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The battle for second place - ToyNews

The battle for second place

For years, the second and the third largest toy company were content to share top-range licenses such as Star Wars, to cater to the same young boy demographic, and to otherwise keep out of each other?s way ? with one short-lived exception.
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Hasbro had flirted with the construction toy space, Lego’s turf, with the introduction of Build to Rule between 2003 to 2005, based upon Hasbro brands such as GI Joe and Transformers: Armada. The range was a resounding flop and it disappeared totally.

Then, middle of 2009, Lego mounted a very bold attack on Hasbro’s most prized product category – board games – by introducing a range of games in Europe. Games and puzzles are not only Hasbro’s largest business, they are also by far the most profitable one. So there is little wonder that the good people of Pawtucket, R.I. saw red.

And this with some justification. Lego’s board games were introduced first in Germany and the UK middle of 2009 and very quickly made inroads. By the end of the year, it had captured in both countries market shares in the middle single digits. Early last year it proceeded to roll-out into the rest of Europe and then made the jump into the US about six months ago. By end of 2010, the company had captured a market share here in the high single digits.

Now, at the onset of Toy Fair 2011, Hasbro hit back and unveiled its counter-attack focusing on Lego’s core business – construction toys. This new entrant is Kre-O and it leverages Hasbro’s key brands – Transformers first, but I expect that Iron Man and others will not be far behind. The components of the toys are interchangeable with those of Lego and allow the child to build either a robot and then disassemble it to build a vehicle, and then again disassemble the vehicle to build a robot.

The launch will be in fall this year and will first comprise twelve different construction sets including Transformers Optimum Prime, Bumble Bee and Star Scream. Consumer prices will range from $7.99 to $59.99.

In contrast, Lego now has at ToysRUs 317 different packs with prices ranging from $6.99 to $359.99.
It is truly a battle of the giants. Lego has a totally overpowering market share in its category in the US of 82 per cent.

To the best of my knowledge, no other company can claim a similar degree of dominance in a major toy category. In terms of shelf space at Wal-Mart, Target and Toys R Us, Lego now has 762 running feet or 70 per cent of the total construction category. Its retail sales in the US are estimated at $1.050 billion. This makes Lego the number three toy company in the US, neck and neck with Spin Master, and behind Mattel and Hasbro.

Hasbro, in contrast, has retail sales in the US of about $3.5bn. The company dominates two major categories – games and puzzles and action figures - and has a fairly significant stake in all the others except, for now, in construction.

How will this new entry change the toy space and its current inhabitants?

Firstly: Hasbro. I would expect that the buyers at the large retailers will give it a very friendly reception. They will be a little sceptical given the Build to Rule experience but will still assume that Kre-O will capture about five per cent market share this year and they will give the brand commensurate shelf space. That would be about four to five four-foot shelves in each of the three major retailers.

To cite one major retailer: “The buyers are unlikely to expand the overall construction toy space to accommodate this newcomer and some of the smaller players are going to get a hair cut as a consequence.”
However, looking at the product as presented today, it appears that the range is severely limited."

In fact, in the words of a senior executive in the toy space: “They have not entered the construction field at all. What they have done is to execute an expansion of the Transformer action figure program into construction.”

If he is right, the product will do well this year by riding on the coat tails of the Transformers: Dark of the Moon movie and will then sharply tail off again next year in line with post-movie erosion curves. Iron Man 3 is expected for 2013 which would be a natural for a line extension but with the same time limitation.
If Hasbro can get the Star Wars construction toy license [now held by Lego] in the context of the re-made 3D Star Wars films starting in 2012, this would be another opportunity and one that is more stable if the history of the associated action figures is anything to go by. However, Lucas is thought to be somewhat unlikely to change what is for them an extremely good and lucrative relationship with Lego.

I would also expect Hasbro to really go to town in terms of advertising and promotion. The Hub will be a likely key component in this strategy particularly since the channel is tops in co-viewership of children AND their parents and since Kre-O is likely to be parent/child decision rather than of the child alone.

Secondly: Lego. It is likely to step up its merchandising, promotional and advertising efforts very actively during the fourth quarter in order to prevent Kre-O from gaining a foothold. In this it will probably not succeed but it may well hope to achieve what it did first with Build to Rule and then with Trio, Mattel’s entry. Mattel never gained marked share in excess of three per cent and kept distribution only because it was a Mattel product. Had it been anybody else’s it would have disappeared a long time ago. In fact, Trio just got tossed from Wal-Mart bricks-and-mortar. However, Hasbro is a different kettle of fish altogether and it is likely to put a lot more ingenuity and effort behind the brand and will hence probably get traction. Whatever the case may be, Lego is very unlikely to lose shelf space because it already now has less shelf space than its market share would warrant.

