Toys and Games - World
Euromonitor International : Global Market Insight
April 2009 Toys and games World
List of Contents and Tables
Executive Briefing...... 1 State of the Market...... 1 Chart 1 Global Presentation Slide 1 ...... 1 Chart 2 Global Presentation Slide 2 ...... 1 Chart 3 Global Presentation Slide 3 ...... 2 Chart 4 Global Presentation Slide 4 ...... 3 Chart 5 Global Presentation Slide 5 ...... 4 Chart 6 Global Presentation Slide 6 ...... 5 Chart 7 Global Presentation Slide 7 ...... 6 Chart 8 Global Presentation Slide 8 ...... 7 Chart 9 Global Presentation Slide 9 ...... 8 Chart 10 Global Presentation Slide 10 ...... 9
Global Market Overview...... 10 Key Trends and Prospects...... 10 Introduction ...... 10 Summary 1 Key Factors Shaping Supply & Demand 2008 ...... 10 Demographic Trends ...... 11 Birth Rates Decline and Populations Age...... 12 Social Trends ...... 12 “green” Concerns in the Western World...... 13 Industry Trends...... 13 Chinese Manufacturing and Product Recalls...... 14 New Product Development...... 15 Summary 2 Key Trends in New Product Development 2008 ...... 16 Summary 3 Major New Product Launches 2008 ...... 16 Packaging and Safety Issues...... 18
Western Europe ...... 18 Headlines ...... 19 Trends in Key Sectors ...... 19 Competitive Landscape...... 20 Prospects...... 20 Summary 4 Regional Trends by Sector 2008...... 21
Eastern Europe...... 21 Headlines ...... 21 Trends in Key Sectors ...... 21 Competitive Landscape...... 22 Prospects...... 23 Summary 5 Regional Trends by Sector 2008...... 23
North and Latin America ...... 23 Headlines ...... 23 Trends in Key Sectors ...... 24 Competitive Landscape...... 24 Prospects...... 25 Summary 6 Regional Trends by Sector 2008...... 25
Asia Pacific ...... 25 Headlines ...... 25
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Trends in Key Sectors ...... 26 Competitive Landscape...... 26 Prospects...... 27 Summary 7 Regional Trends by Sector 2008...... 27
Brics (brazil/russia/india/china)...... 28 Brics in the Global Context...... 28 Brics: Criteria for Success...... 28 Brics: Competitive Landscape: Who Moved First ...... 29 Brics: Prospects...... 30
Emerging Markets (second Tier Markets)...... 30 Emerging Markets in the Global Context...... 30 Emerging Markets: Criteria for Success...... 30 Emerging Markets: Competitive Landscape: Who Moved First? ...... 31 Emerging Markets: Prospects...... 32 Key Drivers...... 32 Prospects...... 34 Grocery Retailers...... 34 Mixed Retailers...... 35 Leisure and Personal Goods Retailers...... 37 Vending...... 38 Homeshopping ...... 38 Internet Retailing ...... 39 Direct Selling ...... 40 Prospects...... 41 Corporate Strategies...... 41 Major Player Comparative Performance...... 41 Major Players by Regional Presence and Main Area of Activity...... 43 Summary 8 Major Toys and Games manufacturers 2007...... 44 Major Players by Sector ...... 44 Summary 9 Top Three Manufacturers by Sector 2007 ...... 44 Major Players by Region ...... 45 Summary 10 Top Three Manufacturers by Region: 2007...... 45 Marketing and Brand Building ...... 45 Strategic Activity...... 46 Summary 11 Toys and Games: Merger and Acquisition Activity 2004-2007 ...... 47 Strategic Alliance Activity...... 48 Summary 12 Toys and Games: Existing Strategic Alliance Activity: 2007...... 48 Degree of Consolidation ...... 48
Key Drivers and Prospects ...... 49 Headlines ...... 49 Decreasing Consumer Spending and Recessionary Economies...... 49 Product Recalls Hit the Industry...... 49 Licensing Deals Drive Increased Sales...... 50 Seasonality and Competition...... 51 Age Compression ...... 52
Global and Regional Competitive Landscape...... 53 Headlines ...... 53 Fisher-price Drives Growth for Mattel...... 53 Hasbro Is “transformed”...... 53 Lego Shows Strong Gains ...... 54
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Private Labels Continue To Show Strong Growth ...... 54 Will Bratz Survive? ...... 54
Regional Trends and Prospects...... 55 Headlines ...... 55 EU Region Passes New Regulations on Toy Safety...... 55 Western Europe Moves Production Facilities To Eastern Europe...... 56 Olympics Drives Demand in China...... 56 North American Parents Increasingly Look To Play As A Learning Tool ...... 56 Emphasis on Family Time in Eastern Europe Couples With Strong Economic Growth ...... 57 Latin Americans Spend Money on Their Infants and Toddlers ...... 57 Increased Disposable Incomes in South Africa...... 57
Key Drivers and Prospects ...... 58 Headlines ...... 58 New-generation Gaming Consoles Become Available...... 58 the User Base Widens ...... 58 Consoles Jump on To the Online Bandwagon...... 59 Mobile Phones A Growing Threat ...... 60 Piracy Continues To Be A Significant Issue...... 60
Global and Regional Competitive Landscape...... 61 Headlines ...... 61 the Year of Nintendo ...... 61 Ps2 Continues To Outsell Ps3 for Sony...... 61 the Xbox 360 Continues To Have A High “game Attach” Rate ...... 62 Software Subsector Witnesses Consolidation...... 62 Is Apple Going To Launch A Hand-held Console? ...... 62
Regional Trends and Prospects...... 63 Headlines ...... 63 New-generation Consoles Expected To Keep Video Games Sales Buoyant in the US ...... 63 Football Fever Hits Western Europe ...... 63 Legislators Look To Further Regulate the Market in the Coming Years...... 64 Consoles Anticipated To Become Important Part of Family Entertainment in Australia...... 64 Eastern Europe Takes To Online Gaming ...... 64 Japanese and South Koreans Gamers Appear Jaded...... 65 Chinese Forecast To Continue To Drive Growth in Asia Pacific ...... 65 Console Manufacturers Look To Increase Their Presence in Latin America ...... 65
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THE WORLD MARKET FOR TOYS AND GAMES
EXECUTIVE BRIEFING
State of the Market
Chart 1 Global Presentation Slide 1
Source: Euromonitor International
Chart 2 Global Presentation Slide 2
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Chart 3 Global Presentation Slide 3
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Chart 4 Global Presentation Slide 4
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Chart 5 Global Presentation Slide 5
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Chart 6 Global Presentation Slide 6
