Toy Industry 1

Toy Industry

By:

Franklin University:

January 28, 2020

Introduction
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The toy industry is a multi-billion-dollar industry with one of the most competitive markets that
have relatively low barriers upon entry. Many components contribute to the success and size of
this industry. Those components include the degree of competition, the business cycle, supply
and demand, the industry cost structure, and financial norms.

Degree of Competition

Five leading companies dominate the U.S. Toy industry; Mattel, Namco Bandai, Lego, Hasbro,
and Jakks Pacific (Gottlieb, 2018). Out of these five, Mattel and Hasbro control over 30% of the
industry, and the top seven toy companies account for about 55% of the market (Gottlieb, 2018).
This leaves 45% of the industry controlled by smaller toy companies. There is a high degree of
competition within the toy industry. Although the leading players control 55% of the market,
there is still plenty of room for the mid-sized and smaller companies to grow. Part of this is due
to the ease of entry of the toy industry along with the ever-changing nature of popular toys and a
large number of influencers within the industry.

The ease of entry for companies in the industry is relatively low. The ease of entry comes from
the vast number of products within the toy industry. The products can range from arts and crafts
toys to action figures to outdoor and sports. With such a wide range of products, it becomes
difficult for a company to control all of them (NPD, 2020). This allows smaller companies to
enter the industry and find a product where the demand is high, but the supply is not. This is
beneficial to smaller companies because they can focus on excelling at one product that is in high
demand. In contrast, larger companies will have to focus on multiple products.

Second, the toy industry has a constantly changing demand. Throughout the year, the toys with
the highest demand could change several times. These changes occur due to the pop culture of
the U.S. Depending on what movies, television shows, music, or video games are popular now,
the toy industry will follow suit. This allows plenty of opportunities throughout a period for new
companies to enter or established companies to create new products (Muller, 2018). The
changing taste of consumers makes it where no one company stays on top too often (NPD,
2020). A company may be the industry leader in a toy for the Disney movie Frozen 2, but a
separate company may be the industry leader for toys associated with the video game phenomena
Fortnite. The shorter life span toys are facing today creates a more competitive industry (Gilliard,
Hoffman, & Baalbaki, 2019).

Lastly, the toy industry is highly competitive due to the number of influencers the sector has.
Influencers are people who have the power to affect purchasing decisions (Kestenbaum, 2019).
The toy industry is becoming more competitive due to these influencers entering the market with
private, smaller companies (Muller, 2018). Influencers such as YouTubers, musicians, or
actors/actresses partner with smaller companies to sell exclusive toys. Examples of this are Just
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Play's toys for JoJo Siwa or Vampirina toys. In 2017, these toys were not a part of the list of the
top toys, but in 2018 both toys cracked the top ten (Muller, 2018). Just play is not one of the
major toy companies. Still, due to their partnering with influencers like JoJo Siwa, a
musician/Youtuber, and Vampirina a children's musical, they had two of the top ten toys in
August of 2018. The ability for mid-sized and small companies to partner with influencers and
create exclusive toys makes the toy industry more competitive.

Business Cycle

Understanding the critical components of the business cycle is an essential topic in industry
analysis. It provides insight into the most significant cost components of the industry, how
demand for products shift, and when products are most likely to be purchased. The toy industry
is a constantly changing field where products have to match their target audience. The primary
demographics for toy companies are children. Although they are not the ones making the
purchases, they are influencing the parents on what toys to buy. Twenty years ago, non-
electronic toys would have been the most popular, such as action figures, board games, etc., but
today electronic toys are becoming more popular (Toy Industry Association, 2014). The cost to
produce electronic toys is going to be more expensive due to the wiring, electrical boards, etc.
(Toy Industry Association, 2014). The changing nature of the toy industry does point to more
and more toys becoming electronic, so this means the main cost component when it comes to
making toys is going to increase as well.

