US OPINION: The growth of movie-based toy brands

2011 is looking likely to produce a healthy crop of blockbuster movies, all with strong potential in the toy sector. US correspondent, Lutz Muller, investigates further.
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Licences, particularly movie-based ones, are capturing an ever increasing share of the toy market and this trend is, if anything, accelerating. In the United States, toys sold under a licence took 15 per cent of the toy market at the end of the Nineties and this increased to 25 per cent by the end of last year. In Europe, too, toy licences did well and in 2009 accounted for about 25 per cent of the total,

According to NPD, at their lowest, licensed toys accounted for 17.6 per cent of the overall toy market in Germany in 2009, and at their highest for 32.6 per cent in Spain. These percentages, too, increased last year.
To put last year’s performance into perspective, licensed toy sales in the US increased last year by about four per cent whereas the non-licensed part dropped by slightly more than one per cent.

In fact, 2010 was a somewhat sparse year as far as children-oriented blockbusters were concerned and 2011 looks so much better. Here is a comparison of the movies last and this year:

Category

BOYS
2010
How to Train your Dragon [3/26/10], Spinmaster, $494m (worldwide box office)
Iron Man 2 [5/7/10], Hasbro, $622m
Prince of Persia [5/28/10], Jakks, $335m
Last Airbender [7/1/10], Spinmaster, $319m
Harry Potter Deathly Hallows 1 [11/19/10], Tomy, $952m
Chronicles of Narnia [12/10/10], Jakks, $407m
Tron Legacy [12/17/10], Spinmaster, $397m

In other words, none was a blockbuster with the exception of the Harry Potter movie. 2011 looks much more potent – the box office numbers next to the movie relate to the most recent movie in the series.

Pirates of the Caribbean [5/20/11], Jakks, $960m (May 25th 2007)
Thor [5/26/11], Hasbro
X-Men First Class [6/3/11], Hasbro, $373m (May 1st 2009)
Green Lantern [6/27/2011], Mattel
Transformers 3 [7/1/11], Hasbro, $836m (June 24th 2009)
Harry Potter Deathly Hallows Part 2 [7/15/11], Tomy, $952m (Nov 19th 2010)
Captain America [7/22/11], Hasbro
The Hobbit [12/1/11], Glorbil, $1,159m (Dec 17th 2003)
Tin Tin – Secret of the Unicorn [12/23/11], Paramount

Also in the case of pre-school movies, 2011 looks very strong in comparison with 2010:

PRE-SCHOOL
2010:
Shrek Forever After [3/21/10], Playmates, $640m
Toy Story 3 [6/18/10], Mattel, $1,063m

2011:
Rio [4/15/11], Toy Quest
Kung Fu Panda [5/26/11], Mattel, $631m (last movie)
Cars 2 [6/24/11], Mattel/TRU, $461m (last movie)
Winnie The Pooh [7/15/11], Mattel, $52m (last movie)
PussNBoots [11/4/11], Mattel, $640m (last movie, Shrek 4)
The Muppets [11/23/11], Disney, $22m (last movie)

While Toy Story 3 was massive as a toy sales generator, Cars 2 is expected to do even better this year. Girls’ movies look weaker but this is somewhat misleading:

GIRLS
2010:
Alice in Wonderland [3/5/10], Mattel, $1,024m
Tangled [11/24/10], Mattel, $559m

2011:
Beauty and the Beast [Q4 2011], Mattel

While Alice in Wonderland last year was truly a blockbuster, its potential as a toy sale generator was not realised. Also, Tangled continued to be a significant driver for Disney Princess toys throughout the first three months of 2011.

We can expect toy licensees to do exceptionally well this year. In addition to movie-based toy licences, there is a host of other toy licences based on TV series and other generators – too many to mention but thought to represent about 50 per cent of all licensed toy sales [the other 50 per cent being movie-based].

However, the ever increasing share of licences in the toy space is not an unmixed blessing for the manufacturers for two main reasons.

The first is that licences cost money. This is typically expressed as a percentage calculated on the basis of manufacturers’ shipments. This royalty or licence fee can vary from a low of five per cent for a very secondary and not movie-backed licence to a high 25 per cent on a very strong licence backed by a strong movie. These costs cannot be simply added to the product cost since the toy, even though carrying a licence, is still subject to competitive retail pricing mandates. This can become a problem for a manufacturer who is confronted by a situation where the licensed product does much better than the rest of the range, or where a licensed product of theirs takes market share from a non-licensed and hence non-royalty product. Such a situation appears to exist with Mattel where the growth of Disney Princess dolls is taking market share from Barbie.

