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US OPINION: The fall and rise of Leapfrog - ToyNews

US OPINION: The fall and rise of Leapfrog

There are no toy companies that equalled the rapid rise of Leapfrog between 2000 and 2003. The company went from $160 million in the year 2000 to $642 million in 2003.
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But, the fourth quarter of 2004 showed the first signs of stagnation and this continued into 2005. From that point onwards, Leapfrog went down the hill all the way to $379 million in 2009.

This decline is widely attributed by some to two events – firstly Mike Wood’s demotion from being the CEO in February 2004 and his departure from the company in September, and the arrival of Jeff Katz initially as a member of the board in July 2005 and then being appointed CEO shortly thereafter. Katz had come from the airline industry and had been intimately involved in the demise of Switzerland’s flagship carrier, Swissair.

During those four years in which Leapfrog declined, the competitor that picked up the pieces was VTech with its VSmile electronic learning program. While the company had been dabbling in electronic learning products since the early eighties, it really only hit its stride in 2004 when it released the VSmile gaming console.

By 2006, VTech had overtaken Leapfrog in worldwide sales, a position that still holds today. 

What did not help Leapfrog was the fact that the market for electronic learning products worldwide pretty much stagnated between 2005 and today with the result that the advances VSmile achieved came totally out of Leapfrog’s pocket.

In fact, the US consumer market for electronic learning products has been in continuous decline since 2005 and VSmile held up much better than Leapfrog during this period, thus further worsening the Leapfrog’s position in its home market. 

When you talk to the national buyers for the category and ask why Leapfrog and the market overall did so badly during the past five years, they all mention one overriding reason - lack of good new products.

In fact, they believe that had it not been for Mike Wood’s legacy in new product ideas he left behind when he departed from the company, Leapfrog would have had not one new product in the past five years – and this includes the 2010 star Leapster Explorer.

Actually, this is in fact not quite accurate. Jerry Perez, Exec VP at Fisher Price, was lured over to Leapfrog in February 2004.

In the two years he was there, he created a very viable toy line patterned on the Fisher-Price model which turned out to be successful and is still vital to Leapfrog’s sales today.

In 2009, things started to turn around for Leapfrog. This was mainly due to the efforts of two senior executives – Bill Chiasson and Mike Dodd. Bill had joined the company late 2004 as their new CFO, and Mike as Senior VP operations in 2005.

Their first success came in June 2008 with the introduction of the Tag Reading System and Leapster 2. Both did extremely well throughout 2009 and the products are still today very good sellers at the top three retailers - Wal-Mart, ToysRUs, and Target.

They followed up with Scout in 2009 and the now very promising Leapster Explorer this year.

Incidentally, the Leapster Explorer is widely expected to be amongst the top toys this Christmas season. 

Jeff Katz left the company early this year and the two executives took over as CEO and COO, respectively..
While all this was going on, VTech was not idle. In the last three years they brought out a very strong and innovative new product palette:

2008

V-Motion - Motion-activated gaming system
Cyber Pocket - Online Game Play
Kid Creative - Electronic art, music, and photography

2009 

Hightech Reading - Pen–touch reading and listening books.
Nitro Web Notebook - Web-connected lessons on math, science, logic etc

2010

Mobigo - Touch-screen math, language and logic
V-Reader - World’s first animated e-reader

I asked VTech whether its phone technology represented opportunities for synergies for its electronic learning programme and this is what Grace Pang, director of corporate communications and strategic marketing, VTech Holdings, had to say: "There are synergies in R&D between our electronic learning and telecommunication
products. One of the good examples is V.Smile Motion. We adapt the wireless technology in cordless telephone to the product. Strong R&D is the key competitive advantage of VTech over its rivals and we will continue leverage our core competences to develop innovative products to the market".

When I talk to the buyers, I get the sense that they consider VTech superior to Leapfrog in terms of technological innovation.

They are also impressed with the fact that VSmile is consistently better merchandised in their stores than Leapfrog. VTech has throughout this year had between three and four end caps at Wal-Mart, Target and ToysRUs compared to Leap Frog’s one end cap or less.

So, what is the outlook for the remainder of the year? Again, Grace Pang: "In North America, we expect platform products to return to growth, while momentum for standalone products will continue. The two new platform products, MobiGo and V.Reader have been on shelves since June and July and they will benefit from extensive media support.

"Growth in standalone products will be supported by extensive line-ups of infant and pre-school items. In Europe, the introduction of new standalone and platform products is expected to stimulate sales. We will also step up our efforts in Asia Pacific and other markets, notably China, Australia and Japan."

I did not get any insights into Leapfrog’s thinking on this subject so I turned to national buyers for their expectations. They appear to think that Leapfrog will continue to do very well this year with growth for the third quarter being in the neighborhood of 18 per cent and for the fourth quarter of 16 per cent.

As for next year and beyond, both companies are facing challenges. In the case of VTech it is the fact that International, particularly Europe, represents more than half of its business. As I said in this space on August 10th (The pre-school race question), there are two problems with a strategy that focuses on Europe. The first problem is that Europe is the only continent that is dramatically losing population. Even worse, the pre-school segment is expected to decline by 25 per cent between now and 2050.

The second problem referred to in the above article was the racial mix of products catering to pre-schoolers. Both Leapfrog and VSmile are virtually exclusively bought by Caucasians and any population growth both in the United States and Europe comes from non-Caucasian minorities.

Leapfrog’s problem is its perceived lack of technological innovation. There is just so much mileage you can get out of dated products if faced with a technologically superior competitor, particularly if the field of your endeavor is in the technological area. So, over time, unless something happens to change the game, Leapfrog appears to be headed for trouble.

That is why acquisition rumors have swirled around the company for the past 36 months. These rumors got new impetus by Mattel’s very recent bond offering for $500 million – money that Mattel really does not need for ongoing operations.

The conclusion of many in the industry is that these $500 million are being raised to finance a very substantial acquisition. There are only a few companies that would fit a bill circumscribed by three parameters – an ideal acquisition provides significant synergies, it fills a product hole, and the new totality is stronger than the two parts separately. Leapfrog would most certainly fit this bill.

It is not that Mattel is a newcomer to the electronic learning area. It has tried several times before and failed. However, this year’s entry, the IXL, promises to do better.

The iXL, which Fisher-Price is touting as its most heavily researched product in years, features Story Book, Game Player, Notebook, Art Studio, Music Player and Photo Album apps.

There is also scope for expansion as the product has a SD card slot and a USB port and is also Mac and PC compatible. Both the blue and pink version of the product are top sellers at ToysR Us and are doing acceptably well at Target and Wal-Mart.

However, as little as one swallow makes a summer so does one entry make for a strong position in the overall electronic learning area. Mattel needs a much stronger presence that covers all age groups Having one product that covers children from three-years up basically means that you do not cater to the very major differences that exist in a child’s progress from three years at one extreme to six years at the other.

On the positive side, IXL shows that Mattel has the technological skills to enter the product category and will have the savvy to obtain the necessary R and D talent to ensure that it keeps technological pace if it decides to buy Leapfrog.

Lutz Muller is a Swiss who has lived on five continents. In the US, he was the CEO of 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.. Read more on his website at www.klosterstrading.com

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