Struggling toy industry looks to licensing

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The $20.3 billion toy industry is under siege. The predators are retail consolidation, the potent $10.3 billion video-game hardware and software business and ever-intensifying age compression as kids move from playpens to PCs in record time.

Marketers at the American International Toy Fair this week will continue to flog licensed properties, wresting all they can each year from franchises such as Star Wars, Harry Potter, Warner Bros.' Yu-Gi-Oh!, Mattel's Barbie and Nickelodeon's Blue's Clues, as few groundbreaking ideas emerge in a segment where innovation ought to be a given.

hard to compete

"The big [marketers] get bigger and the big opportunities come to the big companies," said Seth Siegel, co-founder of licensing agency Beanstalk Group, New York. Mattel commanded 22.2% of the toy market in sales for 2002 while Hasbro racked up 13.5%, according to data based on a sample of 21 toy retailers culled from NPD Funworld's Toy Retailers Sales Tracking System. Mattel and Hasbro remain the industry's heavy hitters, dominating store shelves and licensing deals with star properties.

"These two are the only ones that have very significant franchise brands that they either own or control. It's getting harder and harder for [other] toy companies to be serious competitors," Mr. Siegel added.

Growth engines for Mattel include Harry Potter toys and merchandise; each of the Potter movies has delivered $100 million in licensed-product sales. Toys based on Batman and Viacom's popular Nickelodeon properties Dora the Explorer and SpongeBob SquarePants are bright spots. The company's venerable Barbie franchise accounts for 25% of its sales. "They'll continue to slice and dice Barbie 500 ways," Mr. Siegel said.

Hasbro still relies on Star Wars. The company last month renegotiated its license with Lucas Licensing to market toys and games based on the property for an additional 10 years, or until 2018. Hasbro's core strength lies in classic board games such as Life, Trivial Pursuit, Twister and Monopoly.

Ogilvy & Mather, Culver City, Calif., and sibling Y&R Advertising, Irvine, Calif., and New York handle Mattel, which spent $133.9 million in measured media in the U.S. from January through November of 2002, according to Taylor Nelson Sofres' CMR. By contrast, Hasbro spent $96.7 million during the same period. Hasbro works with Havas' Arnold Worldwide, New York.

"The big-picture view is this is a low-growth business in the U.S.," said Sean McGowan, managing director, Gerard Klauer Mattison. While Mattel and Hasbro are the industry heavies, it's difficult for them to expand their shares into new categories, he said. "The challenge is coming up with new products that are profitable." He said that while gaming via consoles or hand-helds is draining parents and kids' time and spending away from traditional toys at increasingly younger ages, DVD and VHS video sales and fast-food toy giveaways are also diverting dollars from the traditional toy category.

Despite the death of small toy retailers, large chains closing stores and bankruptcy-protection filings by Kmart Corp. and FAO Schwarz, retailers are fighting back. Kay-Bee and Toys "R" Us have begun to partner with drug chains like CVS, along with book, supermarket and office-supply chains whereby they act as wholesalers of licensed goods. "Alternative channels of distribution are finally getting recognized as a source of incremental growth," Mr. McGowan said, adding that the potential for impulse buys at such outlets is promising.

stronger and smaller

Wal-Mart remains the No. 1 toy retailer, commanding more than 20% of industry sales by carefully cherry-picking its lineup and selling toys very close to cost. "What we're seeing with a lot of the toy manufacturers who are doing licensing deals is stronger, smaller assortments with better price value," said Jim Davey, VP-consumer products, Nickelodeon.

Nickelodeon Enterprise's licensing deals with Mattel, Jakks Pacific and others made it a $2.5 billion powerhouse in 2002 toy sales, up 19% from 2001 and the third entertainment licenser after No. 1 Walt Disney Co. ($13 billion in sales) and No. 2 AOL Time Warner's Warner Brothers ($6 billion), according to License. Nick's SpongeBob SquarePants cult hit delivered $750 million in retail revenue in 2002. Next up, Jakks Pacific will launch a line of toys this holiday based on Nick's off-beat "Fairly OddParents" show. Think plush magic wands.

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