IS 2017 TURNING INTO AN ANNUS HORIBILIS FOR THE GLOBAL TOY INDUSTRY?
The global toy industry has been on the up for several years now. A magnificently packed movie slate has seen the toy industry nudge upwards year on year ever closer to the magic $100billion global retail sales level.
The acquisition of Lucasfilm & Marvel by Disney has been a huge supporting driver for the toy industry, as the consolidated control of a huge slice of ‘toyetic’ movie franchises has lead to a much more co-ordinated slate with fewer roller coaster rides of big movie years followed by a drop of the edge of a cliff the following year as used to happen sometimes in the past.
However, there are some rather worrying signs of this growth cycle coming to an end or at least taking a temporary setback:
Summer box office 2017 disappoints – summer 2017 has been a damp squib for the movie industry – summer 2017 is the first since 2006 not to surpass $4billion in North American box office revenues (as per this article in Fortune magazine: http://fortune.com/2017/08/31/hollywood-summer-box-office-movie-stocks/). Clearly this ‘soft’ summer for Hollywood is going to have a negative impact on toy sales, as the less kids get enthused and massively ‘into’ a movie, the less of them will buy toys, and the fewer toys overall will be sold. Unfortunately, a weak performing movie slate is a double negative…much is made of the double sales driver of a movie in the summer followed by a DVD release heading into the back end. Alas, a weak movie most likely heralds weak DVD sales, and therefore a smaller corresponding sales spike for toys.
Franchise fatigue – there has been considerable speculation around the movie going public suffering franchise fatigue. Never before have we had so many movie franchises with so many versions. Has this taken the freshness, the air of excitement, even some of the magic out of going to the movies? There is clearly an argument in this direction, however, I’m not convinced when it comes to kids/family targeted movies and especially toyetic movies – because the consumer i.e. kids move through the target age group comparatively quickly – a 5 year old child who went to watch Cars 1 in the cinema in 2006 would now be 16 years of age. A 7 year old child who watched Transformers in 2007, would have been 17 when Transformers: The Last Knight disappointed at the box office in June/July 2017. Perhaps annual sequels & prequels is a bit too frequent, but that really comes down to franchise management by the movie studios – really the only difference I can identify is that certain movie franchises have almost got too frequent for last years merchandise to have been fully moved through retail.
Lego sales decline – seemingly heralding the end of another monumental growth story in the toy industry, Lego has announced their first half year sales decline since 2004, alongside a wave of job cuts. Lego has been the darling of the toy industry since rising like a phoenix from the flames back in the mid noughties. Unfortunately, every strategy reaches zenith status eventually, and the hugely successful, industry leading brand extension and co-licensing strategy of Lego has possibly run out of steam. There are only so many niches of substantial size (Lego after all only relatively recently launched a concerted push to firmly recruit more girls into the brand via Lego Friends, Elves etc). However, I don’t see a great deal of doom and gloom ahead – ok, there has been a sales correction, which may at least partly be due to the recently announced weak box office performance, but Lego is still a huge iconic and highly aspirational brand – much loved by both parents and kids, Lego has achieved the holy grail of the toy business in getting both sides of the toy purchase dynamic to love the brand!
Hasbro & Mattel shares take a hit – Both Hasbro & Mattel shares have been hit by weak box office performance in 2017, combined more recently by a further hit with the announcement of Lego’s sales decrease and fears about the future of Toys R Us (see next headline). Hasbro’s corporate strategy is much more focused on Hollywood movies – both with their broad relationship with Disney/ Lucasfilm/ Marvel, and with their own franchises like Transformers. Mattel on the other hand have followed a strategy for at least the last few years which is primarily about their own brands i.e. Fisher Price, Barbie, Hot Wheels etc., with licensed product as a secondary focus. Mattel appear to be further into their process of change and reinvention than Hasbro, largely prompted by challenges for the flagship cash cow Barbie and the loss of the perennial Disney Princess license to Hasbro. For Hasbro themselves, I suspect the corporate strategy may need an overhaul to look beyond the movie business for further growth. It’s been a little while since either of these two behemoths made a significant acquisition of another toy company, so don’t be surprised if big moves are made to buy future sales growth via acquisition in the short term to relieve the pressure from Wall Street.
Toys R Us looks to restructure debt, with talks of bankruptcy protection being an option – on the back of all this doom and gloom came the announcement that Toys R Us has hired a law firm specialising in debt restructuring to help manage a $400m debt which falls due in 2018. One of the possible ways of managing this debt could be bankruptcy filing to give the chain protection from creditors. While this is clearly worrying news for investors, it isn’t that uncommon for retailers to have big chunks of debt in this day and age. Moreover, Toys R Us has a somewhat challenging business model in general – a big warehouse packed full of stock which tends to sell in high volumes for only around 2-3 months of the year. That has never been a particularly easy business model/risk to manage. Obviously if there is a weakness at the box office, a big warehouse full of movie licensed toys is going to bear the brunt as much as any other retailer, so there can be no doubt that these are challenging times. However, the toy companies and Toys R Us have a very symbiotic organisation, so there will always tend to be a great degree of goodwill and practical support in terms of trading terms etc. offered to TRU from the toy industry. Therefore, it seems clear to me that a business which is profitable and which is relied on to a fair degree by it’s suppliers is not at existential risk. While I have no financial expertise whatsoever, I would speculate based on pure opinion only that the financial investors to Toys R Us are at more risk than the toy industry itself in this instance.
