Toy Industry Losing Its Glory

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by: Bidness Etc

By Nancy Kross

Long gone are the days when girls use to spend hours and hour with their favorite doll and boys would be occupied with their treasured racing car. Today smartphones, tablets, Gameboys and gaming consoles have outclassed every class of traditional toys be it board games, dolls or cars.

Research conducted by the Michael Cohen Group shows that more than 60 percent of parents say their kids aged 12 and under play on touch screens “often,” whereas 38% stated that they played “very often.” Children today prefer tech gadgets to traditional toys as evident by the fact that tablets like Apple Inc.’s (NASDAQ:AAPL) iPad are rapidly replacing conventional toys like LEGO and Barbie. Similarly, other research has shown that more than two-thirds of kids between in the age group of 7-13 years old opt for a tech gadget instead of a toy.

The traditional toy industry in America is a multi-billion dollar industry and according to NPD group, worth around $22.09 billion in 2013. This industry is highly competitive in terms of prices and innovation, and as the US economy recovers from the aftermath of the recession, the toy industry is expected to show overall positive growth of about 4%-5% in 2014. However, traditional toy companies are expected to face stiff competition from video games and smart gadgets that are increasingly used for entertainment purposes.

Recent Trends

Stronger Demand from Emerging Markets

Purchasing power is increasing in emerging markets, implying that there is going to be stronger demand from these markets for traditional toys as income levels directly impact discretionary spending. China and Russia both are growing markets, and according to sources at Mattel (NASDAQ:MAT), toy sales in the year 2013 tripled in Russia and nearly doubled in China.

Crossover toys and games

A recent development with high potential for traditional toys and games is the rise of crossover toys and games that allow traditional games to be played on electronic platforms and interaction between physical toys and applications on tablets and smart phones.

Age Compression

Age compression is the phenomenon of children feeling older at a younger age, and this is changing the dynamics of the toy industry. High-tech gadgets and online games appeal more to children today and are replacing traditional pastime activities. More recently, physical toys have ceded market share to video-game consoles like Sony Corp.'s (NYSE:SNE) PlayStation, Microsoft Corporation’s (NASDAQ:MSFT) Xbox, and Nintendo Co. Ltd.'s (OTCPK:NTDOY) Wii.

Key Players

Mattel Inc. and Hasbro Inc. (NASDAQ:HAS) are the two most prominent companies in the US toy market. Mattel’s diverse portfolio consists of some of the world’s most iconic brands like Barbie, Hot Wheels, American Girl, Disney Princess, Monster High, Fisher-Price and Thomas & Friends. Last year, the company led the toy industry with gross sales of $6.5 billion but despite leading the overall toy industry, the performance of Mattel was not very impressive. Its worldwide net sales edged up 1% only. For the North American region, gross sales dropped by 2%, and International gross sales increased by 5%. For its core brands like Fisher-Price, sales were down by 6% to $2.12 billion and American Girl sales increased by 11% to $632.5 million, while for Mattel Girls & Boys Brands, which includes Barbie and Hot Wheels, sales were up 3% to $4.3 billion as compared to last year. However, sales for Barbie, the company’s signature product, saw a decline of 6%. Mattel, meanwhile, is aiming to strengthen its performance with the recent acquisition of MEGA Brands, a toy company that focuses on construction play and competes with LEGO. It is also striving to revive its flagship brand, Barbie, however, none of its efforts have paid off so far.

Hasbro is another toy and board-game company that's also been facing headwinds. It has a number of leading brands under its umbrella like Transformers, Monopoly, Play-Doh, My Little Pony, Magic: The Gathering, Nerf And Littlest Pet Shop. The company’s wide product line consists of toys and games, television programs, motion pictures, digital gaming and a comprehensive licensing program.

The previous year was not a bad one for Mattel alone, but even Hasbro sales faced a setback during the holiday season. The company’s revenues remained flat with $4.08 billion in 2013. Net earnings for the year were $286.2 million, or $2.17 per share, compared to $336.0 million, or $2.55 per share in 2012. Weaker sales in North American market were the main reason for the company’s falling profits, however, the company still fared better than its competitor Mattel owing to improved performance in emerging markets. In the US and Canada, sales declined by 5%, whereas revenues were up by the same proportion in international markets. The performance in 2014 is, however, expected to be better owing to new toy lines like “Transformers: Robots in Disguise,” based on action movies introduced this year and the re-imagined Littlest Pet Shop, My Little Pony Pop and the all-new My Little Pony Equestria Girls product expected to be launched in the second half of the year.

Conclusion

Today toy makers like Mattel and Hasbro do not just have to worry about rival toymakers, but tech companies as their biggest competitors. So far tech companies like Apple Inc. and Microsoft are creating devices that capture a child's imagination more than a doll or an action figure might. So in order to regain their lost glory, the only solution for traditional toy makers is that they should innovate and reclaim children’s interest back in their toys.

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