Hottest Holiday Toys 2016

DECEMBER 9, 2016

1) The toys and traditional games market is showing strong growth. Between January and September 2016, this market DEEP DIVE: grew by 6% in the US, according to NPD, and it forecasts 6.5% growth for 2016—which suggests year-over-year Hottest growth should accelerate in the final quarter. In the UK, the market grew by 5% in the same period. 2) In 2015, US consumers spent about $25 billion on toys and Holiday Toys traditional games, up 6.7% year over year. This compares to British shoppers who spent about £3.2 billion ($4.9 billion), 2016 up 5.9% year over year. 3) Sales of connected toys in the US saw 96% growth in the 12 months ended September 30, 2016. 4) Among toys based on licensed property, entertainment and characters comprised the largest category, accounting for 74% of total sales in 2014.

DEBORAH WEINSWIG Managing Director, Fung Global Retail & Technology [email protected] US: 646.839.7017 HK: 852.6119.1779 CN: 86.186.1420.3016

DECEMBER 9, 2016

TABLE OF CONTENTS

EXECUTIVE SUMMARY ...... 3

INTRODUCTION ...... 4

THE TOY STORY ...... 4

THEMES THAT WILL INFLUENCE TOY GIFTING ...... 5

1. SMART AND CONNECTED PLAY ...... 6 2. FILM FRANCHISES CONTINUE TO RULE ...... 7 3. ACTIVE LIVING AND FITNESS TREND TO INFLUENCE CHOICE OF TOY PURCHASES ...... 9 4. MINI TOY COLLECTIBLES ...... 9 5. FURRY PET TOYS ...... 9

WHAT WE HAVE SEEN FROM RETAILERS THIS YEAR ...... 10

OUR TOP TOY PICKS ...... 11

APPENDIX ...... 12

DECEMBER 9, 2016

EXECUTIVE SUMMARY In this report, we focus on the toy industry in the US and the UK, and look at some of the latest trends that we expect to influence holiday toy-gifting. The toys and traditional games market is showing strong growth. In the first nine months of 2016, this market grew by 6% in the US, according to market-research firm The NPD Group, and it forecasts total growth of 6.5% for 2016—which suggests year-over-year growth should accelerate in the final quarter. The UK saw the market grow by 5% year over year in the same period. In 2015, US consumers spent about $25 billion on toys and traditional games, up 6.7% year over year, according to NPD. This compares to British shoppers who spent about £3.2 billion ($4.9 billion), up 5.9% year over year. According to NPD, sales of connected toys—those that can connect to another device and learn a child’s preferences—saw 96% growth in the US in the 12 months ended September 30, 2016. Among toys based on licensed property, entertainment and characters comprised the largest category, accounting for 74% of total sales in 2014, according to the International Licensing Industry Merchandisers’ Association (LIMA). We believe the following five themes will reflect holiday toy purchases this season: 1) Smart and connected play 2) Film franchises continue to rule 3) Active living and fitness trend to influence choice of toy purchases 4) Mini toy collectibles 5) Furry pet toys Based on our research and the frequency of appearances in various retailers’ lists, we offer our picks for toys we think will be the most popular during the 2016 holiday period:

Individual toys: Source: Amazon 1) Hatchimals 2) Pie Face 3) Fisher-Price Code-A-Pillar 4) Trolls Hug Time Poppy Doll

Franchise/play sets/toy range: 1) Star Wars products 2) Lego sets 3) Disney toys 4) Shopkins collectibles 5) The Nerf range Source: Target

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INTRODUCTION “A pair of hop-along boots and a pistol that shoots is the wish of Barney and Ben, Dolls that will talk and will go for a walk is the hope of Janice and Jen,” – Meredith Wilson It’s Beginning to Look a Lot Like Christmas, 1951

2015 revenues for the US toy Little did Wilson know that simple toys would get a high-tech makeover market totalled about $25 over the next half a century or so. And that “Mom and Dad (may not) hardly billion. wait for school to start again”, as these high-tech toys can even impart education and teach skills to children while they play. Toys and games are a major element of holiday-season gifting. In this report, we focus on the US and the UK, looking at the scale of the toy industry, consider some of the latest trends that are driving sales and could influence holiday toy-gifting, and run down a list of the top toys for the season provided by various retailers and toy retailer associations.

