top of page

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…


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


The Importance Of Building Brands In The Toy Business


Many independent Toy companies struggle away for years slowly and relentlessly building their businesses, until they reach a point where they have a very solid business, with great retail relationships, strong product line and are generating significant profit. However, what many companies miss when they only focus on sales and profit, is the opportunity to build Brands or intellectual property.


The benefits of building your own Brands are numerous: Firstly, if you create a successful Brand, you are in control and are not responsible to any other 3rd parties on derivative products and you will not be likely to lose the rights, in effect the opportunity arising from the Brand are yours to control and exploit. With your own Brands you do not pay royalties, so if a company usually pays an average of 10% royalty, you effectively save yourself that 10%, leading to greater profitability. Moreover, if you create a very successful new property, other companies may license rights from your company and pay you a royalty. Finally, your company may eventually be able to sell your Brand for a large one off payday – for instance the Cranium Brand was reportedly sold to Hasbro for $77m, and Mattel paid a reported $680m to buy the Hit Entertainment business and Brand portfolio.


So with all these benefits, why don’t more companies successfully build Brand portfolios? Well there are 3 main reasons in my experience: 1. It takes significant investment of both money, resources and focus, which not every company is willing to apply. 2. It is very difficult, and for every new Brand which is significantly successful, at least five or ten more fall by the wayside. 3. Short term P&L focus – some companies (rightly) focus on driving sales and profitability, but rather than over layering a Brand building approach they just think short term and fail to maximise long term value.


Those companies who focus only on the short term tend to exhibit an over reliance on licensing and/or transient technology, neither of which act to effectively lay down solid, dependable, long term foundations for their business. Technology can provide a short term boost to sales and a competitive advantage, but even patented technology has it’s limitations in terms of true protectability. Licensing is a powerful and normally essential part of a Toy company’s product approach. However, once a company enters the licensing ‘treadmill’ it tends to rely on a significant proportion of it’s revenue coming from hot licenses, and retailers also rely on the company to supply less licensed merchandise. When the company has a weaker year for licenses, revenue falls as do retail listings on other non licensed products.


For the sake of perspective, we must be clear that the most successful Toy companies exploit the opportunities offered by licensing and technology, albeit prudently. The critical point though, is that few Toy companies enjoy long term stable success without their own Brand portfolios. If we look at the major corporate companies such as Hasbro, Mattel and Lego, they all devote significant resources to licensed products and technology driven products, however, they also deploy significant resources to nurture and grow their own Brands often utilising technology and licensing in the process! In other words, for them the end is not solely the sales revenue, they are ALSO heavily focused on building their own intellectual property.


So now we have established the need to Brand build, how can a company actually do it? That’s the difficulty, it isn’t easy, and it’s not possible to provide a full answer in a short article, however, here is one powerful solution which I have seen work magnificently: Focus and resources – one of the most powerful actions independent companies can take is to adopt a Brand management approach, which in practise means turning ‘Marketing’ people into ‘Brand’ people, and necessitates a message of Brand evangelism throughout the company and beyond. This one suggestion can have the greatest effect. If you give a talented marketing person the title of ‘Brand Manager’, then effectively you conjoin the success of the Brand with the success of their career. That individual will move mountains to ensure success, to persuade sales people and retailers to support your Brands and also be more likely to deliver winning consumer communications. For sure there is much more to building new Brands than that, but that is a very effective first step!



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

Home: Blog2
Home: About Me
bottom of page