Another critical aspect of the business cycle is how demand shifts within the industry. As
mentioned above, the demand for toys shifts frequently. Demand shifts due to popular movies,
shows, or video games, seasons, and the number of children being born. When a new film is
released, so too are new toys associated with that movie. While the movie is out in theaters, toys
related to that movie are going to be in high demand (European Competitiveness and Sustainable
Industrial Policy Consortium (ECSIP), 2014).

The demand for toys also shifts with the seasons (ECSIP, 2014). The main season to buy toys is
in the late fall (Black Friday) through the early winter for Christmas. Typically, this is when the
best deals on toys occur, and when toys are in the highest demand (Weisbaum, 2013). Lastly, the
demand for toys shifts due to the birth rate. As birth rates continue to fall, so does the demand for
toys. The reason for this is because the target audience for toy companies is growing smaller. As
kids grow into the teenage phase and out of the "toy" phase, a new generation enters the toy
phase. Since birthrates have been declining, the target market has been shrinking (Garfield,
2018). The fewer children, the less demand there is for toys. The major toy retailer which closed
in 2018, Toys-R-Us, actually cited low birthrates as a reason they had to shut down (Garfield,
2018).
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Different industries will see the sales of their products increase at different times. Some
industries may see sales increase when the economy is doing poorly, while other sectors will see
demand and sales increase because the economy is doing well. Studies show that when an
economy is doing well, retail sales will increase by over 3% (Amadeo, 2020). The toy industry is
an industry in which sales and demand increase when the economy is doing well. This is because
toys are seen as an unnecessary product. When the economy starts to take a downturn,
discretionary spending decreases, and the sales and demand for toys decreases. However, when
the economy is doing well, parents will increase discretionary spending, and the demand for toys
will also increase (Gilliard, Hoffman, Baalbaki, 2019).

Supply and Demand for Toy Products

Supply and demand in the U.S. toy industry continue to change rapidly. From a supply
perspective, trends show significant globalization as manufacturing and competition infiltrate the
U.S. toy market. Imports on toys in 2019 are expected to reach an all-time high of 98.6% of the
total toy market ("Toy, Doll and Game", 2019). Supply from international markets dominates the
U.S. market as the products come at a lower manufacturing cost. Noted inferior product
components and lower wages for workers drive the lower price point and increase in
international supply (DiBenedetto, 2006).

Despite the inferiority in overall toy supply, demand for international toy products hasn't
declined, with China being the number one supplier for the United States, accounting for 88% of
the market (Moreno, 2016). What has changed is where consumers purchase the product.

Earlier in the decade, growth in demand for toy purchases was in computer and office supply
stores (DiBenedetto, 2006). A major shakeup in the marketplace occurred in 2018 when Toys' R
Us was forced into bankruptcy, making the standalone toy retailer a thing of the past. At that
point, the toy retailer claimed 13.6% of the retail market (Winkler, 2018).
Thus, the largest U.S. manufacturers must now sell the product through other retailers. Two of
the leading retailers that were able to fill the void left by the Toys 'R Us bankruptcy for toys and
games in the United States are Wal-Mart and Target (Winkler, 2018).

Despite Wal-Mart and Target being the leading retailers, demand for toy products from brick and
mortar retailers has been predicted to decrease ("Toy, Doll and Game", 2019). However, the
significant demand for online gaming shapes the competitive landscape and has driven down the
demand for the traditional toy.

To compensate for the decrease in demand, toy manufacturers have turned to a mix of different
products to significantly drive demand for the traditional toy. Some of the most notable product
mix offerings include Disney franchise items and Lego products (Moreno, 2016).
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While franchised items have helped drive demand for toys, an emerging trend in the toy market
is the demand for girl's toys (Zillman, 2013).

Degree of Government Regulation

In recent years, the toy industry has received multiple concerns about safety. Recent recalls of
toys produced in China that contain high levels of lead and phthalates are among the significant
concerns within the industry. Throughout the last fifteen years, government regulation of the toy
industry had drastically improved.

