NEWS ANALYSIS: The Tomy RC2 acquisition

ToyNews' US correspondent, Lutz Muller analyses the proposed Tomy RC2 deal.
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Takara Tomy is buying RC2 and challenging the leading US and European toy manufacturers on their own turf.
With this move the company is transforming itself from a local giant into one with a decent presence in all major markets and a viable competitor to Mattel, Spin Master and Jakks. I have omitted Hasbro from that statement because there are ties between the two companies effectively ruling out competition between them.

Tomy has manufacturing operations in Japan, Hong Kong, China and Thailand and owns subsidiaries in the US, France, UK, Korea and Japan with about 83 per cent of its sales there – the world’s second largest toy market with an estimated retail sales value of $6bn. In fact, its market share in Japan is more than double that of Mattel’s or Hasbro’s in the US.

Interestingly, Tomy developed Transformers in the seventies and licensed it to Hasbro in 1984, which now has worldwide rights outside Japan. The company also entered into a strategic relationship with Hasbro for whom it develops and manufactures the Transformers line. Beyblades, too, are a Takara Tomy invention and licensed to Hasbro worldwide outside Japan.

Tomy’s product line is divided into traditional toys which account for about two-thirds of the total and video games accounting for pretty much the balance. Yearly sales in the year ending March 2011 are estimated at 178.7 billion Yen or about US$ 2.2 billion.

Annual sales are $130 million for both the US and Canada. The majority of this is in video games. In toys, its presence is restricted to the Tomico range of play sets.

RC2 has, over the years changed its business model several times. It started out as a toy vehicle manufacturer, hence its name, but then broadened its toy range significantly on the strength of the Learning Curve acquisition.

It continues to be mainly a domestic company with 63 per cent of total sales coming from North America. However, international business has grown much faster than domestic, from 22 per cent of the total in 2007 to 37 per cent in 2010.

It had another setback in 2010 when it lost the non-wood part of the Thomas Friends licence to Mattel. Speculation has been rife that Mattel will also get the remainder when RC2’s license expires at the end of 2012. RC2 did pick up the Disney Chuggington license in 2010 and is selling the products fairly successfully.

However, at least at this point in time, Chuggington sales are a small fraction of what it lost in Thomas.
Hasbro’s pre-school segment was massively strengthened when it took the Sesame Street licence away from Mattel and there is little question that this will make Hasbro a much more formidable competitor in the future. Equally, Mattel’s acquisition of the non-wood part of the Thomas Friends range in 2010, and then the broadening of their Dream Works licence suggests increased competition for RC2’s toy business.

In short, it found itself outclassed in terms of size, promotional clout, licences and movie backing.
The integration of RC2 will give Takara Tomy a much better presence in North America and Europe. To the left are the combined sales on a geographical basis with what I estimate the Fisher-Price and Hasbro pre-school sales to be.

While this gives it a reasonable platform to operate from, the real question is whether Takara Tomy will be able to fashion a competitive advantage from this.

I predict that they will use the connections which both companies have with Hit Entertainment to stop the remainder of the Thomas franchise going over to Mattel. It is equally likely to use its tremendous base in Japan to attack the pre-school market with the newly-acquired Learning Curve products.

Expect it to also materially strengthen RC2’s product development team so as to ensure a much stepped-up flow of new products for the US and European markets and to begin seeking worldwide licenses where existing relationships with Disney and Hit Entertainment will undoubtedly be very useful.

Whatever steps the Takara Tomy/RC2 Group takes, the national buyers at the large retailers will be watching it closely and not with unfriendly eyes. They think that RC2, with the backing it is now going to get, has considerable potential and buyers, for one, do not think that this is a bad thing at all.



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