Trouble in Toyland

Studios are more leery of licensing deals with the changes going on the toy business. Maya & Miguel toy image courtesy of Scholastic Ent.

As toy store chains contract and close, and as discounters control an increasing percentage of toy sales, licensing strategies within the toy category are changing. Animation studios and agents are rethinking launch and roll-out strategies, tweaking the product mix, examining the role of exclusivity and considering alternative distribution channels as they struggle to find a place on store shelves.

The major toy chain, Toys R Us (TRU), is losing market share and thinking about splitting its toy division from its Babies R Us chain, and possibly even selling off the toy operation. KB Toys entered bankruptcy about a year ago and has closed 700 of its 1,300 stores since then. Noodle Kidoodle and Zany Brainy, the two leading book-and-toy specialty retailers, both are out of business, and FAO Schwarz, which also declared bankruptcy, closed all of its stores except two (in New York and Las Vegas) to focus on its high-end catalog/website operations.

Meanwhile, consumers are increasingly turning to discounters for their toy purchases, especially Wal-Mart and Target, which together accounted for over 50% of the market in 2003, according to analyst Piper Jaffray. (The industry is waiting to discover the impact of the recent merger of Sears and Kmart.) Discount chains carry fewer items and feature fewer brands and properties than traditional toy stores. They also sell toys more inexpensively, causing some toy outlets including TRU to discount their prices and lower their margins to compete. Online toy sales are booming as well, resulting in more competition and more price pressure; this trend should intensify as more consumers start using broadband.

Retail consolidation has been accompanied by mergers in manufacturing. The two big toymakers, Mattel and Hasbro, have taken over many formerly independent toy companies, as have other manufacturers, such as Jakks. Few independents remain.

U.S. sales of traditional toys have decreased over the last few years. Sales of traditional toys were down 3% in 2003 to $21.3 billion, according to the NPD Group and the Toy Industry Assoc. While the two organizations will not release 2004 sales figures until Toy Fair starts on Feb. 20, 2005, analysts have estimated that sales were down 5% over the first three quarters of the year and about 1.5% during the critical holiday selling season.

Several factors lie behind the industrys struggles. Kids are moving beyond traditional toys at an ever-earlier age, a phenomenon known as age compression; action figures now appeal to 4- to 6-year-old boys, for example, whereas a decade or more ago they extended up to age 12 or so. Kids spend their time on a wider range of activities than ever before, from sports to videogames to DVDs to e-mailing, all of which compete with toys for their leisure time. New products such as wireless phones and iPods compound the challenge.

The decrease in shelf space for toys means it is more difficult for a new licensed line to break through, or for an established line to continue to maintain a presence. The biggest concern is the number of properties a retailer will commit to in general in the toy category, says Al Kahn, ceo of 4Kids Entertainment, which has deals with Hasbro (for Pokémon), Playmates (Teenage Mutant Ninja Turtles) and Mattel (Winx Club and Yu-Gi-Oh!), among others. Everybody is taking fewer assortments. Theyre looking for the lines that can show volumes and maximum inventory turns. Its a problem if youre trying to establish a new license.

Joy Tashjian knows how difficult it is for an independent production like Delgo to get big licensing deals. © Electric Eye Entertainment 2004. All rights reserved.

Ratings and Retail

While there are fewer toy licensees, there are also fewer broadcasters, especially broadcasters that mean something, says Joy Tashjian, head of Joy Tashjian Marketing Group, which represents Da Jammies, a hip-hop-themed animation property from Head Start Entertainment; Fathom Studios feature film Delgo; and Breakthrough Animations Atomic Betty. Playmates Toys holds the master toy rights for both Delgo and Atomic Betty.

Tashjian points out that selling a property to toymakers and retailers is a different proposition from selling to broadcasters. For example, the toy industry is looking for properties that will appeal to either boys or girls within a certain age range. But thats a retail agenda, Tashjian says. The broadcaster doesnt just program to one [demographic group]. They have different needs.

She also notes that just because a show has high ratings does not mean it will be a good toy line. Theres a huge difference between what kids will watch and what theyll buy. An action-adventure series typically lends itself to more and better toys than a comedy, for example, no matter what their relative ratings strength.

Ratings dont give a fair picture, agrees Kahn, who points out that the aggregate rating for boys/girls 2-11 is not meaningful for a toy company. Manufacturers need to focus on the demographic segments that match their core market. Who cares if the non-target audience is watching the show?

To succeed in licensing, you have to create a groundswell with the kids. You have to create an emotional connection, says Peter Van Raalte, Scholastic Entertainments vp, consumer products. While the TV show is one key factor in establishing that relationship, other elements also are important, such as exposure in other media (e.g., books and websites), as well the merchandise itself. Scholastics series Maya & Miguel, which airs on PBS, has 30 licensees, including Toy Play.

Many licensors believe in giving a show time to establish itself on air before introducing toys and other products at retail. We believe that the TV program should catch on before any products are out, Van Raalte says, explaining that Scholastic wants at least six to eight months to pass before its licensees introduce merchandise. (Some licensors wait a year or more.) We try to encourage our retail partners not to take things in too early, because it will fail for all of us. Maya & Miguel launched last October, and toys will debut in the fall, after the introduction of apparel and books this spring.

Kahn takes a different view. The time between when the TV and the toys hit has been diminishing, he says. 4Kids tries to bring out toys simultaneously with or within a short window after the premiere of the TV series. Kahn believes retailers may focus too much on cumulative ratings if they wait until a show is established, rather than examining more important factors such as the play pattern of the toy, the promotional plans surrounding it, and the popularity of the show among the relevant target audience. While it can be difficult to sell into retail before a show launches, buyers may give the property a chance if all of these factors fall into place.

