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London Toy Fair Proves Buoyant Despite Retail and Brexit Uncertainty

Regardless of the looming Brexit deadline and the question marks that hang over the future plans and ownership of several key UK toy retailers, exhibitors and attendees at this year's London Toy Fair proved quite remarkably upbeat.

Photo: The 2019 London Toy Fair: Uniformly upbeat despite the challenges of the previous 12 months.
The 2019 London Toy Fair: Uniformly upbeat despite the challenges of the previous 12 months.
Photo: The 2019 London Toy Fair: Uniformly upbeat despite the challenges of the previous 12 months.
The 2019 London Toy Fair: Uniformly upbeat despite the challenges of the previous 12 months.

The 2019 London Toy Fair – the 66th such annual event – opened its doors on 22 January and welcomed more than 250 exhibiting companies. A particular surprise here was the return of Lego, with the Danish toy-brick manufacturer having sat out the 2018 event.

Overall, the event took place in the wake of what has been a particularly trying 12 months. Indeed, 2018 has been described as "one of the most challenging and disruptive years the UK toy trade has ever seen".

Adding to the misery, the British Retail Consortium didn't pull any punches, describing Christmas 2018 as the "worst in a decade". In fact, the official sales figures – as supplied by NPD, the New York-headquartered market-research group – show that UK toy sales declined by 7% year-on-year to £3.3 billion. This was, in part, driven by the closure of Toys R Us, while it was also a poor year for licensed merchandise and a generally difficult one for the High Street. Ever present, too, was the ongoing uncertainty occasioned by the faltering moves towards Brexit.

In light of all that, you might be forgiven for thinking that such turbulent and uncertain economic conditions would have had an adverse effect on the UK Toy Fair. In reality, however, nothing could have been further from the truth.

The buoyant mood that characterised the HKTDC Hong Kong Toys & Games Fair in early January was still very much in evidence in London – regardless of how the official 2018 sales figures had ended up. One attendee summarised it perfectly: "I'm more pleased with the atmosphere than anything else. We've got a great line, but that would be irrelevant if retailers had a load of stock left and weren't in a positive frame of mind."

Overall, the feeling was that those UK toy retailers that were expected to do well in the run-up to Christmas did so. As to the remainder, they seem to have emerged fairly clean in terms of carry-over stock. There were even some stand-out retail performances.

The online giant Shop Direct, for instance, enjoyed a very strong Christmas, as did Smyths and B&M. And let's not forget The Entertainer, with the specialist independent retail chain delivering a stellar festive performance – in the five weeks leading up to 29 December, it recorded a 22.4% sales increase.

While each of these retailers has a different strategy and approach, each has carved out its own niche in the market and plays to its core strengths. One of the keys to success in the current retail landscape, clearly, is to know what you do best, recognise where you fit in the grand scheme of things, understand your customer and give them the best possible experience.

As is traditional, the Toy Industry Awards were once again held on the first night of the fair. This year, the big winner – to the surprise of hardly anyone – was MGA Entertainment, with the Los Angeles-headquartered manufacturer taking home Collectible Range of the Year and Toy of the Year, with the latter accorded to L.O.L. Surprise, the company's collectible doll range.

Overall, the L.O.L. brand enjoyed a phenomenal 2018, notching up sales of £100 million. Indeed, if the range were a standalone company, this incredible performance would have made it the third-largest UK toy company based on its sales in the past 12 months. The brand's performance also benefitted the collectibles category as a whole, seeing it buck the overall trend by posting a 32% increase. In total, collectible ranges accounted for one in every four toys sold in the UK last year.

Despite the decline in sales over 2018 as a whole, the UK is still the largest toy market in Europe and the fourth largest in the world. Significantly, online sales increased by 8%, seeing the channel now account for 34% of all British toy sales.

By contrast, the grocery channel declined significantly, although the specialists increased their sales by 6% and the discount channel was up 10%. The fact that toy specialist retailers performed so well was something of a boost for the otherwise struggling UK high street. For some industry commentators, this upturn reflected consumer appreciation of the theatre created by specialist toy shops, with many now going out of their way to create a sense of magic and wonder within their stores.

Photo: Britain’s favourite 2018 toy: L.O.L. Surprise.
Britain's favourite 2018 toy: L.O.L. Surprise.
Photo: Britain’s favourite 2018 toy: L.O.L. Surprise.
Britain's favourite 2018 toy: L.O.L. Surprise.
Photo: Theatre and magic: The appeal of specialist toy stores.
Theatre and magic: The appeal of specialist toy stores.
Photo: Theatre and magic: The appeal of specialist toy stores.
Theatre and magic: The appeal of specialist toy stores.