Inventory Hangover – the major issue for the toy industry as a whole is doing what needs to be done to reduce inventory hangover – because often where movie licenses fail to drive sales to the levels expected, inventory is a big problem, and if not dealt with the carry over can impinge on the following years sales – common sense suggests that if the shelves of retailers like TRU are still packed full of stock from movies from last year, then this years stock may struggle to get onto shelf. One major challenge for the toy industry is the timings of Star Wars movie releases – presumably to avoid cannibalisation, Disney Corp has seemingly targeted December movie release for Star Wars instalments. While this may make sense from a movie perspective, it is difficult for the toy industry to maximise based on that release timing – because a huge chunk of toys are bought well before December i.e. kids Christmas lists are usually completed in October, a December movie release date fails to capitalise fully on the selling window, and if there should be inventory hangover, there is very limited time to markdown and try to move stock through before peak season sales die off.
So in summary, this looks like being a challenging year for the toy industry as a whole. There are however several major reasons why the current summer slump is not necessarily the harbinger of doom some seem to foresee! Here’s some powerful reasons for the toy industry to be cheerful:
Hollywood could reduce the frequency for sequels & prequels and rebalance versus original movies – the movie business will have learnt a lot from this disappointing summer. Perhaps the movie slate has become too unbalanced in favour of existing franchises versus new movies/new concepts. Hollywood needs to reintroduce the magic sparkle of anticipation, of the anticipation of the unknown versus over reliance on a limited number of franchises, and certainly needs to review time in between movie instalments. You can imagine right now there are some contentious conversations going on in tinseltown!
Lego has already reset corporate strategy – concerns about Lego seem to be definitely over egging the pie. Following the recent announcements about Lego’s sales decline I was interviewed by a journalist for a leading national newspaper who asked all the usual questions – is Lego over priced, should it be cheaper etc. The reality is that Lego offers huge play value versus other toys which even when they are expensive often only get played with on Christmas day. The fundamental appeal and benefits of Lego have not changed, all that has happened is that one strategy has run its course, and that strategy has been in place since the company’s much publicised troubles of the mid noughties. Lego has already reset corporate strategy by restructuring and the ex-CEO moving upstairs to orchestrate a more holistic brand strategy versus a focus mostly on toys. When we conduct qualitative research groups and playtesting sessions, it is very clear that parents and kids still love Lego, a short term blip is not likely to be a long term problem therefore.
When licensed toys go weaker, own IP brands tend to see a resurgence – not everyone loses when movies fail to live up to expectations. There will be many toy companies out there having very successful years. Those companies who have perennial products that sell year after year probably won’t see much difference just because Hollywood delivered a disappointing raft of summer movies. In fact, we can expect even those toy companies who are knee deep in licensed brands to redouble their efforts to grow their own brands to reduce the risk of under performing licenses.
Developing markets are advancing at pace – whereas we in the West/Northern hemisphere tend to see the world from our own perspective – are Walmart, Carrefour, Argos etc. up or down – the reality is that the next few decades of growth in the toy industry are not going to be driven from our mature markets to the degree that they were in the past few decades. The gigantic populations and economies of China and India are going to be the driving force of the next decades of growth. China has moved to a consumer based economy and that trend will continue. India has further to go in terms of overall economic development, but a toy industry which is currently worth only a few hundred million dollars must inevitably increase in size by tenfold or more over the next decade or so.
The Global population is rising – the success of the toy industry is closely aligned with birth rates for one obvious but critical reason – when children are born, they inevitably become a new consumer of toy products. The overall global populaton is growing – 7.5billion people today is expected to be 8.5 billion by 2030 – and all of that extra billion people will be toy consumers at some point in the next 15 years. So aside from Wall Street’s pre-occupation with short term focus on the next quarterly earnings reports, the reality is the toy industry can only grow while the global population continues to grow.
So, while 2017 is panning out to be a tougher year than most of us in the toy industry expected…the overall prospects are good for the toy business (eventually!).
by Steve Reece, CEO of Kids Brand Insight www.KidsBrandInsight.com, a leading toy expert consultancy to toy companies around the world, which helps people & companies to get ahead in the toy industry, find the right toy & game factories and to consumer research test their products with kids and parents. Steve also advises investment companies via leading expert networks like Gerson Lehrman (Steve is an acnowledged GLG toy expert).
One of the major long term trends we have observed is the need for lower cost manufacturing alternatives to China. We help toy companies find manufacturing in India – India is set to receive as much as $5-10bn in toy manufacturing in the next decade. If you’d like to find out more about Indian toy manufacturing you can contact us via the company website above!