The Toy Story The toys and games markets in the US and the UK are not just very large, they are growing quickly, too. NPD forecasts this market will grow by 6.5% in the US in 2016. It has already grown 6% between January and September 2016—suggesting growth should accelerate in the final quarter. During this period, games and puzzles saw the highest growth (+16%), followed by action figures and accessories (+12%) and dolls (+12%).

Figure 1. US: Sales Growth by Toys and Games Subcategories, Jan–Sep, 2016

16% 12% 12% 9% 5% 3% 1%

-2% -1% -1%

-9%

In the UK, toy unit sales are expected to exceed 400 million units.

Source: The NPD Group/Retail Tracking Service

In the UK, the toys and games market grew by 5% in the first nine months of 2016, according to NPD. The fastest-growing UK category during this period was games and puzzles (+15%), followed by soft toys (+12%) and dolls

DECEMBER 9, 2016

(+9%). The group forecasts UK toy sales will exceed 400 million units this year, with almost one-third of the expected £3.3 billion ($5.0 billion) 2016 revenue to be recorded during the holiday season. NPD expects shoppers to spend an average of £105 ($131) per child during the festive period. In 2015, US consumers spent about $25 billion on toys and traditional games, up a solid 6.7% year over year, according to NPD. This compares to British shoppers who spent about £3.2 billion ($4.9 billion), with sales up a robust 5.9% year over year. Together, these two countries represented over 40% of the global toys and games market in 2015, we estimate from NPD data.

Figure 2. Estimated Global Toys and Traditional Games Market, 2015 (USD Bil.)

$25.0

$57.9 $4.9

US UK Rest of the World

Source: The NPD Group/Fung Global Retail & Technology

THEMES THAT WILL INFLUENCE TOY GIFTING Games and toys may be produced for and marketed to children and youth primarily, but parents are the decision-makers for the most part. Their beliefs and opinions greatly influence the choice of toys and games they buy for their children. We believe the following five themes will impact holiday toy purchases this season:

1) Smart and connected play 2) Film franchises continue to rule 3) Active living and fitness trend to influence choice of toy purchases 4) Mini toy collectibles 5) Furry pet toys We discuss these themes below, with a focus on the first two: the first Source: Amazon (smart and connected play) is new and growing quickly; and the second (film franchises continue to rule) is substantial in size.

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1. Smart and Connected Play Smart and connected toys—those that can connect to another device and VC funding in connected toys learn the child’s preferences—are quickly gaining traction. Sales of rose from $6.6 million in 2011 connected toys saw 96% growth in the US, in the 12 months ended to $104.3 million in 2015. September 30, 2016, according to NPD. This category has been invoking interest from parents and investors alike. AngelList—a US website that brings together startups, investors and job- seekers—alone lists 349 startups that make innovative toys, with an average valuation of $4.4 million, as of November 24, 2016. Based on these numbers, toy startups in the US have received almost $1.5 billion in funding to date. In addition, research from Tandem Capital, using data from CB Insights and CrunchBase, indicates that venture-capital funding in connected toys rose from $6.6 million in 2011 to $104.3 million in 2015. Two popular firms in this category are Anki and Primo Toys, whose products we profile below:

Anki Anki has created two products, a robot car-racing game called Overdrive and a robot truck called Cozmo. Anki Overdrive: This robot car-racing game allows players to build their own tracks and use a smartphone app to customize the functions of their cars. Periodic software updates provide new functions and allow players to upgrade their cars’ capabilities as they play. The “launch bundle” with 14 track pieces, two cars and four accessories retails at $184.99, as of November 25, 2016.

S ource: Anki

Cozmo: This robot truck allows children to control its movements through the app and even see the world “the way Cozmo sees it,” through its built-in camera. The Cozmo pack comes with four cubes, which form part of the games the child can play with the robot. Cozmo retails for $149.99 as of November 25, 2016.

