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Endgame: Can Toy Licensors Survive in the Brutal New Retail Reality?

While toy retailers and manufacturers have learnt to roll with the punches in these straitened times, licensors are clinging to the practices and fees they enjoyed in times more prosperous, an approach that has alienated many licensees.

Photo: Superheroes or super villains? The jury is out in the case of the globally inflexible toy licensors.
Superheroes or super villains? The jury is out in the case of the globally inflexible toy licensors.
Photo: Superheroes or super villains? The jury is out in the case of the globally inflexible toy licensors.
Superheroes or super villains? The jury is out in the case of the globally inflexible toy licensors.

The toy retail market is constantly evolving, but the pace of change in recent years has become especially noticeable. Most of those changes are well-documented, but a quick gambol through the highlights may well be worthwhile:

●  A growing percentage of toy sales are now made online, primarily through Amazon

●  The emergence of a robust discount sector – headed by B&M, Aldi and Lidl – has impacted on consumer perceptions of price points and value

●  Many of the seeming fixtures of the toy retail sector (notably Woolworths, Toys R Us, Top-Toy and Intertoys) have either vanished entirely or else continue on in an almost wholly unrecognisable form

●  The decline in linear TV viewing has made it both harder to reach consumers with targeted advertising, while also reducing the effectiveness of TV programmes when it comes to creating successful licensable products

●  The increase in online viewing has resulted in trends arriving and departing faster than ever before

●  The increased popularity of gaming among the core toy audience has siphoned consumers away from mainstream toy products

As an industry, toy suppliers and retailers have deservedly built a strong reputation for flexibility and for their ability to react to a changing retail environment, adapting their business models to maximise the opportunities presented by the ever-evolving marketplace.

Some, though, have begun to wonder whether licensing companies are prepared to be as flexible as toy suppliers and retailers. The licensing community has long been an integral part of the toy channel, a relationship that has seen its creativity acknowledged, while many have admired its boundless enthusiasm and optimism. It does, however, have a very particular way of doing things and, while the toy market has had to adapt and become nimbler and more reactive in recent years, it is debatable whether the same could be said of certain parts of the licensing community.

Of course, it would be remiss to assume all licensors behave in the same way. Speaking to a selection of licensees recently, many were quick to point out that you shouldn't tar all licensors with the same brush. Summing up the feelings of many, one said: "Some licensors are really helpful, dynamic and collaborative; others, however, can be unnecessarily restrictive. I guess, at the end of the day, it rather depends on corporate culture, the personalities of the individuals involved and the financial targets they need to meet."

So, what is the upshot of all the changes in the toy market as far as licensing is concerned? Well, NPD's official 2018 sales figures for the UK toy market confirmed that sales of licensed toys fell for the fourth straight year. In 2015, licensed toys represented 29% of total toy sales, a figure that fell to 23% last year. So, right now, it's not a one- or two-year blip. In fact, this particular decline appears to have developed into a mid-term trend.

Of course, licensed merchandise has very much operated on a 'pendulum' basis for many years. Typically, it has a successful few years, driving licensees and retailers to fall over one another in their rush to embrace it. Then, inevitably, the market becomes over-saturated and the pendulum swings back the other way.

In many quarters, 2019 is seen as likely to be a comeback year, with a strong film slate in place. Despite that, some residual nervousness remains among many licensees and retailers. The causes of their collective discomfort are both complex and numerous.

For starters, 2019 is seen as one of the Big Movie Years, which, historically, would almost automatically make it also a Big Licensing Year. It's a fair question, though, as to whether such a direct correlation continues to apply.

Photo: The wonder of Woolworths as was.
The wonder of Woolworths as was.
Photo: The wonder of Woolworths as was.
The wonder of Woolworths as was.
Photo: Cuddly toy killer: Online gaming. (Shutterstock.com)
Cuddly toy killer: Online gaming.
Photo: Cuddly toy killer: Online gaming. (Shutterstock.com)
Cuddly toy killer: Online gaming.

The first thing to bear in mind is the 'feast or famine' effect of any extensive release schedule. Indeed, the huge number of kids and family-oriented movies set to hit multiplexes does see retailers face a number of significant challenges, particularly with regard to which movie or movies to back and to what extent. As ever, shelf and catalogue space is at a premium, with grocers, in particular, cutting back on the footage they reserve for toys. If you also factor in the loss of Toys R Us and its iconic feature wall – which often focused on licensed merchandise – the available in-store space for toys is clearly not what it was just a few years ago.

In addition, with so many competing movies set to premiere, the window of opportunity for sales for each one will be brief indeed, while the logistics required for shifting ranges in and out are somewhat daunting. This is a classic example of where something works for movie studios (where more is more), but doesn't necessarily work for licensees and retailers (where less is often more).

Sequel fatigue has also become an issue, especially when a series of connected movies are released in quick succession. It is also very true that a great movie does not automatically translate into a great licence, especially when the associated merchandise is over-licensed, over-ranged and over-priced.