Scholastic leverages the uniqueness of its series like Maya & Miguel and Clifford to attract specific retailers. Courtesy of Scholastic Ent.

Creating a Point of Difference

In todays competitive market, retailers want to differentiate themselves. They are looking for something unique, whether that can be an exclusive product or the property itself. Everyones looking for something with a strong point of difference, something thats worth taking a chance on, says Kahn. If its formulaic, the chances of placing it are becoming more difficult. He adds that, no matter how popular a show is, it has to lend itself to toys that are fun to play with. You have to have good product development and good product execution. That sets apart the successes from the failures.

With Maya & Miguel, Scholastic has a property that appeals to Latino families, a demographic group in which retailers are very interested. Theyre trying to get more and different customers into their stores, Van Raalte says, explaining that Maya & Miguel is one of a handful of properties with themes appropriate to this market. Retailers are looking for something like this.

It all still comes down to content, Van Raalte continues. [Retailers] have to believe theres a need for the property, enough of a point of difference, and that its not just a copycat property.

Toy stores seek something of their own when it comes to product, whether it be a four- to six-week exclusive on all merchandise to launch a property, or a single promotion, premium or product, tailored to their needs, that they can promote as exclusive. Retailers are looking for a driver to get kids into stores, Tashjian says.

As the number of potential partners declines, its very hard to get an exclusive, admits Van Raalte. (Maya & Miguel s launch will be with a single retailer, although details are unavailable yet.) But, even if a broad exclusive is not viable, a licensor and its partners can still offer a retailer something with added value. One retailer will carry a Maya & Miguel doll from Toy Play that comes with an extra outfit only available at that store.

In the past, many licensors launched properties by forging exclusive deals with higher-end specialty retailers, then expanding in stages to lower-priced tiers. While that strategy is still possible, it is becoming less frequent, especially in the toy category. If youre trying to create a strong license, you need awareness, says Kahn. An upscale retailer might be a viable launch partner if it offers significant promotional support but, in general, it is preferable for the toys to be available to the majority of kids, and that usually means mass-market distribution.

Looking for Alternatives

While the discounters and TRU remain the main channels for toy sales, licensors of animated properties and their toy partners are exploring alternative distribution channels including dollar stores and wholesale clubs, non-toy specialty retailers (such as craft, home improvement, music and office supply stores), supermarkets and drugstores, coffee shops, and apparel retailers (such as Urban Outfitters and Claires). This trend is likely to continue as the number of toy accounts dwindles.

One growing channel is e-commerce, with web-based stores such as Amazon.com and eToys accounting for an increasing share of toy sales. An online toyshop called Tys Toy Box (www.tystoybox.xom) features boutiques of animation-based toys, including one for Atomic Betty. The company works with the propertys existing licensees to source product. Its not that it sells that many toys, but its a platform to reach your consumers and track your consumers habits, says Tashjian. She notes that since the product is limited in number and differentiated from retail merchandise, it does not cannibalize traditional retail stores sales.

Teenage Mutant Ninja Turtles and Yu-Gi-Oh! are brands that dominate toy store shelves. TMNT images © 2005 Mirage Studios Inc. A trademark of Mirage Studios Inc. All rights reserved. Yu-Gi-Oh! images © 1996 Kazuki

In terms of products, many traditional toy categories are struggling, but playthings with electronic components are bucking this trend. They still have a certain novelty cachet that appeals to consumers, and they tend to be higher-priced, which is attractive for toymakers and retailers. Examples include toys packaged with DVDs, childrens interactive televisions, electronic books, toys offering exclusive Internet content to enhance play, portable video players, and all kinds of items with sound, light and infrared communication.

While most licensors try to limit a propertys product assortment, at least initially, to prevent market oversaturation, they also want to provide enough merchandise at various price levels so that they do not lose any potential sales. For example, Toy Play is making about 10 items for its Maya & Miguel launch, with prices ranging from $5.99 to $25.99. We want to provide different price points so theres something for every store, says Van Raalte.

Creating Awareness

With the heightened competition for shelf space, toymakers and licensors do whatever they can to raise consumer awareness and give their properties an edge. As kids time is split among more activities and more media, licensors and their partners need to reach them in a variety of places. TV advertising is still the main method of exposing children to toys, but it is not enough by itself.

A retailer wont touch a license unless theres significant recognition, says Tashjian. But it doesnt have to be TV-based. You have to look beyond the TV show, and you have to make a mark prior to the TV show. You cant go the traditional route from TV to toys to retail any more. You have to do lots of layering.

She notes that partnering with companies in the music, video and publishing categories are critical to creating awareness, as are promotional activities such as mall tours. Malls have become an entertainment resource for families, Tashjian says. For Da Jammies, which is voiced by hip-hop celebrities, a Reebok-sponsored mall tour is scheduled for before the shows launch. Music CDs and radio exposure are also part of the promotional plan for the property.

Scholastic supports its properties through its publishing divisions, giving them exposure in bookstores, magazines, and book fairs and clubs. In addition, the company does local outreach for its PBS shows, including appearances at local TV stations, educational materials and other grassroots marketing. Such activities help make consumers and stations more passionate about the property, which can result in greater TV exposure. While many PBS childrens series are aired once a day on stations across the country, resulting in about 700 to 800 plays per week, Scholastics Clifford is on three times a day in some markets, for a total of about 3,000 plays per week.

As Van Raalte says, You have to stay in front of people when they have so many choices.

Karen Raugust is a Minneapolis-based freelance business writer specializing in animation, publishing, licensing and art. She is the author of The Licensing Business Handbook (EPM Communications).