Market Report: Toy story

In the midst of the 2003 toy fairs season, the industry is showing signs of stress. Irwin Toys Ltd. (Toronto) filed for bankruptcy in December. U.S. toy retailer F.A.O. Schwartz filed for Chapter 11 bankruptcy protection in January. Licensed toys linked with movies and TV shows are being recognized as a hit-or-miss, boom then bust proposition.

Yet there is optimism.

“The supercategories of action figures and infant/preschool, as well as the individual categories of building/construction, ride-ons and arts and crafts, all enjoyed double-digit growth (in 2001),” reported the Toy Industry Association following last year’s American International Toy Fair.

The Hong Kong Trade Development Council notes that educational, creative and developmental toys have emerged as a key sub-market.

Also watch for upcoming web-compatible toys. It’s common for toy makers to have web sites for product promotion, but some are now introducing toys capable of linking with the Internet so that playing can be extended beyond the physical plaything. Bandai, for example, offers toy robots that allow users to play games on the Internet with an animated version of their robot.

LICENSE TO PROFIT

“The sparkling success of licensed products is expected to continue into 2003. While more toy manufacturers will ride on the licensing bandwagon in the hope of success, they should be aware that the trade is characterized by a rather short boom-and-bust cycle,” states an industry report from the Hong Kong Trade Development Council. It continues: “A few leading toy companies have adjusted their marketing strategies to be less reliant on licensed products.”

U.S. toymaker Hasbro, for example, owns the toy license for Star Wars and for Disney movies. Hasbro took a cautious approach to licensed lines in 2002, producing a less broad spectrum of licensed toys than in 2001, reports a toy retailer web site, ICV2.com.

Montreal-based Mega Bloks Inc. has also signed on with Disney, announcing last November licensing agreements with Disney Consumer Products and its affiliates. The agreement covers construction toys featuring Disney characters, including Winnie the Pooh, Disney Princesses, classic characters and Power Rangers.

“Disney’s portfolio of properties complements our existing range of preschool products. And the Power Rangers, with their proven appeal to boys ages 4-7, integrates well into our Micro MEGA BLOKS offerings targeting this age group,” says Vic Bertrand, executive vice-president and COO of Mega Bloks.

Details about the new line of products are being released at the major international toy fairs in early 2003.

However, even the power of Disney marketing is not a guarantee of profitability. Disney’s animated big-screen release, Treasure Planet, had a disappointing box office debut in early December, writes ICV2.com. “It is possible that Treasure Planet will find its audience eventually… but for now Treasure Planet is a major disappointment, and the well-designed Treasure Planet merchandise is likely to languish.”

Licensing was not a treasure chest for Irwin Toy Ltd. either. The company produced Dragon Ball Z toys for North America, but despite impressive sales of the DBZ figures, Irwin filed for bankruptcy in early December. According to ICV2.com, Irwin had production delays this summer which hurt sales, and court filings show the company has inventory valued at $28.8 million.

NOT ALL HAPPY ENDINGS

Although much toy manufacturing has migrated to China and other Asian countries, there remains a multi-billion dollar domestic manufacturing industry in North America.

Mega Bloks Inc. has had tremendous success making proprietary building blocks and construction toys in Montreal. The company holds 20% of the North American market for this type of toy. But aside from this mega success story, much of what remains of the toy sector in Canada is a niche in sporting goods and outdoor recreation products.

“We still do some molding of small toys, but we import most products from China, Hong Kong, India… It’s so much cheaper that we can’t compete,” says Ken McPhail, manager at Actionmatic Ltd., a molder and importer in Chatham, ON.

Harold Chizick of Spin Master, an up-and-coming toy company based in Toronto, says all of his company’s molding is done in China and Hong Kong. “That’s where the experts are.” Spin Master produces Air Hogs air-powered airplanes and vehicles, and a variety of other toys which use injection molded components.

Product safety and ethical sourcing have become concerns for international buyers, and could have implications on global manufacturing. The International Council of Toy Industries, which represents 20 national associations, began implementing a worldwide ethical manufacturing program in December. Manufacturers will be monitored for practices including fair pay, decent working conditions, employee health and safety standards, and the absence of child labor.

To reduce operating costs and stay competitive, the majority of Hong Kong toy makers have set up production facilities offshore, mainly on the Chinese mainland. Thus, Hong Kong’s role is shifting toward quality control, management, marketing, product design and production management. In this function, Hong Kong companies have secured OEM orders from industry giants such as Mattel, Hasbro, Disney, Bandai and Tomy.

The Hong Kong response echoes the response of some Canadian moldmakers to Asian competition: form alliances and shift your role in order to stay in the game.