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Why Do Mass Market Retailers Run Such Aggressive Price Promotions On Toys & Games?


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It’s a recurring annual event in the Toy & Game business to see almost ludicrous price promotions from generalist Mass Market retailers offering products at substantial, and presumably not particularly profitable promotional prices. This represents a big problem for specialist Toy & Game retailers who stock our products year-round and who tend to run a much broader range than the Mass Market box shifters.


Not a lot changes in this space though – I still remember my original inductions in the Toy business back around the turn of the millennium. After going around some of the ‘fluffier’ departments I especially remember being sent along to the UK Sales department. I can’t remember which grizzly Sales veteran was given the pleasure of sharing some grim realities from the sharp end of the business with me, but I can remember really well him telling me that price promotions in the run up to Christmas created ‘a complete f#@ing bloodbath’ every year.



The next part of my induction was to go and meet with colleagues in the French subsidiary. Again, after some nice fluffy talks about Brand pyramids and messaging hierarchy for TV commercials, I was sent out to visit French retail with the Sales team. First, we looked round some really good specialist Toy stores, and then we went to Carrefour. My colleagues explained to me the significant price reductions run by the Hypermarche in Q4 each year, which seemed somewhat excessive even to my greenhorn eyes!


Finally I was hooked up with a US colleague, who after talking me through the workings of Toys R Us (!) and then KB Toys (!), explained to me the pricing strategy of Mass Market behemoths like Walmart. Again he explained how the aggressive pricing of Toys by this type of generalist retailer caused real problems with the Toy Specialist retailers during Q4, when the Specialists who need to make a profit from selling Toys came up against these massive price slashing retail machines who it looked like did not care about profitable sales of Toys.

In c. 25 years, the situation relating to retail pricing has not changed that much in this regard. OK, we have Amazon as a major player in the market now, but if anything their impact is also to cause downward pressure on retail pricing, so the rise and rise of Amazon has hardly decreased competitive pricing pressures.


WHY MASS MARKET RETAILERS CAN SELL TOYS AT A LOWER PRICE VERSUS TOY SPECIALISTS


There are two straightforward reasons why Mass Market retailers can sell Toys with big price discounts and still stay in business:


1.     Bulk sales & efficiencies of scale working at lower margins

Firstly, volume is a big factor in driving pricing strategies for Retailers. Mass Market retailers are set up to move high volumes of products and to make a comparatively smaller margin on each product sold. In other words this type of Retailer is fundamentally set up to drive prices down in order to drive volume. We’ve all heard of price elasticity right? If the price goes down, normally sales volume can be expected to go up.

 

The other factor to consider is that many of the other categories these Retailers operate in have lower volume structures i.e. Food & other FMCG would normally offer lower retail margin versus Toys, as such inherently these Retailers can make lower pricing work because they are set up to deliver the bulk of their sales volumes on lower margin categories versus  a Toy store which would normally operate on 30-50% depending on their strategy.

 

2.    Toys & Games as a traffic driver at Christmas

One of the other key metrics Mass Market Retailers work off is total basket value i.e. how much does the customer spend per visit. They are also looking at how bringing in consumers into store with an offer on one product category nearly always leads to sales in other categories. As per the previous article in this newsletter – footfall is the critical success factor for physical Retail. Overall then these Mass Market Retailers often use the Toy category as a means to drive traffic into store by delivering highly motivating promotions and pricing reductions on Toys. This way they entice more shoppers into store who then buy other products and thus drive up the total basket value, delivering more volume for these volume driven retailers.

 

The bottom line is this – Mass Market Retailers often don’t look at their Toys & Games aisles as profit drivers. Parents feel that they HAVE to deliver a good Christmas for their kids, which will normally involve Toys. The food shopping for peak season family gatherings and set piece meals such as Thanksgiving and Christmas dinners are also a massive volume driver, and if you can get the family budget holder in to store to buy price reduced Toys you are much more likely to capture their Grocery spend, and their spend across other categories.