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Primo Toys Cubetto, from Primo Toys, is a game that teaches children to code. The toy is meant to help children that cannot yet read or write to learn coding without the use of a screen. The set consists of a wooden cube-shaped robot, a board, wooden cubes that can placed on the board, a mat for the robot to move around on and an activity book. Each block denotes a command in a simple programming language (like LOGO) such as right, left or forward—the child needs to place these blocks on the board to move the robot around on the mat. Cubetto was available for $225 on November 25, 2016. Toymaker Fisher-Price has also created a similar toy called the Think-And- Learn Code-A-Pillar, which has re-arrangeable blocks that form its body and determine the way it moves. This toy is on the British Toy Retailer Association’s (TRA) top 12 “Dream Toys” for 2016 holiday gifting. While Primo Toys’ Cubetto is more focused on the child’s learning, Anki’s products help the players experience the dynamic capabilities of a virtual game in a physical game, unlike conventional vehicle and track sets.

Source: Primotoys

2. Film Franchises Continue to Rule Many children and fans of movies or TV series enjoy seeing their favorite characters come to life and become a part of their world. This has led to the rise of a lucrative segment in the licensing business.

Some 67% of US parents Merchandise based on entertainment and characters accounted for 33% of indicate that the toy franchise total licensed merchandise sales in the US, in 2014, according to LIMA. is more important than the Among toys based on licensed property, entertainment and characters comprised the largest category, accounting for 74% of total sales in 2014, brand. LIMA said. Parents’ preferences may have had a role to play in driving sales in this segment. In research on toy-shopping behavior conducted by market research firm Field Agent earlier this year, some 67% of US parents indicated they thought the toy franchise is more important than the brand.

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Star Wars has been a perennial favorite among movie fans, and it has been the leading movie by sales of its licensed merchandise, according to financial news website Insider Monkey. Since the last movie in the franchise was released in December 2015, we believe Star Wars toys will continue to remain popular through this holiday season as well. Top holiday toys lists from Walmart and Amazon in the US, and the TRA and Hamleys in the UK feature Star Wars toys.

Figure 3. Top Hollywood Movies Based on Sales of Merchandise, Jan 2016 (USD Bil.)

Star Wars 32 Cars 10 Toy Story 9 Harry Poer 7 Frozen 5.3 Transformers 3 Star Wars has been the leading movie by sales of its Spider-Man 1.3 licensed merchandise, Avengers 1 bringing in revenues of $32 Teenage Mutant Ninja Turtles 0.9 billion. Batman 0.49 Despicable Me/Minions 0.27

Source: Insider Monkey

Toys based on other franchise classics from companies such as DreamWorks, Disney, Marvel and DC Comics also appear consistently in top toys lists. With the forthcoming release of the new Disney movie Moana and DreamWorks’ Trolls, and with Marvel’s Captain America: Civil War and DC Comics’ Batman vs Superman and Suicide Squad released earlier this year, toys based on the central characters of these movies are on several retailers’ lists.

Source: Disneystore

DECEMBER 9, 2016

Figure 4. US: Top Grossing Hollywood Movies to Date in 2016 (USD Mil.)

486 408 368 364 363 341 330 325

197 162

Source: The Numbers

3. Active Living and Fitness Trend to Influence Choice of Toy Purchases The active living and fitness trend among parents is likely to drive the purchase of “active” toys and games for their children. Two such toys in this segment are the VTech KidiZoom Action Cam, which is similar to a GoPro Cam used by outdoor activity enthusiasts, and the VTech Smartwatch, which teaches children to tell the time. Both items track steps and set fitness challenges.

4. Mini Toy Collectibles A prominent feature in many of the top toys lists is mini toy collectibles. The Shopkins set has been one of the most popular in the mini toy collectibles category, since its launch in 2013. The dolls and toys are based on grocery- store items and have since led to the creation of books, trading cards, a YouTube channel and even a movie based on the characters.