Inevitably, Christmas remains a pivotal period for the UK toy market, with the weeks leading up to the holiday accounting for 47% of all toys sold in the country in 2018. Last year, though. Christmas came particularly late for toy retailers, with weeks 51 and 52 accounting for 8% of total annual toy sales.

Equally worrying, sales of licensed toys declined for the fourth year in a row. While in 2015 they represented 29% of the market, last year they were down to 23.3%. There are, however, hopes that the sector will be rebooted over the next 12 months, largely on account of the licensed merchandising bonanza set to be triggered by the release of such sure-fire blockbusters as Frozen II and Toy Story 4.

Perhaps 2018's most troubling retail performance, though, came courtesy of Argos, the Milton Keynes-headquartered catalogue retailer that was acquired by the Sainsbury's supermarket chain in September 2016. Last year, as part of an attempt to merge the two businesses, many standalone Argos stores were closed, while Sainsbury's also attempted to boost shareholder value by implementing a range of cost-saving measures. With Argos' total toy sales declining 10% year-on-year, this was, understandably, a big worry for UK toy suppliers. While Argos remains the UK's largest retailer of toys – for now at least – the level of sales decline has certainly set alarm bells ringing.

The situation was further complicated by the April 2018 announcement that Sainsbury's was in talks to acquire Asda, a rival supermarket chain. With the attempts to integrate Sainsbury's and Argos having proven quite so ham-fisted, suppliers were understandably concerned that a further acquisition would only add to the chaos. Now, however, a damning report by the Competition & Market Authority – the UK statutory body with oversight of uncompetitive practices – has brought the viability of the whole deal into question.

As part of its assessment of the deal, the CMA recommended that at least 300 stores would need to be sold to a single buyer for the merger to be approved, while either the Sainsbury's or Asda brand would need to be relinquished. As a result of the report, which was issued late last month, it is now thought the merger is unlikely to proceed.

Although the CMA's recommendations were only recently made public, speculation has already begun as to alternative ways forward for the two retailers. Indeed, press reports have suggested that KKR, the New York-based private-equity giant, is planning its own bid for Asda.

According to the report, KKR – one of the private-equity companies with a substantial stake in Toys R Us until its bankruptcy last year – is working on a bid alongside former Asda executive Tony De Nunzio, who would become chairman should a deal be struck. While the Sainsbury's deal valued Asda at £7.3 billion, the retailer would be expected to have a lower valuation in any standalone sale, largely because no economies of scale could be factored in.

If the KKR deal does go ahead, it would mark the first time one of the big four UK supermarkets had come under private-equity ownership. Any sale, though, would likely see Walmart retain a significant minority holding, partly to keep the purchase price down and partly to allow the acquired operation to continue to benefit from Walmart's buying power.

Over the years, Asda has proved a lucrative investment for Walmart, with the US retail corporation having taken out billions in dividends, while also luring many of its key executives to the US to fill senior roles. According to one allegedly well-connected source, Walmart is "not in a rush" to find a new buyer for Asda. Taking a contrary view, though, one former executive has said: "Walmart will have to be clear about whether it is going to sell. The current uncertainty is bad for morale."

The failure of the deal has also left Sainsbury's vulnerable to a takeover, with its share price failing by 17% on the day the CMA report was published. While, prior to its £1.4 billion takeover of Argos, it was worth £7.1 billion, its current share price values it at just £5.2 billion. Adjusted in light of its lease obligations, Sainsbury's net debt is 3.6 times its underlying earnings – more than twice the level of many of its rivals, notably Tesco and Morrisons. There is also a further cloud on the horizon in that it needs to refinance £650 million of debt this year, which may oblige it to approach its existing shareholders for a cash injection.

There is also a belief in certain quarters that Amazon may be watching the situation closely. Acquiring Sainsbury's, after all, would provide the online giant with a ready-made network of stores at a highly affordable price. With Amazon previously in the frame to buy the stores that Asda and Sainsbury's would have been obliged to sell as part of any merger, its acquisition of the whole supermarket chain certainly remains a distinct possibility.

Photo: Toy Story 4: The merchandise-minded movie sequel set to reboot the licensed toy sector.
Toy Story 4: The merchandise-minded movie sequel set to reboot the licensed toy sector.
Photo: Toy Story 4: The merchandise-minded movie sequel set to reboot the licensed toy sector.
Toy Story 4: The merchandise-minded movie sequel set to reboot the licensed toy sector.

Should such an eventuality come to pass, however, how much of the UK toy market would Argos, Sainsbury's and Amazon control between them? The answer any UK toy supplier would give would almost certainly be: "Too much."

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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