How the Hamsters Saved Christmas: Zhu Zhu Pets Recharge Battery Category

Interactive-Toy Craze, Cost-Cutting Contributed to Fourth-Quarter Boost

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BATAVIA, Ohio (AdAge.com) -- Loading up on alkaline batteries was once a familiar rite of holiday shopping for parents, but the category has been in a funk since well before the recession as traditional battery-operated toys and gadgets lost cachet to smartphones, laptops, iPods and other portable devices using different power sources.

But a funny thing happened this holiday season: Alkaline batteries had their best quarter for volume growth in at least three years and their first positive holiday quarter in terms of volume in four years. Zhu Zhu pets, one of the biggest breakout toy hits in years, may deserve the credit, though a round of savage price-cutting also played a role.

It's not entirely clear why alkaline-battery volume rose 3.3% in the 13 weeks ended Dec. 27, according to Information Resources Inc. data from Deutsche Bank. But the gain came almost entirely in the final four weeks, which were up 5.3% over a year ago, saving what had been a largely flat quarter. That corresponded with a run on Zhu Zhu pets, which operate and chatter on two AAA batteries apiece. The electronic hamsters accounted for four of the top 10 entries on Amazon's Toy and Games list and sold so fast that retailers haven't been able to keep them in stock even after Christmas.

Analysts reported last fall that executives of Energizer Holdings said the little critters, marketed by Cepia, a company similarly headquartered in St. Louis, would help reverse long-term negative trends in the category.

A spokeswoman for Energizer, however, said she hadn't yet seen the IRI data and couldn't comment. And a spokesman for Cepia didn't return an e-mail for comment on how many of the creatures -- ostensibly listed at prices as low as $7.99 but which went for many times that on the secondary market at times on Amazon or eBay -- were sold over the holidays.

Discounting
Regardless of the reason, the battery volume rise was a sharp reversal from the 7% decline for alkaline batteries in the quarter just prior. It was also the first volume increase of any kind for alkalines since the third quarter of 2008, when a freakish hurricane wiped out power for days to millions of homes from Texas to as far north as Michigan, and even that was only enough to boost volume 0.4%.

Before that, the last positive-volume quarter for alkaline batteries was the second quarter of 2006, and that registered only a 1.7% increase. The IRI data don't include Walmart, club or dollar stores, whose stronger growth likely would have improved the numbers.

But there's another factor at work here beyond Zhu Zhu: heavy discounting. That 3.3% fourth-quarter volume increase came along with a 7.6% sales decline, thanks to sharply lower pricing and stepped-up promotion. Marketers promoted even more aggressively in December, when a 5.3% volume gain for the four weeks ended Dec. 27 came on an 8.7% sales decline.

Energizer was the only brand marketer to see its alkaline dollar sales actually increase for the quarter, and that was a barely noticeable 0.1% on a 7.4% volume increase. Procter & Gamble Co.'s Duracell saw dollar sales plunge 12.5% on a 4.7% volume decrease. Private label gained considerable share, and Rayovac dollar sales plunged by 43% in measured channels, though they apparently fared better at Walmart.

Lower commodity costs compared to a year ago may have allowed margins to be maintained despite those cuts, though costs have been rising again recently.

Energy vampires
Deutsche Bank analyst Bill Schmitz sees batteries' volume rebound as a combination of "a pretty decent year for toys" and consumers who had been drawing down home inventories to save money finally having to reload.

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Battery sales since 2006
It's not just Zhu Zhu Pets gobbling up batteries, said NPD Group toy and video game analyst Anita Frazier, but also Wii remotes and other toys. She personally noted, somewhat painfully, the heft of Nerf Vulcan toy dart guns, each with six D batteries, that she purchased for each of her four boys.

Despite alkaline being seemingly eclipsed by lithium ion and other newer battery forms, a recent study by Duracell found the average U.S. home has 34 devices that use alkaline batteries today, up from only seven in 1970, and the brand expects the number to rise to 36 by next year, said spokesman Kurt Iverson.

He acknowledged that P&G, like others, placed a greater emphasis on "value" this holiday season with better deals to help spur sales, but said he doesn't believe it's cause for concern about the industry's future.

Private-label manufacturer Spectrum Brands CEO Kent Hussey noted on a Jan. 6 conference call that promotional activity in the category appears to be rising while advertising is declining. That comes at a time when retailers increasingly are playing hardball with brands, as CVS recently booted most Energizer batteries in favor of Duracell and private label.

"Premium brands are not advertising as much as they have historically, which helps us," Mr. Hussey said, since Rayovac produces both a value brand and private label. But he added that branded competitors also have stepped up promotion. "The industry has behaved fairly rationally for the last couple of years," he said, "and hopefully will continue down that path."

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