5. Furry Pet Toys Source: Hatchimals Among the furry pet toy trends, the one that has been attracting the most attention so far are the Hatchimals toys. The toy comes encased in a plastic egg which the owner needs to rub and nurture, and “when the time is right,” the egg hatches to reveal a furry baby animal. The child can then teach the animal to walk, talk and do tricks as it grows. Many retailers have Hatchimals toys are already reported that the toy is already sold out. While these generally retail for sold out at many of the major about $50, some eBay listings for Hatchimals toys begin at over $100 and go retailers, and are selling on up to as much as $10,000. eBay for $100-$10,000.

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WHAT WE HAVE SEEN FROM RETAILERS THIS YEAR Below, we detail some of the initiatives undertaken by retailers in the US and the UK this year:

In the US: • Toys “R” Us plans to hold a “quiet hour” at some of its US stores to help autistic children shop in a comfortable environment. The retailer’s UK stores have been doing this since 2014. Lights will be dimmed, music will be turned off and autistic-friendly signage will be put up throughout the store. • Walmart began its layaway program on September 2, 2016, the same time as last year, but two weeks earlier than it used to launch. Layaway allows shoppers to reserve products across various categories, including toys. By making a minimum payment of $10, shoppers can get a head start with purchasing items on their list before the stores run out of stock. Walmart’s minimum payment is for individual products that cost $10 or more and total purchases that are $50 or more. Once the full payment has been made, customers can collect the product from a designated store. This program is not available for online purchases. • Amazon Prime customers with Echo devices or other Alexa-powered devices can shop exclusive toy deals this year. Amazon has also renewed and expanded its “Interesting Finds” feature that presents a curated collection of products across various categories for men, women, children and pets. As a user indicates his or her preferences by “hearting” items, Amazon gathers similar products and displays them to the customer. Previously, this Pinterest-like function was available only on the web version of the site, but it has now been expanded to the mobile version and the app.

In the UK: • Harrods has introduced a concierge service exclusively for toy shopping. After an initial consultation to understand details such as the age, hobbies, interests and favorite characters of the child, the concierge shows the buyer around Harrods Toy Kingdom—four rooms that contain over 60,000 toys—and suggests suitable toys. Other services provided by the Toy Concierge include giftwrapping and shipping, and there is no minimum required spending. • Tesco launched its holiday toys promotional campaign on October 20, 2016. The retailer stated that it carries out daily price-checks against the same toys sold at general merchandiser Argos to ensure that it provides the best prices to its customers. Harrods has introduced a Toy Concierge service to help shoppers choose from a range of 60,000 toys at its store.

DECEMBER 9, 2016

OUR TOP TOY PICKS

Finally, based on our research, we offer our top picks of what we expect to be the most popular toys in the 2016 holiday period:

Individual Toys:

1. Hatchimals 2. Pie Face 3. Fisher-Price 4.Trolls Hug Time Code-A-Pillar Poppy Doll

Source: Amazon

Franchise/play sets/toy ranges:

1. Star Wars Line 2. Lego set 3. Disney toys of products

4. Shopkins collectibles 5. The Nerf range

Source: Walmart

DECEMBER 9, 2016

APPENDIX The Toys “R” Us “Fabulous 15”

1. Dreamworks Animation Trolls Hug Time Poppy Doll from HASBRO® 2. Hatchimals™ from Spin Master™ 3. Light ’N Go 3-In-1 Activity Walker from Little Tikes® 4. Little Live Pets™ Snuggles My Dream Puppy from Moose Toys™ 5. NERF N-STRIKE ELITE TERRASCOUT RC DRONE Blaster from HASBRO® 6. Num Noms Lip Gloss Truck™ from MGA Entertainment® 7. PAW Patrol™ Zoomer Marshall™ from Spin Master™ 8. PJ Masks Headquarters Playset from Just Play™ 9. POKÉMON Z-RING from TOMY® 10. Power Wheels® Wild Thing™ from Power Wheels® 11. Selfiemic™ from Moose Toys™ 12. Shopkins™ Tall Mall from Moose Toys™ 13. Sky Viper® V2400fpv Streaming Drone with FPV headset from Skyrocket Toys™ 14. STAR WARS™ Interactech Stormtrooper Figure from HASBRO® 15. Think & Learn Code-A-Pillar™ from Fisher-Price®