In recent years, there have been some classic examples of that particular phenomenon. A couple of years ago, one prominent specialist toy retailer told all the licensees of a particularly high-profile brand that it would be taking a year off, using that time to shift all the stock it had built up over the past few movies. It was a sensible strategy for the retailer, but licensees who had signed up to annualised Minimum Guarantees (MGs) would have been very disappointed. This was very clearly an instance of a real disconnect between the retailer's needs and the licensor's strategy.

Of course, the challenges don't just apply to movie licensing. It is common knowledge that licensees of many non-cinematic properties are finding it harder and harder to secure broad retail support, with online-driven trends and generic fads – such as unicorns, llamas, sloths, and mermaids – holding an ever-increasing sway.

It is a notion that many retailers are happy to confirm. Over the course of the past two London Toy Fairs at least, a number of them have been quite upfront about the fact that innovation, new trends and novelty appeal to them far more than any new licence. This is a huge change from just a few years ago, when tracking down the big new licence was front of house for many toy buyers.

To be fair, it's not difficult to get a handle on this changed priority. With non-licensed products, you're not obliged to pay upwards of 20% (or, in the case of some of the greedier licensors, more than 25%) in royalties, while also having to fork out on big MGs. The money saved can then be reinvested in improving the product, adding more features, boosting marketing activity and offering better margins. Even after all that, it's still likely that you will end up with a keener price point.

It is no surprise, then, as to which of the two options buyers are tending to lean towards in the current trading climate, while, in many cases, it is also what their customers are telling them they want. Furthermore, lower price points are gaining market share at the expense of higher price points. In some cases, then, non-licensed toys actually represent a far safer bet in these risk-averse times.

Of course, the situation is not black and white. Some licensors have reacted appropriately to the changing market conditions, becoming more flexible and demonstrating a can-do attitude that has endeared them to licensees and retailers alike. The best of them appreciate that speed to market is essential and, as a consequence, are quick to agree deals and to sort out any required paperwork / approvals. Others…perhaps not so much.

Photo: Licenced Toy Story: A possibly sad ending beckons for a once much-loved industry sector.
Licenced Toy Story: A possibly sad ending beckons for a once much-loved industry sector.
Photo: Licenced Toy Story: A possibly sad ending beckons for a once much-loved industry sector.
Licenced Toy Story: A possibly sad ending beckons for a once much-loved industry sector.

Some licensors are also very partnership-oriented, prepared to take the prevailing retail conditions into consideration when negotiating. Again, others…perhaps not so much. Some licensees have even been known to say, after they have decided to discontinue working with a major licensing player, that they feel like a massive weight has been lifted off their shoulders. It's also been said that working with some licensors is so demanding and time-consuming that it means either having to employ more people or that some staff members have to be switched from other duties just to meet the administration requirements. This is, of course, fine should a property be a nailed-on winner, but it has led to some of the less high-ranking brands from certain big licensors being shunned by licensees and retailers. It is no stretch to say that sky-high royalty rates and MGs, as well a penchant for 'slicensing', soon become wholly unpalatable.

More and more, slicensing – the practice of whittling away at the exclusivity of a licence – has emerged as a major concern for licensees. Indeed, according to one licensee, it is the sole reason he has cut his 2019 forecast by £2 million for a brand he enjoyed great success with last year. The reason he gave? He now has three or four direct and indirect competitors with almost identical products, all of which are competing for the same shelf and catalogue space. It is easy to see why this strategy works for the licensor, but it is equally easy to see why my contact had no option but to slash his forecast. The interesting part is that the licensor didn't even query the reduction – assuming it didn't just miss the budget revision, one has to conclude that it was expecting this to happen.

Photo: Baulch: “Wholly unpalatable”.
Baulch: “Wholly unpalatable”.
Photo: Baulch: “Wholly unpalatable”.
Baulch: “Wholly unpalatable”.

Whole categories are being impacted by some of the commercial decisions taken by licensors, largely based on their internal targets rather than market conditions. At least one major toy retailer recently told me that he believes that one particular licensor has significantly damaged the mainstream action-figure market, as its massive royalty rates have contributed towards prices being too high to realistically drive collectability, thus impairing range sales. Indeed, the number of licensees and particularly retailers who feel that a return to 10% royalties and 'sensible' working practices is growing daily.

Another licensee I spoke to recently outlined a series of issues, including "long and fastidious approvals process" and "embargoes". In the current climate, everyone in the chain – quite rightly – talks about the importance of speed to market, flexibility and nimble, reactive behaviour. Is it the case that some of the working practices of certain licensors actively work against this?

In summary, we have a dynamic toy market which is changing rapidly, mirroring the changes in consumer behaviour and in the retail landscape. The only certainty is that it will continue to change and evolve. Toy suppliers and retailers are highly reactive, flexible and open to change. The challenge for the licensing community is whether it is also open to change. Maybe the current challenges will ultimately work to everyone's advantage – even the licensors – but only if they result in a new sense of realism seeping into every corner of the industry.

John Baulch is the Publisher of Toy World,
the UK's leading toys and games trade publication

Content provided by Picture: HKTDC Research
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