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Chart 7 Global Presentation Slide 7
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Chart 8 Global Presentation Slide 8
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Chart 9 Global Presentation Slide 9
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Chart 10 Global Presentation Slide 10
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GLOBAL MARKET OVERVIEW • Value sales in the global toys and games sector grew at a CAGR of nearly 12% during the review period, reaching US$122 billion in 2007. Growth for 2008 is expected to be reported at 16% over prior year. • The US was the largest market for toys and games overall with a 33% share of retail sales in 2008. • Value sales of toys and games in the Latin American region grew at a robust CAGR of 23.4% during the review period as Brazil and Mexico, in particular, reported increased consumer spending driven by stable economic conditions. • Registering a dynamic CAGR of 21% during the review period, the video games subsector has almost caught up with traditional toys and games subsector which grew at a much more modest CAGR of 6.5% over the same period. • Video games major Nintendo overtook Mattel during the review period and is now the leading company in the toys and games sector. • The toys and games sector is expected to see strong growth in value sales with a projected CAGR of 8% over the forecast period. Growth will be driven by strong consumer demand for video games.
KEY TRENDS AND PROSPECTS
Introduction
Summary 1 Key Factors Shaping Supply & Demand 2008 Trends Sector Region/country
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Demographic trends More working women Toys and games Asia Pacific, Latin America, Eastern Europe Falling birth rates Traditional toys and games Western and Eastern Europe, Japan, North America Ageing population Traditional toys and games Western and Eastern Europe, Japan, North America Growth in middle class Toys and games Asia Pacific, Latin America, Eastern Europe Social trends Environmental concerns Traditional toys and games Western Europe, Japan, North America, Australia Age compression Toys and games All regions Industry trends Safety standards Toys and games Western Europe, Japan, North America, Australia Manufacturing capacities in China Traditional toys and games All regions Licensing Toys and games All regions Source: Euromonitor International
Demographic Trends
Working mothers have more money to spend on toys • As the educational levels of women rise, in both cities and rural areas more women are choosing to join the work force rather than staying at home and being housewives. The work place is more encouraging for women, and secondary family incomes are welcomed. • The change is more significant in the developing economies. Unlike their own mothers, many women of the current generation often choose career before family. Many are having fewer children and they are having them later in their lives. Many young women today are pursuing further education and then choosing to have a career before settling down with children. Some are able to combine the two.
Outlook • This trend is not likely to change in the foreseeable future, as more women now see employment not only as a way to generate income but also as a means of liberation and self-expression. With the growth of the service sector, women are finding it easier to find jobs. Women are likely to focus more on their careers, postpone childbearing and have fewer children in coming years. • Women will be better educated in the future, and this will make their earnings prospects even better. There is more scope for increased work force participation in the developing countries as the disparities between working men and women in those countries are still high. Improved childcare facilities should also encourage more women into the work force.
Impact • Working women typically cannot be with their children while they work. Many, therefore, look to toys and games as substitutes to provide children with entertainment. This has generated an increasing amount of guilt among some parents. • At the same time, mothers with higher levels of education tend to pay greater attention to their children’s mental and personal development. As a result, pre-school and infant toys are the leading subsectors among traditional toys and games.
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• Many in the new generation of children are more likely to spend their leisure time at home, playing on their own rather than playing outside with other children. The increasing number of functional products being introduced into the toys and games market is another reason for growth in the sector.
Birth Rates Decline and Populations Age • The average number of children born to women in the less-developed countries has fallen from 6.2 to 3.0 over the past three decades In Europe, the fertility rate dropped to 1.42 and in Japan to 1.43 during the review period. A fertility rate of 2.1 children per woman is needed to replace the current population. • Declining birth rates and increased life expectancies have “aged” many of the world’s populations. Worldwide, the group of people aged 80 years or more grew by 17% during the review period, the strongest growth of any age group.
Outlook • The trend toward declining birth rates is expected to continue in the medium term and to stabilise in the long term. Governments in Western countries are looking to encourage couples to have more children in order to address shrinking and ageing populations. France is offering cash and tax incentives to women having babies, a tactic other countries may soon adopt. Based on various government efforts, there is likely to be a slight increase in the fertility rates in some Western European countries. However, the increased rates will not be enough to replace the current population. • Globally, the number of people aged 65 or more is forecast to grow by 10% over the next five years, and in the longer term that growth is expected to accelerate rapidly. Growth of this age bracket will come as baby boomers begin reaching the age of 65 at the end of this decade.