Walmart’s Top 25 “Chosen by Kids” Holiday Toy List 1. My Life As Food Truck 2. Num Noms Lip Gloss Truck 3. Pom Pom Wow Decoration Station 4. Doc McStuffins Hospital Care Cart 5. FurReal Friends® Torch, My Blazin’ Dragon 6. Hatchimals 7. Little Live Pets Puppy 8. Batman vs Superman: Dawn of Justice Batcave 9. Barbie Rainbow Cove Princess Castle Playset 10. Fisher Price® Imaginext® Bat Flight City 11. Fisher Price® Little People® Sit 'n Stand Skyway 12. My Little Pony Explore Equestria Crystal Empire Castle 13. Teenage Mutant Ninja Turtles Mega Lair Playset 14. Pie Face Showdown! Game 15. Razor PowerCore E100 Electric Scooter 16. Teenage Mutant Ninja Turtles Remote Control Skateboarding Mikey 17. Fisher Price® Imaginext® Ultra T-Rex 18. Hot Wheels® AI Racing Playset 19. Nerf® N-Strike Elite® HyperFire® Blaster 20. Tyco® Terra Climber Remote Control Vehicle 21. Vtech® Go! Go! Smart Wheels Treasure Mountain Train Adventure 22. Disney® Princess Carriage 23. Paw Patrol Zooming Marshall 24. Sky Viper Streaming Drone 25. Star Wars™ Electronic R2D2

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Target’s List of Top Toys for 2016 1. Bright Beats Learnin’ Lights Dance Mat 2. Fisher-Price Thomas’ Sky-High Bridge Jump 3. B. Zany Zoo Wooden Activity Center 4. Playskool Sesame Street Love2Learn Elmo 5. Fisher-Price Code-A-Pillar 6. PAW Patrol Zoomer Marshall and Target-exclusive Everest 7. Jaguar Sports Car 12V Electric Ride-on 8. Our Generation Sweet Shop Ice Cream Truck 9. Wonder Woman Invisible Jet 10. Shopkins Groovy Smoothie Truck with Shoppies Doll 11. Hatchimals 12. Barbie Rainbow Cove Princess Castle 13. FurReal Friends Torch, My Blazin’ Dragon 14. Qixels 3D Maker 15. Disney Frozen Little Kingdom Elsa’s Magical Rising Castle. 16. Hot Wheels Track Builder Power Booster Kit: Rocket Edition 17. CHiP, the Robotic Dog 18. Teenage Mutant Ninja Turtles: Out of the Shadows Tactical Truck 19. Star Wars X-wing vs Death Star Assault 20. Meccano Micronoids 21. LEGO Friends Amusement Park Bumper Cars 22. 3Doodler Kid-safe 3D Printing Pen Set 23. LEGO Star Wars Krennic’s Imperial Shuttle 24. Simon Air Game 25. Sky Viper Hover Racer 26. Jetson V6 Hoverboard 27. Nerf Rival Khaos

Amazon’s List of Top Toys for 2016 1. Pie Face Showdown Game 2. Codenames 3. Bloxels: Build Your Own Video Game 4. Shopkins Happy Places House Playset 5. Hot Wheels A.I. Intelligent Race System Starter Kit 6. Scientific Explorer Magic Science for Wizards Only Kit 7. Playskool Sesame Street Love2Learn Elmo 8. Fisher-Price Imaginext DC Super Friends Super Hero Flight City 9. Fisher-Price Dance & Move BeatBowWow 10. SELFIE MIC Music Set 11. AquaBeads Ultimate Design Studio Playset 12. Fisher-Price Shimmer and Shine Magic Flying Carpet 13. View-Master Deluxe VR Viewer 14. Barbie Dreamhouse 15. Barbie Pop-Up Camper Vehicle 16. LEGO City Airport Air Show Building Kit 17. Nom Noms Lip Gloss Truck Craft Kit 18. Wonder Workshop Dash Robot 19. Hatchimals Draggles 20. LEGO Friends Amusement Park Roller Coaster Building Set