Thirdly: Mega Brands. Mega is very much a turn-around and it is doing a good job in acquiring licenses and regaining market share. Today, it has about 10 per cent of the U.S. market, mainly on the strength of the Halo and Thomas licenses. In terms of shelf space, it now has 17 per cent of the construction category at Wal-Mart, Target and ToysRUs. The discrepancy between shelf space allocation and market share may make it vulnerable if the buyers need to find space for Kre-O in the fall.

Then there’s K’Nex. It has about four per cent market share and slightly more than three per cent of the shelf space. While it is vulnerable because of relatively high price points and relatively weak licensed properties overall, the Sesame-licensed products may well benefit from the major push Hasbro is undertaking for its just-acquired Sesame pre-school toy line.

In fact, the K’Nex CEO, Michael Araten, has a very upbeat view of Hasbro’s entry: “I see Hasbro's entry as a positive as they are a best of breed company led by an incredibly talented team. Hasbro's marketing machine will bring more traffic to the building toy aisle which will help all of us in the category. I expect shelf space to grow at most retail channels for building toys. Therefore, I see 2011 as another great year of leadership for building toys.”

If we look at Best-Lock, it has about two per cent market share and its shelf space participation in the big three retailers is equally about one per cent. The company’s products typically do not carry licenses but rather focus on being very strong on the price/quality equation.

This is what Stephen Minsk, VP Global Sales, has to say: “The entry of Kre-o will make the aisle a little more crowded for a start. It being a Hasbro product will automatically guarantee shelf space for this year, which means likely less shelf space for existing manufacturers.

“How that breaks down will be a matter for individual retailers but construction has been a very strong category so there will be a strong push from the other brands to increase rather than decrease shelf space. The items seem to be priced at similarly to Lego/ Mega and will perhaps take some market share from Bionicles and Halo, yet they do not appear from the pictures to be classic construction toys at all. In fact for many of the items I can't even see pins pictured so not totally sure it should be placed in the construction isle at all.

“It seems like this is Build to Rule reinvented with a few tweaks . I think the second tier players will lose some market share and shelf space to this line certainly in 2011. It is competitive with Mega perhaps more than anyone, for sure, on price and look.”

As for all the other brands – their life will begin to be a bit more difficult when Kre-O comes in. Trio of Mattel has already been tossed by Wal-Mart and is likely to come under scrutiny sooner or later by the other two retailers. Two of the others, Waba and Erector, are exclusively at Toys R Us and relatively safe given the retailer’s greater toy shelf space. Super-Blox of Craz-Art [La Rose, Larry Rosen’s company] is only at Wal-Mart and looking somewhat vulnerable.

There are also two new products waiting for an opportunity to enter the fray. One of them is Geomag of Switzerland. In fact, Geomag is a potential come-back story. It was here before, at TRU if memory serves, a number of years ago, and did very well there but then went bankrupt. Geomag is based on the use of magnets and the general view is that this product concept has been killed and firmly buried by the Magnetix recall.
The other is Creative Toys with its Swivel-Snaps. This a different story altogether. Their construction components are compatible with Lego but provide a swivel technology which is unique and allows construction alternatives quite beyond any of the current players in the field. I am not quite sure where it is in terms of distribution capability but I would be inclined to take the product seriously.

In summary, Kre-O is likely to be a stronger challenger to Lego than its ill-fated predecessor Build to Rule or Mattel’s Trio but it is still unlikely to be able to significantly shift Lego from its 82 per cent perch. It strikes me as an opportunistic rather than a strategic entry and one that – in its current presentation – is totally dependent on the success of boy-related movies for which Hasbro has or can get the construction toy license.

Given this movie association, the Kre-O range will do well when the movie does well and will fall of sharply as the resonance of the movie declines. The really tough time for Kre-O will come in any year when there is no movie backing at all. 

Lutz Muller is a Swiss who has lived on five continents. In the United States, he was the CEO for four manufacturing companies, including two in the toy industry. Since 2002, he has provided competitive intelligence on the toy and video game market to manufacturers and financial institutions coast-to-coast. He gets his information from his retailer panel, from big-box buyers and his many friends in the industry. If anything happens, he is usually the first to know. Read more on his website at www.klosterstrading.com

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