Impact • As a result of declining birth rates, the target group for children’s toys and games is shrinking. In fact, some European markets have reported drops in sales. This should be worrying news for players in this sector. • On the other hand, while there are fewer children, increased disposable incomes allow parents and grandparent to indulge these fewer children more. So, while volume sales may decline, value sales are expected to grow. • With an ageing adult population, marketers of toys and games will need to look beyond the traditional target market of children to increase sales. This effort has already begun, as games and puzzles aimed at adult audiences have become significant sellers in several markets. Indoor games have seen sales growth, as well, together with video game software for adults.
Social Trends
Age compression is here to stay • With the growth of digital technology, many of today’s children are no longer interested in playing just with dolls, model cars or Frisbees. There are now a multitude of entertainment options, many of which are leading to kids growing “older” faster. This trend has been dubbed by marketers in the industry as age compression. • Spending more time with adults has also been a contributing factor in age compression. At the same time, nutrition has improved, leading to many children attaining physical maturity more quickly.
Outlook • The trend is expected to continue as the factors leading to age compression become stronger over the forecast period. Factors such as parents spending more time away from home, exposure to various forms of digital entertainment, improving nutrition and increased socialising with adults are expected to continue and to expand into more parts of the world. • In the developed countries of Western Europe, contrasting social trends of “back to nature” and the desire to capture simple pleasures may take on more significance among parents. But this is not likely to become a mainstream outlook.
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Impact • Sales of toys and games will be driven primarily by new technologies as manufacturers strive to satisfy the emerging consumer demand for digital products. This trend is likely to continue as infants grow into older children and join the ranks of those now participating in the swelling toys and games market. • Competition among companies in the sector was traditionally based on their ability to offer low prices. More recently, as a result of incorporating cutting-edge technologies into products, toys and games manufacturers have seen demand shift towards more interactive toys and games. This has benefited the video games hardware and software subsectors, which are experiencing phenomenal growth. • Activity/construction toys have maintained a level of consistency in demand due to the developmental aspect of simultaneously offering play and learning values. Model vehicles, formerly the dream toys of many young boys, have been supplanted by PlayStation hardware and software titles.
“green” Concerns in the Western World • There is a growing environmental awareness among US and Western Europe consumers, and attitudes about “green” issues now play a part in the decision–making process when it comes to buying their children toys. This was underscored during the wave of toy recalls that occurred in 2007. • The levels of recyclability and biodegradability of toys are now becoming notable selling points as toy manufacturing technology continues to advance. • Even though “eco toys” constitute only a small fraction of the toy industry’s annual sales, consumer interest in the US and Western Europe continues to grow.
Outlook • Environmentally friendly features are expected to be key selling points in the toys sector over the forecast period. There has been a clear focus on “green” toys at recent toy trade shows, as the industry caters to parents’ growing demands for safer and more environmentally friendly products. Many parents, as well, are increasingly emphasising environmental awareness to their children at a young age. • A report by Greenpeace “Playing Dirty”, published in 2008 pointed out that all three major video gaming units, Nintendo’s Wii, Sony’s PlayStation 3 and Microsoft’s Xbox 360, still have a long way to go before they can be considered eco-friendly. Manufacturers could be under increased pressure in the future from environmental watchdog groups.
Impact • A number of niche players specialising in eco-friendly toys (usually made of wood) have entered the toys and games market. Japanese toy manufacturer Tomy launched its eco-friendly Eco Angels range, a line of six baby and toddler toys made with corn, sugar cane and other natural substances rather than traditional plastic materials. • Tomy is also using packaging made from sustainable products. In general, toy and game packaging is becoming more environmentally friendly as more suppliers switch to biodegradable boxes or, in other cases, simply minimise the amount of packaging material. • FAO Schwarz launched a new line from Green Toys that features toys made from recycled plastic milk containers. Products include an indoor gardening kit, a cookware and dining set and sand play-set. Toys “R” Us has launched a range of eco- friendly toys that are being promoted as addressing the emerging consumer preference for environmentally friendly products. • Energy efficient components are likely to make their way into future video game consoles as a result of this trend.
Industry Trends
Licensing: a vital tool for growth • The vast majority of new toys launched in the sector today are licensed products. Although this is not a new trend, it is a growing trend. Licensing is affecting the way toys are now developed and marketed.
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• GFK figures suggest that about one-half of all the toys sold in Australia are licensed products. During the review period, there was significant investment in licensing that contributed to growth in the traditional toy subsector. Though figures are not readily available, the picture is likely to be the same in North America and Western Europe.
Outlook • Toy manufacturers will continue looking for attractive licensing properties over the forecast period. On the other hand, licensors are being more selective about the toys that bear their name. Studios and intellectual property owners are focussed on who can generate the best synergy with the license and what innovation the manufacturer can offer that will align it with its brand image. • Hasbro has set the tone of toys brands leading to movie productions which, then again, generate more licensing revenues for the original toys.
Impact • Between 2006 and 2008, there were significant movie licenses that drove an increase of sales in the toys and games sector. The Star Wars movies were supported by much promotional hype which LEGO took advantage of with its Star Wars range. The movie Cars aligned with Mattel’s toy car range that was a perfect fit. Hasbro, through its property rights with the Transformers movie, saw increased sales of action figures. Although these toys successfully drove sales for their manufacturers, it is nevertheless true that licensing revenues must be generated during a relatively small window of time as it is difficult to get longevity out of licensed properties. • Movie tie-ins and licensed properties will continue to be primary factors in the growth of the toys and games sector, in both traditional toys and games and video games. In an industry based on innovation and new ideas, licensing provides new ideas when genuine product innovation is lacking. • Manufacturers, however, will be forced to exhibit greater innovation and synergy in their toys, otherwise studios will not sell them the rights. The Indiana Jones movie in 2008 was predicted to generate the lowest amount of merchandise ever for a big box office release.
