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GP17Nov04: The Toy Story

Toy BluesThe Economist (October 21, 2004), just took a look at the toy industry and found it to be down in the dumps.  Its “Trouble in Toyland” reported a 2% third quarter drop in sales for Mattel of Barbie fame, a similar 2.5% decline at Hasbro, and profit troubles at Michael Milken’s Leapfrog (www.leapfrog.com), which was thought to be the industry’s rising star.  One must look beyond the industry leaders for real signs of health. 

This latest news merely continues the string of heart attacks plaguing the industry since the 90s to include the closure of FAO Schwartz, once toyland’s premier store, shrinkage and tumult at Toys R Us, and the disappearance of a host of producers in China where most toys are made these days. 

The global economy, faltering since at least 2000, the changing tastes of youngsters, especially in America, and the vast grab of marketshare by discounters such as Wal-Mart and Target—these factors and more have changed the face of the industry.  Our adolescents may be age 14 by the calendar, but they are going on 40 in terms of their wealth of experience.  Many companies in all parts of the toy world simply have not kept up with changing times and morphing youths.  German toymakers—Playmobil and Ravensburger to name two—are healthy.  But, in general, only very agile, somewhat lowbrow companies such as Jakks Pacific have thrived in this tumultuous environment. 

The Toy Predictor.  The woes and restructuring of this industry are of more than passing interest.  If you read the toy leaves correctly, you can get a feel for what is happening in the whole of the global political economy.  Toys tell us a lot.  We know investors, for instance, who watch toy sales to see how military toys and toy guns are doing.  If toy tanks are up, then they know we are about to have a resurgence in arms sales and national military expenditures.  We think the troubles in the toy economy accurately forecast blips or worse in all of business. 

Lawrence Sterne, said by some to be the father of the English novel, painted characters who each had a “hobby,” especially in his engaging tale Tristam Shandy.  The hobby of each turned out to be a psychological compulsion, something each had to do, often to the harm of the community.  The Uncle who played war games with toy soldiers turned out to be the most benign, the fellow with the least harmful compulsion.  From the toys of children and the hobbies of adults, we learn most about the psyche of a community and where it is headed next.  The Internet, Blackberries, video games, ATMs, ubiquitous cellphones —these new tinkertoys most tell us about our current state of mind, our passion to relate to one another electronically.     

Today, on the basis of what’s happening in toys, one can see that you have to do business with Wal-Mart and Target, or you’re toast, no matter what you are producing for the consumer.  That’s the simplest lesson the world of toys can give businessmen in all sectors.  Secondly, your bottom line obliges you to invest in totally new products, rather than doing product extensions: the 45 versions of Barbie no longer work.  The marketing expenditures associated with tired products are too burdensome for a company that wants both profits and growth.  Further, toys show us that you have to learn how to do co-branding with  producers of other kinds of products, with media, and with retailers to summon up enough marketing clout to cut through the message clutter in the global marketplace.  And finally you have to reach slices of the audience your current marketing may not even touch.  For instance, Fisher Price has just kicked off a high-powered marketing campaign in Spanish to better reach Latino tots with its wares.  We suspect that consistent performers will have to penetrate every demographic and every age group, while reaching beyond the developed world into emerging economies.  

Who Will Be the Survivors?  Amidst this volatility, we suspect the winners will not be the name companies that have been around for generations, but newly minted entrants who are inventing new categories and ginning up entirely different business processes.  Typically, they are making a great deal of use of freelance talents, not on company payrolls, to develop original toys with a new feel to them that appeal to youngsters who fast grow bored with the old and are onto the new before we even know what the “new” is. 

In this vein, we recently chatted with toy industry veteran George Volanakis, one-time chairman of the Toy Industry Association, who has headed a slew of toy companies that have shown durability.  He last assisted in Hasbro’s turnaround by slicing out millions of dollars of recurring cost while extending Hasbro’s penetration of international markets. Currently he is taking Corgi (www.corgiclassics.com/index.htm), a collectible toy company with commanding marketshare in Great Britain, into new countries (especially the United States) and into new distribution channels, particularly the mass market.   

He remarks that the key to toy company success now is rampant creativity: 

The true successes both now and in the past are those companies who step out of the norm with products that are unique, exciting, and very much up to date with kids’ current tastes.  Every year a handful of companies ALWAYS rise to the surface because they take a chance with something new.  These are usually small companies … who have minimal development resources and who search the inventing community for truly unique products. 

The toy industry is not for the faint of heart.  It takes fortitude and determination to succeed.  It is truly an entrepreneurial industry that has a low cost of entry but a high cost of failure. 

The No Risk Paradox.  By implication, Volanakis makes clear that the established major companies are loathe to take enough risks.  In our current anti-risk atmosphere, boldness is a rare commodity.  But extinction lurks for those who play it too safe.  Security lies in risk taking.  More toy companies will disappear, because they have nothing new. 

We would suggest that timidity is haunting and hurting several industries.  William Baumol of  NYU (see Big Ideas) has warned us about the economic dangers poised by an anti-risk mentality.  The big networks have conjured up low cost shows and no cost talk TV: their audiences are eroding.  Hollywood is not doing well in the theaters, and it has only kept revenues up by raising the price of tickets.  The endless film remakes (Alfie, of all things, seems to be the latest) signal a recurring lack of  imagination.  Newspaper circulations continue to erode at a terrible rate, because editors and publishers alike have not adjusted to readers on the fly who require far different information packages.  Well, these are just a few of the industries that are shrinking because their leaders are already shrunken. 

For the major toy companies, and for the goliaths in any industry, the question is one of successful downsizing in order to get rid of superfluous capacity, bloated infrastructure, and a mindset that resists dramatic innovation.  Costs have to come down 20-30%, a mammoth job, but creativity has to soar at the same time. Cost-cutting and creative product development, incidentally, require leaders of diametrically opposed temperaments.  However, the temptation so far for big company managers has been to cheapen their products and services, an opportunistic feint which eventually erodes their consumer franchise.  They have not been looking for the truly new.  The big company under pressure has to regain agility, recapturing the ability to work with disparate partners outside the company.  We will comment on the collegial adaptability new markets require in future issues. 

Similarly, big government, as we hinted in weeks past, is striking out because today’s problems, domestic and foreign, won’t respond to yesterday’s tired formula.  Yesterday does not know how to wrestle with the future.  A lot of low cost, practical Yankee inventiveness is needed. 

Mega Bloks.  For an example of the smallish company that can light a fire even as the lights are extinguished in much of the toy industry, look at Mega Bloks, Inc. (www.megabloks.com) (TSX: MB: TO) in Montreal, which has been giving renowned Lego a heavy case of indigestion.  It recently came to our attention because of an alliance it has struck with an educational internet company we follow.  It has not only shown the innovation Mr. Volanakis esteems, but it also has very much developed a truly global marketing presence—two themes fundamental to any growth enterprise today. 

P.S.  You will find a small list of toy stores that are different at “Best Toy Stores.”  The chain stores are boring and cluttered.  The rare distinguished toy boutique inspires dreams. 

P.P.S.  Do take a look at “The World of Dahl on Global Province.  The site it mentions commemorates Roald Dahl, an absolutely wonderful writer of children’s books whose fantasies were later imported into the movies and into other wares based on his imagination.  Be warned that the site is hard to get around—an uncharming introduction to a very charming world.  This is a problem in the whole world of toydom: the engineers and marketing people put up silly obstacles that get in the way of the magic.

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