The second is both considerably more ominous and of recent date – it is when a large retailer makes a direct deal with the licensor. We have had three examples of late for this development. The first was when Wal-Mart made a deal with Dreamworks for the How to Train Your Dragon movie last year. This partnership included Wal-Mart’s commitment to design the entire marketing campaign which included the making and placement of commercials for the property on TV and movie theatres, the placement of 2,500 Viking ships in the Wal-Mart supercenters and of a 40-foot ship in Manhattan’s Times Square. It also agreed to give the Dragon toys the type of shelf space which the range would not have obtained otherwise. In return, it got the exclusive for the US. The one thing Wal-Mart did not do was manufacture the toys – it made a deal with Spin Master to do this for them at exceptionally favourable terms and, in return, Spin Master obtained the rights to sell these toys internationally without restrictions.

In short, the company was, at least for the US, reduced to the role similar to that of a contract manufacturer. Nevertheless, this may have made strategic sense given the background of Spin Master’s expansion into Europe where it late last year opened two more offices – Germany and Benelux – in addition to the UK location it has had for a while.

A very similar deal was entered early this year between Toys R Us and Fox for the movie Rio, with Toy Quest being the master licensee for the toy range. TRU is de facto the master licensee and has the exclusive for the US. In return, the retailer handles all the marketing and advertising in the US and gives the product range extensive shelf space. In fact, an end cap went up nationwide for the Rio toys at the beginning of April, with the movie not hitting until April 15th. Toy Quest is handling the manufacturing side of the toys and has the rights to sell them on an unrestricted basis internationally. The company at one stage claimed to be the seventh-largest toy manufacturer in the US and its international network is pretty strong and extensive, particularly in Asia and Europe.

Again here, there are positive spin-offs for the manufacturing company, Toy Quest, since its involvement with Rio deepens the relationship with Fox on one side and TRU on the other. TRU is also the party involved in the third and in many ways the most astonishing deal. Traditionally, Mattel is the master toy licensee for Disney and this was definitely the case when Cars, the spectacularly successful animated movie, was first released in 2006. Since then, the franchise in total – toys, video games and other categories - has blossomed into a $2 billion annual business. Cars 2 is expected to be even more successful and to break the record set last year by Toy Story 3 for toy sales.

However, this time around, the line-up of companies selected to make the Cars toys available has undergone a major change. Yes, there continue to be the predictable entities like Mattel for most of the die-casts, Lego for the construction category, Spin Master for R/C vehicles, Ridemakerz for customized products and, of course, Cars Monopoly by Hasbro. However, there is one newcomer – TRU.

TRU not only has the worldwide exclusive for all wooden Cars products, it also manufactures the toys themselves – 15 SKUs to start but more to come - and is responsible for the entire marketing and promotion effort. This is a direct and royalty-based relationship between Disney and TRU which is quite unprecedented. The range will be sold only in TRU stores in the US, Canada, Japan, Australia, UK, Spain, Portugal, France, Germany, Austria and Switzerland.

Add this to the fact that TRU just recruited Neil Friedman, arguably one of the three best toy people in the world and formerly number two at Mattel, as president for the US operation. Friedman was not recruited for his retailing skills but for two reasons: one of them is that he is a highly talented and immensely experienced toy marketer. The other is that his Rolodex of potential toy licensors is legendary. With his connections I would bet my bottom dollar that he will bring many more exclusive and direct licensing relationships to the TRU table.

So, what does this all mean? If the percentages quoted in the first paragraph are correct, it means that US retail sales of licensed toys grew from $3.7 billion in 2000 to $5.35 billion in 2010. In other words, non-licensed toy sales dropped from $20.9 billion in 2000 to $16 billion last year. With the entry into the licensed toy segment by the two toy behemoths Wal-Mart and TRU, the competition in the only toy growth area will become so much more intense. The advantage a large toy retailer enjoys over a manufacturer is immense because the retailer is the primary exposure point to the consumer.

The retailer determines the amount of shelf space and, equally importantly, the merchandising focus and extent. Also, the retailer, by cutting out the manufacturer, can also offer the product so much more competitively since the manufacturer’s gross margin – typically a third of the retail price – is no longer at issue.

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