Chinese Manufacturing and Product Recalls • During the review period, major toy companies from around the world having shifted their manufacturing bases to China, where the low production costs were matchless. This led to the introduction of low-priced products from China into retail markets worldwide, as distributors and importers sourced products directly. Recently, Chinese manufacturers developed the ability to make quickly and cheaply exact copies of toys made elsewhere. It takes Chinese producers only a few weeks to put exact copies of the newly released toys into mass production and export them worldwide. • In 2007, however, there were an unprecedented number of recalls of products made in China. Millions of products, even from reputable companies like Mattel and RC2 Corp., were pulled off store shelves.
Outlook • China’s cost advantage will not disappear in the short term, and Chinese goods are projected to dominate volume sales in most of the traditional toys markets. At the same time, companies have begun to explore other low-cost production locations. Western European manufacturers have already begun to consider establishing operations in Eastern European countries, which are closer to home markets and easier to monitor. • Safety standards are expected to be addressed more seriously addressed by governments worldwide. In addition to the issue of lead in toys, there is the emerging problem of polyvinyl chloride (PVC) in toys. While the discovery of lead has recently dominated the headlines, PVC is one to watch as the plastic is used in the manufacture of many toys. The US Environmental Protection Agency has identified vinyl chloride, which is used to make PVC, as a carcinogen. This and other concerns about the chemicals used to make PVC have led to PVC being banned from toys sold in the European Union. There may be a further ban on PVC in toys in California in 2009.
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Impact • The wide availability of low-priced Chinese toys and games had an adverse effect on local toy manufacturing in markets around the world, including those in the developing economies of Latin America and Asia. Many domestic companies have had to shut down their businesses during the review period, while others have transformed themselves from manufacturers into distributors/importers. • The positive impact of low-priced toys has been that demand from low-income households has increased. The target market group for toys across the world has expanded. Many consumers do not care if a cheap toy is broken after a week, because children will eventually not want to play with it even if it remains unbroken for a year. Many more parents can now buy toys for their children because of their lower prices, even if only a small percentage of the family budget is dedicated to toys. • As a result of recent product recalls, toy manufacturers are facing intense pressure to come up with safer alternatives. Mattel and Hasbro, for example, are experimenting with corn-based plastic. Retailers like Target and Sears are responding to consumer concerns by initiating programmes to remove some of the toys and other products that contain PVC. Regardless, given the widespread use of PVC in toys, the job of eliminating it will be very challenging and it may lead to price increases as more expensive alternative components are used.
New Product Development
“Other toys” see the growing use of electronics • Bridging the gap between traditional toys and games and video games is the growing presence of electronics-infused traditional toys. LeapFrog, for example, has launched two new products, a second Leapster line and a new Tag learning system which it hopes will reverse the company’s current financial misfortunes. The much-anticipated Tag features a pen-based reading system that utilises optical hardware and optical character reading software. • Other recent notable releases of electronic toys include the following: • Fisher-Price’s “Kid-Tough Digital Camera”, a highly durable camera that can withstand being dropped on land and submerged for 30 minutes under water; • VTech’s “V-Motion”, a Wii-like console that gets children involved in science, spelling and arithmetic; • Playskool’s “Kota the Triceratops”, an advanced interactive plush toy that children can ride; • Hasbro’s FurReal Friends series, a realistic set of animals that responds to touch; • Jakks’ “XPV R.A.D. Robotic Air Defense”, a remote-controlled flying robot that travels on land and then launches into the air and is capable of performing aerial stunts.
More licensing-driven releases • Besides international mega-movie licenses like Star Wars, Iron Man and Hulk bringing new releases into the dolls/figures market, there were also regional developments. For example, in Singapore, LEGO launched its ExoForce toy line. These activity/construction kits feature Japanese animation-inspired designs. They also have a tie-in with a TV series featuring sets from the LEGO ExoForce toy line. These toys are likely to be a hit with Singaporean children who are exposed in equal measure to American and Japanese popular culture. • China saw its Olympic mascots drive demand for new dolls/figures and soft toys. India has begun to develop characters based on its culture and mythology. A Hanuman doll has been introduced, and the Cartoon Network is airing a serial called Chota Bheem that is spawning a set of dolls, pencil boxes, school bags and related products.
Online connectivity • Leading manufacturers are updating their traditional toys to be compatible online. Petshop from Hasbro is one example of a toy that “upgraded” and achieved success in 2008. • In the Netherlands, an interesting new local product called Swinxs was launched. Swinxs is a so-called game console but it is used without a screen. This means that it mainly designed as an outdoor game; the console can be used for all kinds of traditional games such as play tag but comes with many more games. Free games can be downloaded from its website www.swinxs.com. The console is not just an outdoor game console; it can also be used as a MP3 player, as well. While the company that developed
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Swinxs is a start-up, its launch partner is high-end department store De Bijenkorf, a major player in the sector. • Video games have also been pressured to move in this direction. Microsoft has introduced the Xbox 360 Live! Service, while Nintendo has introduced Wiiware, an online service. • Interconnectivity has become fashionable among consumers, and next-generation consoles have this capability. In 2007, GameSpy’s online multi-player technology was incorporated into Unreal Engine 3, permitting the connectivity of a PC’s (and therefore also a Mac’s) online gaming infrastructure with that of PlayStation 3’s open network infrastructure. This trend was pioneered by the interconnectivity of Nintendo’s DS hand-held and Wii home consoles. The PSP and PS3 will also share interconnectivity, Sony has announced.