The Consumer Products Safety Commission (CPSC) was created in 1972 "to protect the public
against "unreasonable risks" from consumer products that contribute to 27,000 American deaths
and 33 million injuries a year" (Weisskopf, 2007). Despite the CPSC being created to regulate
the consumer products, the agency has gone through drastic budget cuts and does not have the
staff and money to keep up with the millions of toys that are imported each year. (Weisskopf,
2007). The agency continues to rely on each manufacturer to abide by the rules. By law, each
manufacturer "must report safety concerns within 24 hours of their discovery, a process that
usually results in a voluntary recall, like a large number of Chinese-made toys pulled"
(Weisskopf, 2007).

The Consumer Product Safety Improvement Act, which was amended in 2008, set regulatory
standards that included a ban of the chemical phthalate as well as lead in products intended for
children under the age of 12. (Monosoff, 2009)

The new standards had a significant impact on manufacturers and sellers of the consumer
product. The increase in regulations increased the maximum civil penalty for violations
(Monosoff, 2009). The new rules meant that manufacturers now have to do more testing on the
products, which means longer development time and higher costs to make sure the products meet
all standards imposed by the Consumer Product Safety Improvement Act.

Industry Cost Structure

The U.S. market will always have a place for toys as long as children are being born, despite
changing economic trends. However, with online retailers like Amazon and Walmart, the
competition is increasing. Businesses dealing with toys need to be creative to reach their target
audience by developing an attractive price range structure for their entire inventory. Evaluating
competitor prices on the same or similar items that will be offered is the first thing you need to
do before pricing the toys. This will give a company a good idea as to how much they want to
pay for their inventory and will allow them a better chance of selling if their prices are better
than their competitors. An excellent strategy to consider in pricing is knowing exactly how much
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will overhead cost, including your advertising, to learn how low you can price while making a
profit. (Rosado, J., 2017, November 21)

Another critical component is starting a business plan before a product is introduced to the
market, including distribution, marketing strategies, project sale growth, and determining cost-
effective manufacturing. The plan must include raw materials and establish contact with
suppliers for materials or services that are needed and hiring the right staff. Toy manufacturers
will keep production at a low cost by having cost-effectiveness at the top of their agenda. Since
toys are low margin products in retail stores, the product can be sold at a lower cost. The markup
for these toys production cost to the retailer is usually lower.

The toy industry cost structure can be affected by the economies of scale through production,
research, innovation, effective marketing, and distribution. The United States was popular for toy
manufacturing, but over the years, it has gradually shifted to other countries like Brazil, Mexico,
South East Asia, and Europe. This expansion has increased productivity and the readiness of
customers at a low cost. Material cost is one of the major components of manufacturing, and
materials like plastic, wood, clay, or paper are used the most in toy manufacturing. Materials
utilization varies across manufacturers, and it may also depend on the type of toys the company
produces. “The [chart in Appendix A] shows the percentage and cost of sales, which consists
mostly of material and related components cost and accounts for a sizable portion of the total
cost in the industry" ("Games and toys", n.d).

Some other key cost structures to consider within the industry are research, development, and
marketing expenses because they will help to regulate a product's ability to capture newer market
competition. The industry cost of sales was higher across the board, followed by research and
development and marketing expenditure. See the table in Appendix B with approximately 46%,
13%, and 3% (Games and toys", n.d). The Lego Group has been leading the market for a while
now, their advertising and marketing expenses are very high, but they also have the highest
revenue compared to other companies whose cost of sale is mostly their cost structure. Lego
Group has effective chain management and recycled material.