REALITY CHECK: WHY DOWNWARD RETAIL PRESSURE ON PRICING IS A GOOD THING FOR THE TOY BUSINESS

So now we have a clear idea that aggressive price promotions are a long-term structural challenge we need to manage on an ongoing basis. The bottom line is that we are in the business of selling more products, and the lower pricing gets the more we will sell. We may not want to fund a cycle of ever lower pricing as then we end up failing to make profit, but if we are selling our products on relatively equal terms to all Retailers, then what they choose to sell those products for is actually their business. If they want to sell them at cost, or even less, then that is up to them. In fact in many markets it’s considered illegal (against competition and consumer protection laws) to even suggest what retail price might be.


I remember managing an iconic Toy brand some years back, and the trade margin offered at the (suggested) Retail price was minimal, because this was one of those products the Retailers just had to stock, that they knew would sell through and which we therefore had to make the least effort/use the least persuasion to maintain listings. Our customers regularly sold this item at cost or below, and for sure they complained like heck about the low margin they were making on the product, but in the end that was their concern. Despite ongoing rumblings the same promotional pricing ‘bloodbath’ repeated on this iconic product year after year. And year after year, it remained a top seller and was the Number 1 margin driver across our entire product range for our company.


So the bottom line here is that while it’s often very difficult to deal with hysterical Retailers who are seeing cutthroat pricing from their competitors, this is just part of the game that they have chosen to play. It’s normally not our fault as Toy companies.



HOW TOY COMPANIES SHOULD SUPPORT TOY SPECIALISTS IN THE FACE OF TOY PRICING PRESSURES WITHOUT ENCOURAGING ANTI-COMPETITIVE FACTORS

Now, having made it clear that pricing promotions are inevitable, the next question is how should we manage that situation so that our Specialist Toy & Game Retailers who are committed to our industry and support a much broader range of products, and who really know and love the products and therefore help the consumer to know and love our brands and products, can also thrive even when they can’t dream of competing with Mass Market price promotions.


Let’s start with one clear assertion: Specialist Retailers need to stock the really ‘Hot’ items which every kid wants, otherwise they don’t become THE destination for Toys. But the reality is that they either a). Won’t sell through those products so well if they don’t compete on price or b). Won’t make any profit if they do compete on price. So while they need to stock these items to be a must visit destination for Toys, the reality is that they will make their money elsewhere, and Toy companies have to work really hard to help them do that.

This goes back to the point made earlier on these Retailers running a bigger range vs. Mass Market Retailers. A sound strategic approach for Toy companies to take is to plan a range which offers several SKUs which will favour Toy Specialists due to specification, price points and product style/type. If we go back to the example I used above of the iconic Toy product Retailers had to list, we would produce various higher spec and therefore higher priced versions of this product in order to offer an item to the market which would suit Specialist Retailers.


So for sure our Toy Specialist customers are not going to enjoy some of the range they have to stock, but if we structure our product ranges properly then we should be offering them plenty of products with which they can find less low end of the market price competition and perhaps even some items with channel or Retailer exclusivity.


The one thing I can guarantee on this topic is that Q4 price drops are going to be with us for as long as Mass Market Retailers stock Toys, and I genuinely hope that is forever, because we couldn’t run this business just on our beloved Toy Specialists, but we also couldn’t run it with just the Mass Market, so we need to work to supply products to fit all needs.

 

 

 

N.B. All trademarks and other intellectual property featured herein are the property of their respective owners.

 

 


SPIELWARENMESSE – SPIRIT OF PLAY BLOG

5 TIPS FOR AN OPTIMAL RESULT AT THE SPIELWARENMESSE

This article was recently published by Spielwarenmesse.de, the official Blog of the world’s biggest Toy Trade show. It’s my top 5 tips to maximise your results from attending Spielwarenmesse in Nuremberg.

 

 

PLAYING AT BUSINESS PODCAST

EP 103 – Why Product Selection Is Critical For Toy & Game Companies (AKA Why I Turned Down Settlers Of Catan)

Among my many claims to infamy in this industry, one of my biggest misses when taken at face value would be the time I turned down the distribution rights for now perennial classic 'gateway game' Settlers of Catan. This mightiest of Games has now sold over 40 million copies, yet I was right to turn it down...because product selection is everything for Toy & Game companies. Click the link below to here more.



AND FINALLY…

I’m now well into my second decade working as a Consultant to Toy & Games companies. My company has helped hundreds of clients across the trade. Do you have problems that could benefit from outside help? If you want to take advantage of my c. 25 years experience working across functions, categories and markets in the Toy & Games business just click here for more information on how you can work with me:

 

 

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