New Toy Brands Are Challenging The Status Quo

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Includes: HAS, MAT, VTKLF
by: Lutz Muller

Summary

Jazwares, eOne, Just Play, Melissa & Doug, and MGA Entertainment are making major inroads.

Mattel has shifted focus and is gaining, whilst Hasbro is facing major headwinds.

The new drivers are product innovation and not movies or major licenses.

The worldwide toy space is in flux and it is the innovators who are driving it. They are also proving the pundits wrong, they who preached that the business was powered by the movies, by the big licenses, by the big spenders, and by the largest marketing machines. They also said that the demise of Toys "R" Us would spell the demise of the smaller brands so desperately dependent on this retailer.

Fact is that new entrants from second- and third-tier companies are upending major toy categories. With the exception of Mattel (NASDAQ:MAT), they are all privately owned companies and none of their brands are supported by licenses, movies, or other crutches. The brands I am talking about are Barbie's Career dolls, the Enchantimals, LOL, JoJo Siwa, Hairdorables, and Vampirina in the fashion doll space; Roblox and P J Masks in action figures, and Mattel's LaughnLearn and ThinknLearn and Melissa & Doug in the learning space. As for the baseline, I looked at the leading brands in the three toy categories - Barbie, Disney Princess in the fashion doll category; Star Wars, Transformers, and Spiderman for action figures; and VTech (OTCPK:VTKLY) and Leapfrog in the learning space.

To make sure that I had my facts straight, I consulted in August with national buyers at twenty-three major retailers in fourteen major toy markets around the globe. I asked them what the leading five IPs in each of the three toy categories were in their chain, and I allocated weights to reflect the difference between the top position down to the fifth position. I then went back to my retailer data collected a year earlier at the same retailers and followed the same method.

This was the result in terms of position and weight last year and this year in the case of fashion dolls:

Source: Klosters Retailer Panel

To illustrate the metrics - Disney Princess in August 2017 appeared four times amongst the top five brands as reported by five North American retailers and had a weight of 11 following the method of allocating 5 points to the top position down to 1 point to the bottom one. In 2018, with the same retailers, the brand appeared only 3 times and its weight nearly halved to 6.

What this tells you that Barbie increased its weight by 10% worldwide and Disney Princess lost more than a quarter. This agrees with our worldwide sell-through retailer data amongst 30 retailers worldwide which show for the former a 5% increase and for the latter an 8% decrease for the quarter. Equally interesting is to note that Barbie's 2018 performance was mainly driven by their recently launched Career doll range.

What is really impressive is the performance of the brands that did not appear in any of the top five ranks last year but made a major impact this year - Enchantimals of Mattel; JoJo Siwa, Hairdorables and Vampirina of Just Play; and LOL of MGA Entertainment. Between them, they accounted for more than 40% of the total weight of the category worldwide. What is even more impressive that they did this despite the demise of Toys "R" Us in the U.S., the U.K., and Australia.

As for the action figure category, this is how the metrics shakedown:

Source: Klosters Retailer Panel

Again here, we see the existing "old" brands taking a beating at the hands of the newcomers. This, too, is backed by sell-through data generated during the third quarter on the strength of feedback from national buyers at 30 retailers in 17 countries. Both Star Wars and Transformers are reported to be sharply down worldwide. The exception is Spiderman because of its strong sell-through performance in North America, specifically the U.S.

Finally, the learning space:

Source: Klosters Retailer Panel

When VTech acquired Leapfrog two years ago, the national buyers - who do not like monopolies - reached out to a number of companies inviting them to develop toys in the learning space and promised them footage in the learning aisle if they did. Two did, Mattel and Melissa & Doug and the metrics above tell the story of what then happened. They were not the only ones that tried but they were the only ones who came up with true innovation in their product development.

To confirm that these sell-through metrics I then also looked at the shelf space as recorded by me at Walmart (NYSE:WMT), Target (NYSE:TGT), and [in 2017] Toys "R" Us:

Source: Klosters Retailer Panel

The shelf space comparison above bears out exactly what the Ranks Values suggested and this for each IP. In fact, Barbie and Mattel's new learning products expanded their shelf space in 2018 even though the brands lost Toys "R" Us. All other "old" brands lost shelf space whereas the newcomers did all very well. In short, the U.S. shelf space metrics are totally consistent with the sell-through information provided by the national buyers.

The real question is why. What you see is newcomers clearly beating the old-established brands even though these newcomers do not have the movie backing and the strong license support the old brands have. The outlier here is Mattel but only until you consider that the company's products driving its performance in the Barbie and the learning space are new products which again stand out through their innovative profile rather than movie or license underpinnings. The same innovative resurgence by Mattel is shown by the performance of Enchantimals.

In this context, it is useful to remember what happened to Lego. The company too relied for years on movie-driven licenses for its innovation engine with the result that its sales performance began to deteriorate throughout 2017. After ousting its CEO, the company embarked upon a major reorientation of its product development effort where the new focus was on product innovation rather than dependence on movies and licenses.

Could it be that Mattel has learned this lesson and Hasbro (NASDAQ:HAS) has not?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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