The Australian Toy Market: Large, Growing And Welcoming

|
Includes: HAS, MAT, SNMSF
by: Lutz Muller
Summary

Australia’s toy market is in its major characteristics very similar to the U.S., the U.K. and Canada. It is hence an easy country to enter for Western toy manufacturers.

However, getting shelf space at the retailers after Toys "R" Us’s closure is a major problem and negotiating leverage has clearly shifted from the manufacturers to the retailers as a result.

The top four companies control nearly half of the market and Moose, Mattel and Hasbro are battling for the second position after Lego who continues to dominate the market.

The Country

Australia ranks as one of the best countries to live in the world by international comparisons of wealth, education, health and quality of life. The sixth-largest country by land mass, its population is comparatively small with most people living around the eastern and south-eastern coastlines. In fact, Australia is one of the most urbanized nations with over 90% of its population living in urban centers and occupying a mere 0.22% of the country’s land area.

Australia is also a very wealthy country – it had a GDP of A$1.69 trillion [or US$1.2 trillion] and became the wealthiest country in the world in 2018 in terms of its median wealth per adult. Yet, like in many other countries, this wealth is not equally distributed in Australia either. Australia is among countries with the highest growth in income inequality in the world over the past 30 years, according to the International Monetary Fund. Vitor Gaspar, the IMF’s director of fiscal affairs, has told an audience at the launch of the IMF’s latest Fiscal Monitor that Australia’s income inequality growth has been similar to the US, South Africa, India, China, Spain and the UK since the 1980s.

The language is English. The county’s population of 24.7 million is predominantly [85%] Caucasian with the original population, the Aboriginals, representing less than 4%. Australia is a constitutional monarchy, largely modeled on the Westminster system of parliamentary government with H.M. Queen Elizabeth II being the Head of State.

Like most developed countries, Australia's population is ageing as a result of sustained low fertility and increasing life expectancy. This has resulted in proportionally fewer children (under 15 years of age) in the population and a larger proportion of people aged 65 and over. The Children population segment 14 years old and younger numbered 4.6 million in 2018 and is growing at a 1.4% annual rate. This has obvious implications for the Australian toy market.

Overall, the country is very easy to do business in but it has a few problems. This is how Australia compares in the key parameters with the other countries previously analyzed by the author:

The first column – Difficulty in doing Business – deserves a closer examination:

Very clearly, the major bugbear in arriving at the present rating is the “Trading across Borders” criterion. As it stands, Australia sits at the 95th spot on the World Bank’s ‘Trading Across Borders’ ranking. That’s an astonishing slide from 2011, when it was 34th. Now, the nation is lagging behind New Zealand, which is 56th, Singapore, at 42nd, and the US, at 36th.

This low ranking is caused by an astonishing lack of digitization in importation logistics where manual processing remains the norm. While the advent of email naturally reduced the use of paper, the current processes used by freight forwarders, customs brokers and trade finance have remained, for the most part, the same with minimal evolution. Part of the problem is that, while systems are not completely analogue, they are set up to reward inefficiency and duplication rather than innovation.

For example, a perverse situation has arisen whereby some players in the supply chain derive significant income from late fees and penalties – and they are able to do so because their customers and their customers’ customers have limited visibility over their cargo. Consequently, an estimated A$1 billion of value is tied up in these outdated and antiquated practices, and it’s the small to medium enterprises that suffer the most. The current system is one which forces Small-to-Medium Enterprises [SMEs] to pay freight forwarders, customs brokers and others on the supply chain to engage in ineffective processes on their behalf. This worsens any pre-existing inefficiencies in the logistics sector and is a possible cause for Australia’s sharp fall in its ‘Trading Across Borders’ ranking.

The Toy Market

The Australian toy market is much larger than people generally assume when they consider the small population of the place. In fact, it is larger than Mexico or Italy and about the same size as Spain.