Targetting adults • In Singapore, designer dolls/figures from Play Imaginative, including its new Tofu Gum, Grabbit and Zugan toy lines, are gaining popularity among adults. These higher-priced toys are available only in limited numbers, and they feature custom designs by renowned artists and toy designers from around the world. These toys are primarily marketed through word-of-mouth and through internet blogs and online forums. Held for the first time in 2008, the Singapore Toy and Comic Convention (STCC) offered a platform for companies to market these limited edition toys. The inaugural STCC managed to draw 140,000 visitors over a single weekend, a turnout that rivalled that of the San Diego Comic Convention. • With football video games attracting the young adult audience in Western Europe in 2008, video game manufacturers are now looking toward the adult market.
Summary 2 Key Trends in New Product Development 2008 Trends Sector Incorporation of electronics into traditional toys Traditional toys and games Synergy with the online world Toys and games More licensing agreements Toys and games Attracting adult consumers Toys and games Novelty and being different Toys and games Source: Euromonitor International
Summary 3 Major New Product Launches 2008 Brand name Company Unique selling point Market Caja Fuerte Errekaese SA Indoor game - unlock the Argentina combination numbers of your rivals before they decipher yours. Vivid Games Vivid Imaginations Indoor game - based on UK Limited BBC show "The Kids are All Right" Fingers Football Ditoys SA Indoor game – play Argentina football with your fingers Monopoly – special Hasbro Inc Indoor game classic with Germany, Singapore editions a difference Fisher-Price Fun & Learn Mattel Inc Preschool – learning time Argentina in an interesting way V Motion V Tech Preschool – activity toy Canada, US that has a Wii-like console and joystick Kelly dolls and Mattel Inc Dolls/figures Argentina
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accessories My Little Pony Hasbro Inc Dolls/figures – line Germany extension Fun to Feed Cabbage Funtastic Dolls - come with food Australia dolls and ice cream that the doll licks and eats Mushabelly Chatter Prima Toys Dolls/figures - unique South Africa sound when squeezed Indiana Jones, Hulk, Iron Hasbro Inc Dolls/figures – new Germany, US, Greece, Man licensed products based Malaysia on the movies Tyco Terrainiac Mattel Inc Model vehicle – multi- Australia terrain, futuristic looking remote control vehicle Speed Racer Car Mattel Inc Model vehicle - car that Australia, Belgium, matches the Speed Malaysia Racer movie; support by mass media Playmobil Geobra Brandstätter Activity/construction – Germany, UK, Hungary, GmbH & Co. KG new characters Italy, Netherlands LEGO Bionicle LEGO Group Activity/construction – Hungary new figures LEGO Star Wars LEGO Group Activity/construction – Italy new figures based on the movie Playskool Dance/Kota Hasbro Inc Soft/plush toys – Belgium, Canada, dinosaur that reacts to France, US children’s actions Petshop Hasbro Inc Soft/plush toy - new Belgium, France range with secret code inside used to enter a virtual world on internet where kids care for and play with the pet Hasbro Furreal pets Hasbro Inc Other toys - realistic pets Canada, Malaysia that respond to touch Fisher-Price's Kid-Tough Mattel Inc Other toys – can endure Canada Digital Cameras 30 minutes under water Scope TV Lansay Other toys – bowl-shaped Belgium, France microscope that works connected to a TV screen Nerf Gun Electronic Arts/ Hasbro Other toys Portugal Meccano Meccano SN Other toys - an interactive UK robot that interacts with the owner's voice (wi-fi) Playstation 3 Sony Video game hardware - Chile, India new generation console Wii Nintendo Video game hardware - Chile, South Korea, new generation console Taiwan XBox 360 Microsoft Corp Video game hardware – Argentina new generation console PSP Lite Sony Corp Video game hardware – Belgium, Hungary, handheld console new Malaysia version
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Wii Fit Nintendo Video game software - Chile, Mexico, Canada, active gaming Australia, Germany, Spain, Hungary, Netherlands, Poland, Portugal, US Wii Sport Nintendo Video game software Chile Mario Kart Nintendo Video game software Canada, Australia, Chile Brain Challenge Gameloft Inc Video game software Argentina Grand Theft Auto IV Microsoft Corp Video game software Argentina, Australia, Germany, Spain, Malaysia UEFA Euro 2008 Electronics Arts Inc Video game software – Germany, Greece, football Turkey Wiiware Nintendo Downloadable game Germany, Portugal service Nintendo LEGO Indiana Nintendo Video games Germany, Hungary, Jones software/activity Netherlands, Singapore construction World of Warcraft: Wrath Blizzard Activision Video game software Romania of the Lich King Source: Euromonitor International
Packaging and Safety Issues
Safety concerns high on product recalls • With the spate of product recalls and the concerns over high levels of lead in toys, safety issues were at the forefront in 2007. Governments around the Western world were pressured into drawing up stricter regulations and ensuring better monitoring. • Companies also took their own initiatives on this front in order to reassure customers and restore their confidence in brands. • With increased industry and government vigilance over Chinese-made toys, the issue of excessive lead is expected to fade in 2009. But the incident tarnished China’s image as a leading supplier of low-cost and reliable consumer products, and some consumers may continue to shun toys made in China. More broadly, the lead scare made many parents rethink their ideas about what toys their children should be playing with. • Beginning in 2009, German manufacturers will be obliged to declare any health risks associated with using their products. This would include declaring materials in the products that may have an effect on genetics or cause cancer. This will be passed on to retailers who will then provide consumers with any information about products that may be dangerous to children.
