What Makes Toy Companies Successful

What Makes Toy Companies Successful

There are numerous factors which combine to create successful toy companies.

Firstly, and perhaps most fundamentally, the toy industry is very heavily influenced by family companies & long term management approach. Hasbro, one of the major global giants of the industry started life as ‘Hassenfeld Brothers’ (with 3 brothers involved – Herman, Hillel & Henry). Mattel’s original growth was driven by husband and wife team Elliot & Ruth Handler. Furthermore, Lego is famously still owned within the same family which launched the company. Such global giants have stood the test of time partly due to the continuity of management approach. This effect can be seen not just in the €billion global companies, but also across the toy trade - of the thousands of returning exhibitors at Spielwarenmesse every year are many family founded, owned and managed companies.

Those toy companies enjoying strong ongoing success which are not family owned & run, still tend to have very strong management teams in place long term – Spin Master would be an example of this, where the company was founded by college friends who have remained at the helm through a very impressive growth curve leading to stock market flotation recently.

The second factor, and perhaps the most obvious one, is good product. A toy company without good products is like a car without engine and wheels – it won’t go very far! One of the most intriguing facets of the toy business is that all different kinds of products sell, but for products to be successful, they must generally feature some kind of compelling play experience and/or aspirational status. There are companies who have a nearly completely new product line each year, and there are companies who have a few products which have sold for years (even decades in a few instances!). Most toy companies though do aspire to ‘carry forward’ product, as selling the same product again next year will usually be cheaper, more profitable and easier if the product has sold well in the previous year’s. In fact, the toy industry as a whole has a very considerable product ‘churn’ rate, with roughly two-thirds of all products on shelf new developments each year. So the actual reality is usually a combination of both the old trusted products and the new novelties.

The third factor in successful toy companies is less exciting but absolutely imperative – that is risk & cash flow management. I remember sitting in a meeting with a very experienced toy industry consultant soon after I joined Hasbro. The one thing that stuck with me from this guy was when he said “Inventory is the thing that kills toy companies”. The toy business works on a comparatively high manufacturing cost vs sales value versus other entertainment industries. Manufacturing costs are typically between one quarter to one third of selling price. So there is nothing else on which toy companies spend more money. Therefore, slow moving inventory can be very damaging financially. Aside from having so much money sat there not doing anything, warehousing costs can add up and cause a financial headache. Typically, those toy companies who achieve success are those who have strong financial disciplines – clearing house in December and heading into a new year with fairly lean stock holding is a typical feature of successful toy businesses.

Additionally, those companies who can consistently manage the annual cash flow cycle are most likely to survive the test of time. Although some toy companies have a significant spring-summer business, the majority of the toy industry is driven by cash flow inputs peaking between September & January. Therefore, for the rest of the year, many companies who are driven by peak season business are cash poor & operating in deficit. This is not just the smaller companies – you can see from the Q1 & Q2 results from the major corporate companies that even they tend to lose money in the first quarter or two of the year. So companies which successfully manage the painful cash flow cycle of the toy business are most likely to survive in the first instance, and thrive beyond that!

Fourthly, when we look specifically at start-ups in the toy industry, achieving success is more of a marathon than it is a sprint. Those people/companies expecting to move the world in their first selling cycle are most probably setting themselves up for disappointment and failure! On a personal note, when I joined a new business, it took 4 or 5 selling cycles to become established in our home market. And that is with the backing of a strong parent company/infrastructure, with industry leading staff and lots of established relationships with retailers, licensors and others in the trade. So for a new venture with no in house toy industry expertise to achieve any measure of success in an industry driven by an often painfully slow annual business cycle is going to take years. We’ve probably all encountered those companies who attempt to enter the industry in a blaze of activity & frenzy, but who fade away long before achieving significant results. Those companies who achieve success tend to be those who are at Spielwarenmesse or their own local shows year after year, and each year they tend to have a few more products, maybe an extra staff member and a few more sales. Organic growth is typical in the toy industry.

There are some other contributory factors, but these tend to be the most important ones based on my analysis.

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