Just like in the U.S., the Australian toy market is highly seasonal. About 40% of all toy sales are made during the last quarter.

The Australian toy market was essentially flat in 2018 and is expected to grow about 2.5% in 2019 – about half the anticipated worldwide growth rate. However, Online sales are growing rapidly. The fastest growing segments of the online market are the toy, media and department industries:

Source

The closure of Toys "R" Us has had a similar impact in Australia as it had in the U.S. and the U.K.:

  • Most of the sales made by Toys "R" Us have by end of last year migrated to other retailers.
  • Main beneficiaries were the Mass Retailers, Online providers and the remaining Specialty Stores. Toy Mate for one is taking advantage of this. The retailer has already taken over a former Toys "R" Us store site in Sydney and plans to open several more throughout Australia this year.
  • The smaller manufacturers and distributors were inordinately dependent on Toys "R" Us and are hence more affected by its departure than the larger companies.
  • Just like in the U.S., the loss of Toys "R" Us toy shelf space has not been fully compensated by the remaining retailers with the result that competition for product placement is intense. As a result, the retailers have significantly sharpened their demands for pricing and promotional concessions from both new and existing vendors.

However, the fate of Kmart Australia is likely to be much different from that of its U.S. namesake. The Australian operation is owned and managed entirely by Wesfarmers. Wesfarmers Limited is an Australian conglomerate with interests predominantly in Australian and New Zealand retail, chemicals, fertilisers, coal mining and industrial and safety products. With sales of more than US$50 billion in 2018, it is the largest Australian company by revenue, overtaking Woolworths and BHP.

This is how the Australian toy market breaks out:

Source: Klosters Retailer Panel

One of the national buyers at a large toy retailer in Australia talked to me about the current status of the top six companies:

  • Lego is clearly in a league of its own in that it totally dominates Australia’s largest toy category – Construction toys. Whilst the company had a very rough couple of years due to its complete dependence on movie licenses for product development, this has now changed as it has elsewhere. Whilst movie licenses are still a factor, emphasis is now being put on in-house product creativity and this has begun to show in the market place. There is little doubt that Lego will continue to dominate the Australian toy market for the foreseeable future.
  • Hasbro (HAS) has had tough sledding in 2018 for a couple of reasons. One is that the 2017 Star Wars success could not be repeated. The second is that the company was inordinately hit by the closure of Toys "R" Us which had been its major retailer since time immemorial. Basically, Hasbro’s market share declined in 2018 from a 13% high in 2017. The expectation is that the company will again begin to grow in 2019 given the very high number of movie releases for which it has the toy licenses.
  • Mattel (MAT) fared a little better and could in fact increase its market share in 2018 even though its non-Barbie Girls business got hammered by MGAE’s LOL. Barbie nevertheless continued to grow in 2018 like it did elsewhere. What benefited Mattel in particular was its performance in toys backed by movies – Aquaman and Jurassic World. However, since the company does not have the strong movie release schedule it had in 2018, it is somewhat unlikely that it can maintain its market share next year.
  • Moose is Australia’s largest domestic toy company and is tied with Mattel for the second position after Lego in Australia. The company is doing extremely well with its top brands – Shopkins, Treasure X, Grossery Gang and Pikmi Pops – and all expectations are that it will continue to take share from both Hasbro and Mattel over the next few years.
  • Spin Master (OTC:SNMSF), too, is doing well and gaining share. Its major products are Paw Patrol, Hatchimals, Luvabella and its range of board games. However, it does appear that its two leading products – Paw Patrol and Hatchimals – are both slowing down. Rusty Rivets and later Bakugan, both in the Action Figure category, could compensate for this but, if not, it is likely that the company will have a tough time in 2019.
  • MGAE is the clear star performer mainly on the strength of LOL which authoritatively has captures the #1 slot in the Fashion Doll category in Australia [as it has elsewhere]. At this point, it appears likely that the company will further expand its market share in Australia particularly as they are now taking over the entire marketing and sales responsibility and no longer depend on their longtime distributor, Headstart.

