19 Oct 2016
Licensed Products and the Changing Shape of the UK Toy Sector
While never as segregated as the specialist and Big Four toy retailers in the US, there are signs that the success – or lack of success – of certain toy franchises starting to have quite an impact on just how toys are now sold across the UK.
I first started working in the toy trade back in 1980, with my initial focus on the UK and European toy markets. It wasn't until I first visited the New York Toy Fair in the early 1990s that I truly came to appreciate the power that the Big Four retailers – Walmart, Kmart, Target and Toys R Us – wielded in the US both then and now.
The big players in the UK – retailers such as Argos and Woolworths (now sadly defunct), mail order companies such as Littlewoods and supermarkets, most notably, Tesco – all commanded large market shares, but it was on a wholly different scale to the American giants. Even across in France, its hypermarkets, such as Carrefour, didn't really come close.
Naturally, the sheer size of the American toy market – generally accepted to be at least 10 times the size of that of the UK – meant that the sales numbers posted by the biggest American retailers comfortably outstripped anything that UK retailers could possibly hope to achieve.
It wasn't just about the numbers, though. It was the aura that the buyers of these retail chains exuded, and the way that toy suppliers behaved around them, that came as my greatest surprise. On my first visit to the New York Toy Fair, I was talking to the UK Managing Director of a very large, global toy company when the Walmart buyer arrived at his stand. Everyone – including me – was promptly asked to leave, even all of the other retail customers. None of us was allowed to be present at the same time as the representative of the world's largest toy retailer.
A few years later, an American executive came over to the UK to work for the newly established British division of his company. He later found himself at meeting with a major British retailer, one who attempted to play a bit of negotiating hardball with him.
His response was simple: "Please don't try to threaten me. I'm used to dealing with Walmart and its sample order is bigger than anything you can hope to write for the whole year." I don't know exactly how the buyer reacted, but the message was very clear – you may be one of the biggest retailers in the UK but, in the Grand Scheme of Things, you're nowhere near as powerful as you might think.
This is a challenge that has long faced UK buyers in Asia, where they can never hope to place orders of the same magnitude as the big American buyers. If a line is in short supply, the US retailer will almost certainly get first refusal on the stock, simply on account of its ability to place larger orders. Conversely, some lines may not even go into production unless the US retailer backs them. It is, after all, their orders that make the difference between a line becoming a commercial success and one that doesn't even get off the ground.
If the major European buyers face challenges from their US counterparts, they pale into insignificance compared to the challenges faced by American independent retailers, those businesses known locally as Specialty Stores. Inevitably, their biggest challenge has always been their inability to compete on price – with the exception of Toys R Us, a Specialty Store, but on a far larger scale.
The big American players are all multi-channel retailers, with the potential to use toys as a loss-leader to draw in customers. Combined with their massive buying power, giving them access to better prices, the ability of the big guns to work on a reduced margin means that Specialty Stores are always likely to compare unfavourably on price when it comes to the same product ranges.
As a result, many of the small stores choose the obvious course of action – they simply stock different products to the big retailers. If Walmart backs a line, they avoid it. Although not carrying in-demand products means they risk alienating customers, at least they don't have to constantly explain why their items are so much more expensive or have to contend with losing money every time they sell an item. Ultimately, this has seen the US Specialty sector evolve into a parallel industry to the toy companies that service the Big Four.
In the UK, there has been no matching phenomenon. The country's major retailers haven't really been able to deliver the level of business required to persuade the bigger toy companies to completely ignore the independent channel. More importantly, British consumers have a slightly different attitude – they want to buy the toys on their kids' lists from whichever shop they choose to visit.
Although there have been a few cross words from time to time – usually when the major accounts have started price wars aimed at taking market share from their (major) competitors – there has never been the dividing lines between major and independent retailers that has long existed in the US.
For the first time, though, there is a sense that the UK independent trade is starting to develop a slightly different approach, with a number of operators consciously beginning to diverge from the majors in terms of their stock selection. Nowhere has this been more noticeable than in terms of licensed character merchandise.
According to NPD, the Washington-headquartered market research group, Star Wars is now on course to be the UK's biggest-selling licence ever. Despite this, according to a number of the larger independent stores, sales of such items – with the possible exception of the Lego range – have been negligible since Christmas.
Conversely, even before the launch of Pokémon Go in the summer of this year, sales of related merchandise through independent channels were extremely strong. Overall, there is a feeling that this is largely because many of the major accounts hadn't previously backed the brand to any substantial extent. The success of the new app will inevitably encourage the major accounts to support Pokémon far more heavily in 2017, and it will be fascinating to see what impact this has on the sales in the independent sector.
There are, of course, exceptions to any rule. Products in both the Paw Patrol and Shopkins range have been flying off the shelves of retailers of every size all year – proof that certain brands can straddle both worlds successfully. The fact that the manufacturers behind these two stellar properties – Spin Master and GP Flair – have a strong reputation for being fair and equitable with retailers of all sizes is clearly the major factor here.
Perhaps the prime example of major accounts adversely affecting a property over the past few years, however, came with the 2015 release of the Minions movie. Despicable Me – the 2010 movie that first introduced the world to the Minions – had been an unexpected hit, leading to a far more high-profile and effective merchandising programme for its 2013 sequel.
The release of the Minions spinoff was then supposed to take the brand to dizzy new heights, with many major buyers buying heavily into the hype, as did the independent retailers. Sadly, an over-proliferation of high-priced product proved to be its downfall.
By the time the movie launched in the summer of last year, many major retailers were already concerned at the volume of stock they were sitting on, most of which hadn't moved at all in the month leading up to the film's release. As a result, when the film eventually opened, Tesco discounted its entire Minions range by 33% in a desperate attempt to clear its mountain of stock. This left many independent retailers with product that could be bought at Tesco for less than what they had originally paid for it.
The fallout from this unfortunate situation has been significant, with the UK distributor of the main Minions range having subsequently lost the contract. The new appointee is now hoping to reinvigorate the brand in time to capitalise on the release of Despicable Me 3 in 2017. The licensing company has also appointed a new master plush partner to complement the master toy partner, with the idea of bringing a more reasonably priced range of product to market alongside the main toy line.
Overall, the Minions affair should be seen as a salutary lesson in balancing the requirements of individual channels whilst also taking into consideration the size of the market as a whole. Sometimes, individual retailers' orders add up to far more than the market can take. Naturally, retailers don't know what their competitors have ordered and each one wants to get their slice of a successful range or brand.
It's understandably hard for a toy company to say "no" to an order or to suggest a retailer has over-ordered. Sometimes, though, the long term health of a range of property can be severely damaged – or even destroyed – by such short-term avarice.
John Baulch is the Publisher of Toy World,
the leading trade title for the UK and European toy trade