Tuesday, April 26, 2005

No Fun For Toys Any More?

On March 17, Toys ‘R’ Us announced that it has agreed to sell the entire company to a group of investors led by KKR Group, Bain Capital and Vornado Realty Trust for $6.6 billion. The sale may lead to a sizeable number of store closing. Industry observers said the move was mostly expected as traditional toy chains have struggled to recover from the constant, brutal price war launched by Wal-Mart and Target. Same thing happened last year, KB Toys went to bankruptcy and till now they have closed nearly half its 1,300 stores and laid off 3,400, one-third of its work force.

On April 15, Mattel Inc., the No.1 toy manufacturer in US announced that its first-quarter net earnings fell 28 percent, due to tougher competition and slowing sales of their key items, including Barbie and Juice Box. On April 18, Hasbro Inc., the No.2 toy maker in US, also announced its first-quarter net loss of $3.7 million.

What has happened to the US toy industry? Does it mean that toys become less attractive to the US consumers? Will the leading toy manufacturers in US continue to suffer in the future? An overview of the current US toy market can help address these questions.

Consumer Dynamics: in US, older people become younger and younger people become older, which means more adults are looking for toys that they can play with family and friends in their leisure time; on the opposite, more children over 8 are getting older faster and unwilling to play the same toys as their younger brothers or sisters. This trend has generated the big impact on toy manufacturers, who are still focusing on the child market or offer narrow and similar product portfolio to different age groups.

Product Variety: “What is a toy?” is currently a key question to all toy manufacturers in US. Electronic toys are gaining more market share from traditional toys - video games, Cable TV, internet, and even MP3 players become children’s new favor. In addition, digital cameras, costume jewelry, CDs and DVD players are making their way into toy market too. Evolving from competing between each other to fighting with more and more toy substitutes, the traditional toy manufacturers are facing a new market game.

Channel Diversity: the takeover of Toys ‘R’ US and the bankruptcy of KB Toys imply new trends in the toy channels. Now toys ‘R’ everywhere – besides the traditional toy chains, you can purchase toys from discount stores (e.g. Wal-Mart and Target), electronics stores (e.g. Best Buy and Circuit City), convenience stores, bookstores, drug stores, online retailers and even gas stations. Among them, discount stores have changed the whole industry. Low pricing of Wal-Mart not only gives toy manufacturers huge pressure on profitability but also squeeze traditional toy chains out of the market. Someone even said that, “Wal-Mart does not expect to make money on toys selling during holiday seasons; they just want to attract more traffic and make money on other categories.”

Supply Pressure: Traditional toy manufacturers are also suffering as the results of continual increase of oil price. The rising price makes plastic, the necessary material for toys, more and more expensive. With both low pricing power from Wal-Mart and high sourcing cost from suppliers, it is obvious that Mattel and Hasbro are losing money.

Competition from China: China is producing over 70% of the world toy products with very low manufacturing cost. For example, a Barbie Doll with $20 selling price in US only requires $0.35 assembly fee in China. To leverage this cost advantage, some discount stores in US have started to source directly from China. When the US toy manufacturers launch their new products, the stores will quickly provide similar samples to Chinese manufacturers in order to produce low-priced private label products for stores. This leads to the intensive price competition and shorter product life cycle to the branded US companies. So US toy manufacturers become reluctant or cautious to invest on the product innovation and new product launch.

Under such kind of market condition, does it mean that traditional toy manufacturers have no future in US? No, we believe that the US toy companies can still establish and maintain their competitive advantages through three strategies:

1) Detailed Market Segmentation and Target Marketing

To satisfy various consumer needs, US toy manufacturers need to further breakdown their consumer segments. For example, Bratz has achieved its success through directly targeting girls who mature into 8 to 12 age range and emphasize on the individualization concept to attract these customers. Bratz quickly established its unique niche market and grabbed huge market share from Barbie. From its success, toy manufacturers can learn that the right market segmentation and better understanding of target consumers are very crucial in the current evolving market.

2) Tailored Product Offering for Different Channels

To reduce the power of discount stores and regain the control of channels, US toy companies should differentiate their channel management. We recommend that manufacturers launch their new products first from traditional toy chains and department store etc., who can help them maintain their product price premium and sell to the high-end consumer group. Then manufacturers can gradually introduce these products into discount stores and other mass markets with reduced price to capture the low-end market. Furthermore, toy companies can even think about building up their own flagship or specialty stores for key brands, to provide product portfolio show, launch new products and also develop the consumer communities.

3) Alignment with Other Industry Players for New Product and Market Development

To catch up with the product variety trend, traditional toy companies can try to seek partnership with other industry players, e.g. consumer electronics or software companies, to leverage their expertise on new product development for electronic toys, and at the same time, to share self consumer knowledge, market experience and distribution network with these partners. Such kind of alignment can bring both side win-win results.

Guyun Tang, Lulu Xu and Xiaoli Zhou

1 Comments:

Blogger snowflakebebe said...

Bratz also appeal to adult collectors who got tired of the same ugly plastic fashions Barbie came with and were attracted to the colorful and pretty way the Bratz dolls were made.

I also hope TRU does not shut down in a major way because then not much will be left to fight Wal Marts "low prices" and the more people that go out of business the greater the chance of the day arriving when WM just says we'll sell whatever we want for whatever we want.
sfb

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