Packaging goes “green” as well • In North America and Western Europe, packaging is becoming more environmentally friendly as some toy- makers use earth-friendly inks and biodegradable boxes while others simply use less packaging overall. These regions are characterised by excessive packaging and this generates a great deal of criticism from environmentalists. • As well, in developing countries many companies have improved their packaging. Old-fashioned plastic bags have been replaced in some instances by high-quality, colourful cardboard boxes.
WESTERN EUROPE
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Headlines • In 2008, the UK reported sales of US$5.7 billion in the toys and games sector, representing 13% of regional sales and making it the largest market in Western Europe. • The share of traditional toys and games in the sector fell from 66% in 2003 to 50% in 2008. • Italy saw sales of toys and games grow by 13% in 2008 over prior year. • Spain enjoyed cumulative growth of 70% in the sector during the review period, the highest in the region. • In 2008, sales of video game software in Western Europe grew by nearly 21% in 2008, reaching US$13.2 billion, making it the leader among all subsectors. • Western Europe witnessed heightened parental and governmental concern regarding product safety in the aftermath of numerous product recalls in 2007. • Nintendo grabbed the Western Europe leadership position from Sony in 2007. Mattel was the third largest company in the region. • Driven mainly by the video games software subsector, sales of toys and games in Western Europe are projected to reach US$57.9 billion in 2013, representing a CAGR of nearly 6% over the forecast period.
Trends in Key Sectors
Trends • The new-generation consoles have given a further boost to demand for video games in Western Europe. Video games software is the single largest subsector in most countries of this region. In countries like France, UK and Spain, video game sales have overtaken sales of traditional toys and games since 2007; in most other countries in the region, this is expected to happen in 2009. • Among traditional toys and games, doll/figures have enjoyed a resurgence due to the increased number of licensing arrangements. In 2008, retail sales grew by nearly 11% over prior year. The trend was most evident in France, where the boom in licensed toys helped dolls/figures retail sales grow by more than 21% in 2008 (in US$) over prior year. New movie releases have allowed manufacturers to create new figurines. The success of mini figurines, such as Petshops, Ponyville and Poly Pocket, also contributed to the healthy growth rates in this subsector. • Infant and pre-school toys were popular in the Western European region, registering growth in 2008 of more than 9% over prior year. Declining birth rates and fewer children notwithstanding, educated mothers looked to give their children a head start, and having children learning while playing became a strong focus. In Turkey, the increase in the number of working women has heightened this trend, as educated mothers pay greater attention to their children’s mental and personal development. In Turkey, infant and pre-school toys saw sales growth of 19% in 2008. • In the UK, the largest market in Western Europe, boys have been the driving force of sales growth for traditional toys and games. The biggest (and most profitable) subsector is, without doubt, action figures. Licences related to films and TV series are becoming increasingly important for companies competing in the market for boys’ toys. Blockbuster films such as Star Wars, Spiderman and Transformers all had a massive impact on toys and games sales during the review period, as have TV series such as Doctor Who. Overall, one-third of all sales of boys’ toys came from licensed merchandise in 2007, compared to just one- fifth of sales ten years ago. In 2008, the release of Iron Man, Indiana Jones, Speed Racers, The Incredible Hulk and Batman ensured another strong sales year for boys’ toys. • In the UK, model vehicles (the number two boys’ toys category) saw negative growth in 2008. The category is seeing the end of a bad period brought on by the introduction of various remote-controlled products, such as Character Options “Dragonfly” and Silverlit Toys remote-controlled helicopter. • In Italy, the launch and sustained marketing of consoles brought a stupendous 48% growth to sales of hardware. Portable consoles – the PSP and DS – were a big hit in Italy with middle-aged consumers, as well. Nintendo’s Brain Training software has also been a big hit in Italy. • The hardware market in Netherlands, Portugal and Spain completely tanked in 2008 and even shrunk marginally as the high growth rates of 2007 could not be sustained. It could be hypothesized that the
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console-driven gaming market is still a niche market and that those who wanted to buy consoles did so in 2007. In 2008, focus in these markets shifted from consoles to software. • High levels of broadband usage and PC penetration has led to strong competition from online gaming in the region.
Competitive Landscape • In 2007, Nintendo’s retail sales in the ten markets under study in this region grew by 98% over prior year. In the process, Nintendo leapfrogged past Sony into the market’s leadership position. The company has enjoyed success with its Wii and DS, as well with its software. France, UK, Spain and Germany are important markets in the region, and Nintendo has had unprecedented success with the Wii in Spain. Non- availability and lack of company presence has hampered further growth for Nintendo in the region. • Sony lost ground due to its poor performance in the UK market, the largest in the region. Sony delayed the launch of its latest-generation console PS3, which had initially been expected in 2006. This delay caused Sony serious problems and gave its main competitors, Microsoft and Nintendo, a full year in which to monopolise the market. Thanks to the success of its portable and home consoles (DS and Wii), Nintendo became the leader in the video games hardware subsector in the UK with a 31.4% market share in 2007. • The region is not homogenous, with consumers in each country expressing different preferences. For example, the French took to the Wii, and it enjoyed more success than the PS3. In Belgium, on the other hand, the PS3 was the most popular console, as the Dutch seem to prefer PC gaming. • For third-ranked Mattel, Europe as a whole accounted for 56% of its international sales. Sales grew by around 10% in real terms in this important region in 2007. The company performed below par in Turkey, Italy and Germany, while in Sweden and Portugal its licensing efforts paid off. In Sweden, an example of its successful licensing effort is the line of toys from Mattel based on the 2006 movie Cars. A further example is the new line of dolls from Mattel based on the TV film series High School Musical from Disney Channel, first released in 2006. Now, children can play any of their favourite characters in any of the films. In Portugal, Mattel was the leading player in the traditional toys and games sector with a market share of 26% in 2007. Hot Wheels ranked first in volume sales in the model vehicles subsector, and it continues to attract the attention of young collectors. • In the traditional toys and games sector, Hasbro enjoyed more success in 2007 than Mattel with growth in sales of 21% in sales in the ten markets under study. Hasbro has done well in the countries where boys have driven demand, due to their strong line up of action figures. In the UK, Hasbro saw sales increase by nearly 32% in 2007, while in Turkey sales grew by 25%. • Western Europe has strong domestic players in individual countries. Smoby is in Italy and France, Geobra is in Germany while Famosa is in Spain. Each company has specific winners in their respective portfolios. LEGO saw good growth in markets in several European countries, though Germany and the UK are its strongest markets. LEGO responded well to the changing competitive environment with a product line that addressed the demand by parents for a learning toy. They also addressed children’s needs for hi-tech and digital products ands increased sales through licensing.
