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Sweden - In Difficult Markets, Distributors Are Better Than The Toy Companies Themselves

|Includes: HAS, Mattel, Inc. (MAT)

I have always maintained that a toy company is generally better advised to place its own people into an international market place rather than relying on local distributors. One reason of course is that having one's own executives on the spot generally ensures greater control and greater commitment and this tends to outweigh the advantages of going third-party.

However, there are exceptions to this rule. One is where the country's laws, customs or religions absolutely demand local control and commitment. The other is where the market is too small to warrant creating an infrastructure for a single company. The third is where a distributor is clearly so entrenched and dominant that an American toy company would find it preferable to let the distributor handle the business with little supervision from the side of the company.

One of the markets where a combination of these factors applies is Scandinavia - Denmark, Finland, Norway and Sweden. For the purposes of this article we have focused on Sweden as the biggest toy market of the four and we are using Tactic Games OY as an example of what a distributor does.

There are a number of obstacles that face a toy company doing business in Sweden. One is the language itself, Swedish, which means that you cannot use the packaging that you have for larger adjacent markets such as Germany. Secondly, product quality and not price is the prime determinant for market position which explains why Lego is #1 and has with 22% double the market share of its next following competitor, Hasbro (NASDAQ:HAS). Also, Mattel (NASDAQ:MAT) with a mere 7% market share is way below what you would expect and one reason is that the Fisher Price recalls ten years ago have not been forgotten.

Thirdly, it is a relatively small toy market place and one that is split between an inordinate number of outlets. The top four retailers in Sweden account for an approximate 25% market share whereas in the U.S. Amazon, ToysRUs, Wal-Mart and Target between them have more than 75%.This is the market place as estimated for 2016:

Sweden Retail Market

2016

 

Leading Retailers

   

Million Euro

   

Toy Specialty Retailers*

50%

       

Non-Toy Specialty Retailers

15%

Infant/Preschool

60

 

Mass Retailers

 

15%

Games and Puzzles

50

 

Internet Retailers

 

20%

Dolls

 

60

 

* of which Top Toy/TRU 12%

 

Outdoor

 

60

         

Vehicles

 

40

 

Leading Toy Companies

 

Construction

120

 

Lego

   

22%

Arts + Craft

20

 

Hasbro

   

11%

Plush

 

30

 

BR Brands

Distributor

9%

Action Figures

30

 

Mattel

 

distributed by Legetoj

7%

Youth Electronics

10

 

Brio/Ravensburger

 

6%

Other Toys

20

 

Tactic

 

Distributor

4%

Total

 

500

 

All Others

 

41%

Source: Klosters Retailer Panel

             

As the fourth complicating factor, the number of toy outlets is very considerable and extremely diverse:What the toy market number of €500 million does not include is the web imports by Swedish consumers from Amazon and other online providers located in fellow-EU countries such as Germany and the U.K. and which amount to another €50 million to €75 million. This is, incidentally, another complicating factor in that prices for the same product vary greatly depending of whether you import it via Amazon or buy it at the Swedish ToysRUs store. For instance, the Star Wars Rogue One Sergeant Jyn Erso figure with gun is shipped by Amazon UK at £7.99 [or US$9.99] whereas at ToysRUs Sweden the same item retails at Swedish Kronas 199.90 [US$ 21.99].

Channel

Number of

Points of Sale

Points of Sale

Covered by

 

Chains

all Product Categories

including Toys

Tactic

Hypermarkets

3

177

177

177

Supermarkets

10

1426

300

225

Specialty Toy Stores

4

336

336

331

Book Stores

3

278

120

120

Dpartment Stores

5

276

163

153

Discounters

6

229

229

104

Web Stores

15

15

8

8

Gas Stations

3

451

250

250

Kiosks

2

807

0

0

Ohers

1

81

81

81

Internet Retailers*

10

10

3

3

Total

62

4086

1667

1452

         

*Swedish Internet Retailers carrying toys are Halens.Se, AdLibris.Se and Cdon.com

Source: Klosters Retailer Panel

Given this somewhat complicated picture, it is not totally surprising that distributors are doing well. In fact, even ToysRUs had in 1996 decided to go local and to entrust the management to BR Toys under a franchise agreement. Today, there are 2 BR toy stores and 25 ToysRUs stores under BR management in Sweden which makes them today the largest toy retailer in the country.