In the last few years, the toy industry revenue has risen steadily. Lego, Mattel, Hasbro, and
Tomy Co. are the most significant players, and they are expected to retain their position in the
market slowly growing from USD 3.87 billion (2012) to USD 4.33 billion (2016). The future of
this industry will be determined by new-age kids playing habits and lifestyles, which will create
more pricing pressure from retailers and more purchase options. Toys provide kids with tools
that help them relate to the world. There is always a toy trending for every generation.
"According to the Global Industry Analysts, Inc. Asia-Pacific, China is expected to outstrip the
United States as the largest market for games and toys industry in 2017" ("Games and toys",
n.d).
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Financial Norms

The toy industry is made up primarily of companies that retail toys, games, and hobby supplies.
According to the Barnes Market Reports (C. Barnes & Co., 2020), there were over 13,000
establishments in the toy industry in 2020, which have been on a declining trend since 2017. But
this year is the first year the industry is seeing an increase and is expected to continue this trend
into 2021. The sales achieved by these establishments are about $18 million and continue to
trend upward.

To name a few, some of the big players in this industry include Hasbro, LEGO, and Mattel. In a
2019 article on Mattel (Gilliard, Hoffman, & Baalbaki, 2019), the CEO was quoted stating the
company did not sell enough Barbies in 2014. The downward trend continued into 2017. With
sales decreasing, the company started seeing less gross profit and an actual operating loss with a
negative income before taxes. This is just one example illustrating the industry trend in the toy
and gaming industry, but companies like Lego felt the same downward trend. The CEO of
LEGO went on the record stating that 2018 was a defining year in the toy industry with the
disruption in retail channels causing unprecedented change (MarketLine, 2019). In the past, the
largest customers for this industry were Wal-Mart, Toys "R" US, and Target. For Mattel alone,
these companies made up 39% of worldwide sales (Gilliard, Hoffman, & Baalbaki, 2019), so the
reliance is significant.

Looking at the financial information reported in the market reports, the toy industry as a whole
has a 1.33 average ratio of sales per establishment (C. Barnes & Co., 2020). When comparing
financial ratios, Hasbro is outperforming competitor Mattel, according to MarketWatch. With a
2.07 quick ratio, Hasbro is far more likely to cover its debts in comparison to Mattel's 1.43 ratio.
This is likely a result of higher sales reported in the sub-sector children's toys and games. In
2020, the sales reported for children's toys and games, except dolls was over $7.7 billion, while
dolls and accessories accounted for $54 million (C. Barnes & Co., 2020). Hasbro and Mattel
specialize in different sub-sectors. The negative industry trend affects them differently. With
Barbie still being Mattel's top seller, besides Fisher-Price branded toys, the company realizes
more of the industry norm of financial decline than its more diversified competitor, Hasbro.
Mattel is, however, attempting to compete by making moves like acquiring MEGA Brands in
2014, but the sales in that division of Mattel aren't performing as well as Barbie does for the
company.

To further demonstrate the difference sub-sectors make in this industry (see Appendix C), the
difference in return on assets (ROA) and net margin show that the industry downturn has
different effects on company stability. To analyze a different sector of the toys, games, and
hobby supplies industry, Namco Bandai (Bandai), a gaming company, is also a company
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outperforming the downward industry trend. Mattel, Hasbro, and Bandai have ROA ratios of
10.99, respectively. This supports the idea that the companies' ability to repay debts in this
industry is somewhat dependent on the sub-sector it occupies. This is due to the difference in
sales shown in Appendix C. Both Hasbro and Bandai have quick ratios above two, while others
have less than 1.5. Therefore, while this type of company can stay afloat in this industry, there is
a shift in the toy demand that companies will need to adapt to for the industry averages to return
to the figures previously seen as children's interests change with technology.

Closing

Overall, as the toy industry continues to be successful, it also has a very competitive market that
makes it hard for companies to dominate the industry. Demand is constantly changing, and new
competitors can enter the market with relatively low barriers. However, as government
regulation has increased over the years, speed to market and product cost has continued to
increase. Supply and demand are constantly changing as new products are released and what
becomes popular at the time. The toy industry must continuously keep up with the latest trends
and what consumers are demanding.

References

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https://www.thebalance.com/u-s-retail-sales-statistics-and-trends-3305717

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Appendix A
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Appendix B
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Appendix C