Prospects • Retail sales of toys and games in Western Europe are projected to be US$57.8 billion by 2013, representing a CAGR of 5.7% over the forecast period. • The main driver of sales growth in this sector is expected to be video games, with a projected CAGR of nearly 12.4% over the forecast period. At the same time, sales of traditional toys and games are expected to stagnate, with a projected CAGR of 1%. • New licensing deals are likely to ensure some level of growth in the dolls/figures subsector, while infant and pre-school toys are expected to see increased demand from new parents. All other traditional toys and games subsectors are expected to stagnate or shrink marginally as older children move up to video games. • Sales of toys and games in Turkey, particularly sales of traditional toys and games, are likely to experience strong growth over the forecast period, based on the country’s strengthening economic and political situation. Sales of toys and games are projected to grow at a CAGR of more than 8% over the forecast period. The increase in the number of young people and the relatively unsaturated market will ensure the sector remains dynamic. Video game sales are expected to grow even faster, with a projected CAGR of
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more than 27% over the forecast period. Sales in the hardware subsector are expected to grow more than sales in the software subsector. This is mainly due to consumers owning their hardware but being able to exchange games for short periods. Piracy is also a factor that significantly reduces revenues from software. New legislation to combat software piracy was passed recently, but generally controls remain inadequate.
Summary 4 Regional Trends by Sector 2008 Sector(s) Trend/Development Region Video games hardware and Adult gaming and wider user base Western Europe software Traditional toys and games Stricter legislation for safety EU region standards Traditional toys and games and Increased cross-licensing Western Europe Video games software Source: Euromonitor International
EASTERN EUROPE
Headlines • In 2008, retail sales of toys and games in Eastern Europe were estimated to be US$2.5 billion, representing growth of nearly 18% over prior year. Sales of video game hardware were the main driver of growth, increasing by more than 31%. • Despite rampant piracy, video games software registered the highest cumulative growth rate during the review period, with retail sales increasing by 340% between 2003 and 2008. • Good general economic growth in the region encouraged consumers to spend and the benefits were felt in the toys and games market during the review period. • The market for toys and games in Eastern Europe is highly fragmented. In 2007, LEGO Group and Hasbro were the market leaders. • Retail sales of toys and games in Eastern Europe are projected to reach more than US$4 billion in 2013, representing a CAGR of more than 10% over the forecast period.
Trends in Key Sectors
Trends • Eastern Europe is enjoying strong economic growth and this, in turn, has led to increasing levels of personal disposable income and growing consumer expenditure. According to Rosstat (Statistics of Russia), the average income in Russia increased by about 18.4% in 2007, compared to growth of 13.5% in 2006 and 8.4% in 2005. Increasing pensions and salaries led to enormous growth in the retail trade during the review period. In Poland, consumer expenditure is reported to have risen by 5% in 2008. • Consumers in the region are spending more on toys and games. Per capita spending on toys in the region grew by 158% between 2003 and 2008, negating the effects of declining birth rates and the ageing population. • Eastern Europe is characterised by strong informal markets. Though organised retail grew significantly during the review period, informal markets remained a very important distribution channel. Away from the big cities, non-store retailing still dominates. Because of their lower prices, low-income and middle-income families continue to buy children’s goods in non-store outlets. Affluent parents look to buy toys and games from specialist shops, because specialists stock premium and branded goods. At this time, there is no significant mid-market in organised retailing in the region. • Eastern Europe is characterised by piracy and black markets, especially in the video games software subsector. Black market software can be acquired in two ways. Consumers can buy pirated software or video games from non-store merchants or they can download it for free from the internet using file-sharing
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programmes. As the internet evolved, software merchants began to lose ground to people downloading illegally. • Indoor games is a high growth subsector in Eastern Europe. Given the region’s long and cold winters, this is not surprising. But the nature of these indoor games has undergone a subtle change. Parents now look for games that have some kind of learning or educational value as well. In Russia, the government has a policy of building strong families, which is evident everywhere from advertising campaigns to financial bonuses. (Parents of second and third children are given financial bonuses.) Many Russian parents are buying more indoor games to strengthen the sense of family. • As informal markets in Eastern Europe became flooded with inexpensive made-in-China imports, domestic manufacturers of traditional toys took a pounding. However, the lack of quality and durability of these imports has disappointed consumers and repeat purchases of these toys have slowed. The formal toys market is still perceived by many as an urban, elite market. • Due to its high price relative to disposable incomes, console gaming is still not widespread, although it is enjoying strong growth. While retail sales of video games hardware grew by a cumulative rate of 198% during the review period, per capita spending was US$0.40 in 2008. Household penetration rates are higher in Hungary and Poland.
