Contributor Jon Salisbury wanted some reliable inside info on the state of play in the US market and who better to ask than Sean McGowan, the highly respected toy analyst at Needham and Co on New York’s Wall Street?
The toy giants dominate the market in the US, striding across the multi-billion dollar landscape like mighty behemoths. But recent history has seen a slight shift in that perspective, with novel and lower-priced SKUs from fresh young companies grabbing the headlines.
That’s not to say that the big boys are losing ground but the success of brands such as Cepia’s Zhu Zhu Pets and Blip Toys’ Squinkies, has awakened the industry to the fact that lots of smaller and private companies have interesting products with mass appeal in an industry dominated by the likes of Mattel, Hasbro and Lego.
Zhu-Zhu Princess was the newest addition to the Zhuniverse and was expected to deliver another winner at Christmas. According to Laura Kurzu of Cepia, the key to the Zhu Zhu phenomenon has been affordability: “It has to be priced appropriately especially in these times,” she said. “We’re very very keen on making sure all of our products are affordably priced. They range anywhere between $5-$20, so you can buy a product and have a great experience for not a whole lot of money.”
Bill Nichols of Blip Toys has defied the odds at a tough time for small manufacturers. His company is a nimble 16-person operation in Minnetonka, Minnesota, a town best known in toy terms for the famed Tonka vehicle brand.
Blip faces competition from manufacturing giants with mega advertising budgets. Big retailers, like Toys R Us, Target and Walmart, all want exclusive toys to offer. Independent retailers who might take a chance on smaller manufacturers have all but disappeared.
In 2009, Bill Nichols bet that the economy would still be so shaky in 2010, that a bargain-priced plastic toy would take off. With the help of “mommy bloggers” and a tepid economy, Nichols turned the squishy Squinkies into a fad. At the time of writing, just before Christmas, Walmart.com has been sold out of them for more than a week, and stores nationwide are sold out or limiting how many Squinkies each person can buy.
Like Zhu Zhu Pets, the toys are collectable and the hundreds of characters are even cheaper, selling for $10 for a 16-pack.
You would have thought that the successes that these smaller companies have been having might pique the fancy of a bigger player, so what is stopping them from flexing their acquisitive muscles?
“Big acquisitions may be rare in the near term,” says Sean McGowan, analyst at Needham and Co. “Among the bigger toy makers, Mattel is historically reticent about acquisitions. It could seek to bolster its boys’ business through a purchase, but more likely it will continue to be cautious. Hasbro has enough on its plate with the Hub TV venture that I doubt it will be in the market.
“Lego will probably always just be Lego, and is highly unlikely to buy anyone. Spin Master may seek to deploy some cash to secure more stable lines, but I would think it could do that better as a public company. On the other hand, Spin Master might make a good acquisition target itself for Mattel or Hasbro. It may now be too big for someone else to buy.”
Smaller companies like MGA have made acquisitions like Zapf, Smoby and Little Tikes and the company may be feeling emboldened to buy something new, now it has won the latest round of the Bratz wars with Mattel. But McGowan says: “I doubt Isaac Larian would sell his company to anyone else, and the continuing legal uncertainty about Bratz would surely affect the price, but he may be an acquirer.”
Another company, LeapFrog, “remains an interesting potential target,” muses McGowan. “Its brand(s) are attractive, its operations have been stabilised, and it seems to have a strong enough cash position to survive on its own, but still be attractive to a buyer.
“Curiously, its two largest shareholders, Larry Ellison and Mike Milken, have been selling stock lately. Why they would sell at these low prices when they declined to sell earlier at much higher prices is a mystery, but I doubt either multi-billionaire needs the cash.”
An analysis of what is happening in the US is vital as a barometer for what may happen over here. No wonder the US remains such an important benchmark for the UK market. Two nations divided by the same language, but very much unified by their toy habits.