retailers are often much maligned by toy companies for refusing to take risks, but when you are set to make a comparatively small percentage margin on a product bought at risk, this does not encourage a risk taking approach!

The issue for toy companies is that while extending licensing may seem to be the ‘magic button’ in terms of driving quick sales, it also brings with it significant risks and counter challenges to deal with.

RISKS OF LICENSING

1. Up front financial commitment – for a license with any strength, a minimum guaranteed, non-refundable payment will be expected/required by the licensor. This is a risk from 3 perspectives: a). increasing the financial risk of launching a new product in the instance where the product launch fails b). cash flow challenge, as you pay the advances up front some time before you can expect any pay back c). under recouped guarantees (i.e. where your sales don’t exceed the amount needed to recoup the guaranteed amount at a reasonable royalty rate) – this last factor is the bane of finance departments!

2. Loss of focus on your own brands – the reality is that the majority of the value in your company will be driven by your own brands – in terms of brand equity, long term stability and profitability. Yet if your sales team has some super hot license which everyone loves, you need to pay special attention that they use the ‘must have’ products to leverage additional listings for your own brands.

3. Beware the downward stretch of the roller coaster – the strength of most licenses will ebb and flow over time. Moreover, sometimes you may have a super hot license in your portfolio which drives huge sales. The challenge is that this in itself can create more problems for you, because no license sells at super hot levels forever. The massive movie franchises have slower years when there is no new release, the fads & crazes can reach peak sales for a while, but always cool down eventually. So if you suddenly find in a hit year that you have sales of perhaps 200% of your usual sales, the next year you may be back to 100%, or even less if your organisation has not planned for the down cycle of the license.

4. Licenses come and go – even if you manage to find that rarity of a license which has both huge appeal/sales driving impact AND longevity, licensors are unlikely to guarantee you the rights for longer than 3-5 years at most. More often than not, the end of a contracted licensing period sees a new licensee take over a product category, so beware the treadmill effect – if you play the licensing game, be willing to run the ‘hamster wheel’ to maintain your licensed brand portfolio.

5. Not every licensed brand or product works – strong licenses help to sell more products, that’s a proven fact in general, but beware the exception that breaks the rule – clearance stores are full of licensed products, some of which has just had it’s time, some of which just didn’t sell.

6. Not every licensor manages their licensee portfolio ‘fairly’ – the term ‘slice-ensing’ is used to describe a situation where a licensee tries to slice up the ‘pie’ into too many pieces, leading to poor opportunity or very muddied waters for the licensee. Beware what rights you are getting, and ensure they cover what you need. It is normally prudent to be sceptical of vague promises not to over license versus contractual stipulation!

There are three paths you can take in this business: 1). To pursue building your own brands only – this is often a long and difficult road, but ultimately fruitful…IF you make it. 2). Build a business based solely on licenses – this can be a quick starting, quick boosting approach, but beware building a business based on foundations in sand. 3). Combine both prudently for long term and short term success.

The last option would be the recommended course – if you look at even the corporate giants, with their huge portfolios of proven powerful brands, they still have a licensed portfolio – often around 25% of their total sales are licensed based, despite the vast riches of own brands they poses.

We run a Consultancy business helping toy & games companies get ahead. For more information, check out www.KidsBrandInsight.com/services

We also run a Strategic Sourcing Consultancy advising toy & game companies around the world on their Sourcing strategies, reviewing their vendor base & suggesting improvements. To date our Sourcing services have saved our clients $tens of millions. For more information on how we can help, just go to: www.ToyTeamAsia.com

It Takes Time To Build In The Toy Industry…

It Takes Time To Build In The Toy Industry…

Newcomers to the toy industry are often unpleasantly surprised by the timelines – by just how long it takes to get things done. At the time of writing (September) most companies are beginning the sell in process for products which will hit shelves in around one year’s time. For those who enter the toy industry from other industries, this elongated process can seem bizarre at best, and highly obstructive at worst.

For certain, when it comes to setting up and building new toy companies, one of the major challenges is just how long it takes to complete the process and receive the funds from sales. If in the meantime the founder has to live, eat and play then we have a potentially huge barrier to entry for any one without significant capital at hand.

Even when a company is established to some degree already in sales terms, it can take some time to reach critical mass, and sometimes even longer to reach profitability. One client company we consulted with had virtually no sales in the first year of trading, some sales in year 2, very good sales in year 3 (but significant loss), breakeven in year 4, and finally profit in year 5. That’s a very long time to deliver a profit! Moreover, this is not entirely uncommon - it takes time to make progress in the toy business.

One major reason for this is that retailers are not keen on taking on new suppliers in most circumstances. New businesses must build a distribution base from the ‘ground up’. This process varies massively depending on which market the company begins in – for instance in the UK (my home market) there is a comparatively small independent toy shop sector, with the vast majority of sales being via national chain retailers…exactly the type of retailer which tends to prefer not to take on new suppliers. So in the UK market the new toy company tends to work hard to build a limited distribution base, and from there normally companies will tend to add a few national retailers during each sales cycle i.e. a few new customers per year. So we can begin to see why it takes so long to become established. – it can take 5 years, or sometimes longer to reach full distribution.

There are shortcuts in terms of distribution – distributors with existing trading accounts can get the products of a newer toy company on shelf, but this comes with challenges in itself – lower margin, less control, less focus – not always a recipe for success. It is not unusual for companies to start with distributors, before eventually taking back the business to supply retail direct with now established products, yet even this takes time.

Furthermore, when we look at the giants of our industries, we see further proof of just how long it takes to grow a successful toy company:

Hasbro – originally founded as Hassenfeld Brothers in 1923 as a company selling textile remnants, began selling toys in the 1940s, before shortening the name from Hassenfeld Brothers to Hasbro. Until comparatively recently, a member of the 3rd generation of Hassenfelds involved in the business was Chairman of Hasbro, and before CEO. (I myself even worked under Alan Hassenfeld in my time at Hasbro). So we can see just how long a journey Hasbro took to get to where they are today.

Mattel – Founded in 1945, the founders themselves continued to work in the business for 30 years, before leaving in 1975. While certain new product/brand introductions and acquisitions catapulted Mattel forward, they started quite some time back and took time to grow.

Lego – founded in 1932, this iconic brand and company has gone from humble beginnings in a small carpenter’s workshop, as a wooden toy company to a huge global juggernaut. The Lego brick in it’s current form was launched as long ago as 1958 though, and the company is now in the hands of the grandson of the founder, so again we see just how long it takes to reach the top of the toy trade.

We could look at more and more examples, but one very noticeable factor for long term success is the prominence of family originated businesses at the top of the tree – one major reason for this is that building a toy company from start to finish can be more than one generation’s work!

When we consult with smaller or newer companies, we often find a huge amount of impatience relating to sales growth, but the reality is usually that prudence and incremental solid progress are the foundation of ongoing success, and the smash hit products or landmark acquisitions are usually additional stepping stones along the way.

We run a Consultancy business helping toy & games companies get ahead. For more information, check out www.KidsBrandInsight.com/services

We also run a Strategic Sourcing Consultancy advising toy & game companies around the world on their Sourcing strategies, reviewing their vendor base & suggesting improvements. To date our Sourcing services have saved our clients $tens of millions. For more information on how we can help, just go to: www.ToyTeamAsia.com