At the beginning of this year, this was the top product lineup in the two key categories, Fashion Dolls and Action Figures. This confirms pretty much the market share estimates given further above:

Retailer

Best

Second

Third

Fourth

Fifth

Fashion Dolls

Big W Australia

LOL Headstart*

Barbie MAT

Pony HAS

Moana HAS

Trolls HAS

Kmart

LOL Headstart*

Luvabella Spin Master

Barbie MAT

Dis Princess HAS

Lori Battat

Target

LOL Headstart*

Barbie

Mattel

Luvabella Spin Master

Pony HAS

Sparkle Girlz Funville

Big Ape

LOL Headstart*

The Wiggles Hunter Products

Sylvanian Epoch

Poopsie Headstart

Pony

Hasbro

Action Figures

Big W Australia

Transformers HAS

Justice League

MAT

Spiderman HAS

TNMT Playmates

Grossery Gang Moose

Kmart

Jurassic World MAT

Mighty Muggs HAS

Avengers HAS

Transformers HAS

Fortnite Epic Games

Target

Fortnite Epic Games Banter

Treasure X Moose

Mighty Beanz Moose

POP Ikon

Spiderman Hasbro

Big Ape

Scarab

Hexbug

Ooshies Hasbro

P J Masks Headstart

Teenage Mutant Ninja Turtles Headstart

PawPatrol Spin Master

*Note that MGAE, the owner of LOL, is taking over selling and marketing

Source: Klosters Retailer Panel

I asked the same national buyer as to what a newcomer to the Australian toy market should do, or not do, to be accepted by her company. This is in essence what she said:

“With the departure of ToysRUs we have been absolutely inundated with offers from new vendors – vendors who previously relied on ToysRUs and its shelf space for the exposure of their products. As a result, we first determine just how well such a vendor did with this former competitor of ours. If it did well, we will find a spot for it. As for total newcomers, companies who have not done business in Australia before, they will have an uphill struggle even to get a hearing. If they can demonstrate that they have a unique product that has done extremely well in another Anglo-Saxon country such as the U.S. or the U.K. then we are willing to listen. To make sure that the product has a good chance it is advisable to establish some sort of a sales record in Australia. There are two ways of doing this:

  • If the company does not want to establish a legal presence in Australia at the beginning, it can go two ways. One is via a distributor. There are several but many of them were very dependent on ToysRUs and are having major cash flow problems since the retailer shut down. They also are in the process of losing their best product licenses as a result. So, caution is indicated when going this route.

The other is to promote the product in Australia via traditional and social media and to deliver to consumers via Amazon. In the case of a U.S. company which is a First Party Amazon vendor this works but it makes the product more expensive than it needs be. To give you an example, the Barbie Dream House, if shipped from Amazon U.S. to an Australian address costs U.S. $380.33. The same item if shipped from Amazon Australia to a Prime customer in Australia is only A$ 466.75 or U.S.$333. Also, Amazon U.S. does not ship products provided by Third Party vendors to Australia.

  • The second avenue is to establish a subsidiary in Australia. This is a separate legal entity with limited liability and is an Australian resident for tax purposes. The subsidiary can be wholly owned by a foreign shareholder, however, it is required to have at least one Australian resident director. Having done this, the Australian company can then begin selling product online from its own website or via Amazon Australia before going to brick-and-mortar retail. “

The final takeaway is that Australia is an easy market to enter and in which to operate. Like all other countries, it has its problems but they are on the whole minor. Foreign companies and products are generally well regarded. It is also a reasonably large market for toy products. However, it is a very competitive place and, after the demise of Toys "R" Us, not one where shelf space is readily available. In short, if you have a truly unique product that has been very successful elsewhere, you will not have too many problems getting accepted by the leading retailers. If you don’t, you will have to do it the hard way just like everywhere else.

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.