Mattel, too, decided to go the distributor route and is now handled by VN Legetoj who displaced the former distributor BarnNet last year. Whilst Mattel is clearly VN Legetoj's largest account, they have others - 4Kids, Wader, etc.

In the specific case of Tactic, they have a fairly wide range of distributorships - Ty, Bruder, Carrera, Greentoys, Geomag, John Adams, POPmedia [Beatrix Girls], Iconix Brand Group [Strawberry Shortcake] and others. Most of these are exclusive to Tactic with rights for the entirety of Scandiavia - Sweden, Denmark, Norway and Finland.

Other companies decide to do it by themselves - Hasbro, Simba Dickie, Jazwares are examples of this. The question is - what model promises the better outcome?

Firstly, the motivation is different. Distributors live and die by their success each year. The easiest thing for a licensorr is to yank the brand if the outcome is not what he or she expected. You yank enough brands and the distributor is toast. The Hasbros of this world do not face this conundrum. If they have a bad year they may put the country executive on notice that they are not happy but they are not going to go out of business.

Secondly, because of the threat of losing an agency or distribution rights the distributors are forced to drill much further down in doing their selling job than Hasbro would need to do. To give you an example, this is what the Tactic CEO said:

"We have our own sales companies in Sweden, Finland, Norway and Denmark. In Iceland we work with strong local distributors. In each country we have dedicated key account managers for top customers and categories. The sales personnel and reps in each country sell to independent customers and act as professional merchandisers. We also use local merchandisers for certain toys. All the sales people are hired by Tactic on permanent work agreement and all of them get fix monthly salary. The sales management will get yearly bonus based on quality and quantity targets of year. The field sales forces have bonus system based on sales target and it is calculated after each quarter. The rest of staff will get annually extra bonus based on company result. Tactic is not using sales agencies. Large chains such as ToysRUs are handled by our Sales Director himself."

As a result, Tactic covers all toy-carrying chains except for Kiosks. Hasbro, on the other hand restricts itself to the top 50% which represent about 80% of the toy market.

The Tactic CEO also added that "the sales teams in each market are supported by our central marketing team of six persons. We utilize TV campaigns, print adds, trade catalogues, Internet, social media and direct marketing to each household with children [partly financed by the licensors]. In addition we have a permanent show room in each country where all our main customers visit at least twice a year."

What he did not mention but is equally vital is the fact that in Sweden personal business relationships are incredibly important. Credibility and trust are the absolute bedrock governing transactions and a deal sealed with a handshake is binding. These relationships tend to be built up over time and will trump other business factors generally considered more important in Anglo-Saxon countries. These aspects tend to favor distributors over company executives simply because they tend to be at it over much longer periods.

There is clearly also a downside for using a distributor even in a country like Sweden. There is no question that a Hasbro sales person, selling only Hasbro products, is much more focused on his products, or knowledgeable on them, than a distributor, who has a number of toy companies to represent, can possibly achieve.

There is another downside which is rarely acknowledged - internal empire building. If you are VP Marketing in charge of Europe for a large toy company, having your own operation in a country like Sweden is much more prestigious than having a distributor. That is why many companies have a token own presence in a country even though the real work is being done by a distributor.

So, the question is - who achieves better results? When asking this, I always focus on the top five brands in a given category. Taking the two toy icons - Mattel and Hasbro - and focusing on their key product ranges Action Figures and Fashion Dolls - this is what ToysRUs Sweden is telling me:

Rank

1

2

3

4

5

Fashion Dolls

Barbie AS Legetoj *

Winx BR Brands **

DC Super Hero Girls Legetoj*

Star Darlings BR Brands ***

Steffi Love Simba Dickie

Action Figures

Schleich Figurines Maki****

TMNT BR Brands *****

Bungees Jazwares

Battle Nox Kirdix******

Steffi Love Simba

Source: Klosters Retailer Panel

* Mattel Distributor ** Winx Club Distributor *** Disney Distributor **** Schleich Germany Distributor ***** Playmates Distributor ****** Nicoro Toys Distributor

The table abover appears to be pretty clear - distributors win hands-down against the toy company-owned operations. In fact, Hasbro - the world's third largest toy company - does not even show up.

So what is the take-away? It probably is that cookie cutter approaches to international toy marketing may be preferred by large multinational toy companies but could very well backfire in many places. Sweden is a case in point - unless you really know what makes the country tick you better go with somebody who does.

(This article was first published by the Toy World Magazine U.K. on March 1, 2017)

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