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21. 3Doodler Create 3D Pen 22. American Girl Melody Doll, Book & Backpack Collection 23. DreamWorks Trolls Hug Time Poppy

The below are available exclusively on Amazon: 24. Hape Solid Beech Wooden Blocks Stacking Set 25. VTech Go! Go! Smart Wheels Launch and Go Ride On 26. Little Tikes Fully Assembled Cozy Coup: Ready to Ride 27. Fisher-Price Thomas the Train Wooden Railway Santa’s Workshop Express 28. Fisher-Price Rock, Roll ‘n Ride Trike 29. FurReal Friends Flurry, My Baby Snow Leopard Pet 30. Hape Solid Beech Stacking Blocks with Carrying Sack 31. Little Tikes School Bus Activities Gym 32. Hape Handyman Go-To-Caddy Wooden Tool Box 33. Monster High Skelita Calaveras Collector Doll 34. Play-Doh Disney Princess Prettiest Princess Castle Set 35. Fisher-Price Power Wheels Chrome Dune Racer 36. Power Wheels Thomas the Train Thomas with Track 37. Snap Circuits 203 Electronics Discovery Kit 38. Little Tikes EasyScore Basketball Set

Tesco’s List of Top Toys for 2016 1. Hatchimals 2. Sindy 3. Beat Bo/Beat Belle 4. Lego City Volcano 5. My Fairy Garden 6. My Little Pony Power Pony Collection Pack 7. Nerf N-Strike HyperFire Blaster 8. Paw Patrol Air Patroller 9. Speak Out 10. VTech Magical Unicorn

Hamleys’ List of Top Toys for 2016 1. V-Tech Kidizoom Smartwatch 2. DreamWorks Hug Time Poppy Doll 3. Nerf Mega Mastodon Blaster 4. Hamleys Magic Showcase 5. Paw Patrol Zoomer 6. Pieface Showdown 7. Giant BeanBoozled Spinner Game 8. Mini Beachcomber 9. Marvel Legends Captain America Shield 10. Iron Man Helmet 11. Star Wars Virtual Reality Viewers 12. LEGO Star Wars Krennic’s Imperial Shuttle

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Argos’s List of Top Toys for 2016 1. Zoomer Chimp 2. Paw Patrol Air Patroller 3. LEGO City Volcano 4. VTech Toot Toot Drivers Goldmine 5. Nerf Modulus Tri-Strike 6. Tiny Treasures Baby Doll 7. SelfieMic 8. Design a Friend Tiffany 9. Snuggles My Dream Puppy 10. Fisher-Price Code-a-Pillar 11. Star Wars Sphero BB-8

NPD’s List of Top Toys for 2016 1. Pie Face Showdown 2. Hatchimals 3. Star Wars line of products 4. Disney Princess Carriage 5. Speak Out 6. Air Hogs Helix Sentinel Drone 7. Tsum Tsum Plush Toys 8. Torch My Blazin’ Dragon 9. Wowwee CHiP robot 10. Think & Learn Code-a-Pillar 11. BoseBuild Speaker Cube 12. Pokémon Sun and Moon 13. LEGO sets 14. Skylanders Imaginators

UK Toy Retailer Association’s List of Top Toys for 2016 1. Snuggle My Dream Puppy 2. Friends Amusement Park Roller Coaster 3. Hot Wheels Ultimate Garage 4. Nerf N-Strike Elite HyperFire Blaster 5. Star Wars Rebel U-Wing Fighter 6. Silly Sausage 7. Speak Out 8. Paw Patrol Air Patroller 9. Thomas & Friends TrackMaster Sky-High Bridge Jump 10. Shopkins Chef Club Hot Spot Kitchen 11. Hatchimals 12. SelfieMic

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Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 [email protected]

John Mercer Senior Analyst Swarooprani Muralidhar Research Assistant

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