Competitive Landscape • LEGO leads the overall toy and games market in Eastern Europe, bolstered by its strong presence in Russia. The company has been present in the region for a long time, and this has helped to build the brand and foster the willingness of consumers to pay higher prices for their products. In Russia, LEGO’s Harry Potter licensed products were very popular during the review period. • Since 2006, Hasbro Inc has focused on the Eastern European region. A study team sent by the company to the region was asked to attempt to understand the peculiarities of the region so the company could fine-tune product launches. Hasbro has established operations in Hungary, Russia, Poland and Romania, as well as other countries like Bulgaria. Hasbro looks ready to overtake LEGO in the Russian market. It is introducing a new edition of the board game Monopoly, and it continues to produce interactive soft toys, which are now becoming increasingly popular. • Third-ranked CD Projekt of Poland is the leader in the video games market in Eastern Europe and the leader in the computer gaming market in Poland. The distribution of games and multimedia software in Poland, the Czech Republic, Slovakia and Hungary remains the company's core business. Recently, the company entered the world of game production. The company is considered a leader in innovation in the market due to its low-price policy, customer-oriented solutions and various loyalty programmes offered to the gamers. It is worth noting the success of CD Projekt as it has changed the way Polish gamers think regarding domestic game production and original game prices. It is clear that many gamers now understand that they do not need to pay high prices to access the newest games. • The region has several local players in both the traditional toys and games and in the video games software markets. In Russia, the main domestic producers are Ogonek, Vesna, Krugozor and Zvezda. Generally, they are expanding their product ranges in order to compete with foreign companies. On the other hand, they are unable to compete in such subsectors as plastic dolls/figures and soft/plush toys due to the low level of their technology. At this time, Russian manufacturers are unable to produce the colourful and quality products consumers now demand. • The toy manufacturer Ogonek is taking significant share in the activity/construction, model vehicle and “other traditional toys and games” subsectors. Its factory produces more than 600 types of children’s toys, all made from environmentally safe materials using advanced technologies and modern equipment. • TREFL SA is the leading player in Polish jigsaw puzzles, board games and playing cards. Other Polish companies are very successful in video games software. In addition to CD Projekt, significant companies include Tate, the producer of Kao Kangoo, which appeared in seven different language versions in many European countries and in the USA; Reality Pump, whose Earth series is available in the European, US and Asian markets; and People Can Fly, which produces the famous Painkiller game. • Noriel Impex in Romania started out as an importer. But it transformed itself and it is now a private label and, arguably, the best know Romanian brand after Aradeanca Dolls. The company uses the internet to promote its products, and it has created an online environment wherein visitors can discuss the toys they like.
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• Among the console marketers, Sony has established a lead over Nintendo and Microsoft. Sega is still a significant player in the Russian market. Nintendo has a weak presence in the region, and the non- availability of its products has hampered its growth in Eastern Europe.
Prospects • Retail sales of toys and games are projected to grow at a CAGR of 10% over the forecast period, a rate lower than that in the review period. The region faces the demographic challenges of declining birth rates and an ageing population, which it will need to address to ensure good economic prospects. • The market for traditional toys and games should increase steadily in tandem with the rising popularity of electronic gadgets, computers and video games. However, manufacturers of traditional toys will need to adapt their products to the changing digital realities if they intend to not to lose ground. The line between toys and consumer electronics will begin to blur as more interactive products are introduced over the forecast period. However, sales of traditional toys are not expected to decline immediately as their prices are still lower than those for electronic products. • The Wii from Nintendo is likely to bring cheer to the console market in the region. Sales of video game hardware are projected to grow at a healthy 13% CAGR between 2008 and 2013. The number of adults playing video games is expected to increase over the forecast period, and that boost from adult consumers will be needed to overcome the demographic obstacles the regional market faces. • The disposable incomes, and hence the purchasing power, of Russian consumers will continue to increase, and this will drive the continuing growth of sales of video games software. • It is projected that online gaming will drive enormous growth in the video games sector. This is likely due to the many games now under development that incorporate an online facility. Companies such as Microsoft and Sony have developed online gaming facilities for the owners of their consoles.
Summary 5 Regional Trends by Sector 2008 Sector(s) Trend/Development Region Toys and games Increased per capita spending Eastern Europe Video games software Piracy and black market sales Eastern Europe Video games hardware Growing niche market Eastern Europe Source: Euromonitor International
NORTH AND LATIN AMERICA
Headlines • In 2008, retail sales of toys and games in the Americas were estimated to be US$60.6 billion, representing a growth rate of 17% over prior year. • Sales in North America accounted for 92% of the total in 2008. Latin America, on the other hand, enjoyed a cumulative growth rate of 187% between 2003 and 2008, a rate more than three times that of North America. • In North America, sales of traditional toys and games stagnated in 2008 due to the increasingly strong demand for video games. • Video games software enjoyed stupendous growth of 34% in 2008, with increased sales coming from both North America and Latin America. • Based on its leadership position in Latin America, Mattel is the market leader in the toys and games sector in the Americas. In North America, on the other hand, Nintendo and Sony have both overtaken Mattel. • Retail sales of toys and games are projected to reach US$91.3 billion in 2013. Sales of video game hardware are expected to drive the market to a projected cumulative growth rate of 51% over the forecast period.
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Trends in Key Sectors
Trends • It was tough times for traditional toys and games sales in North America. In 2008, sales shrank marginally compared to 2007, and the high number of product recalls combined with the lead scare did not help matters. In addition, there was a renewed focus on video games. In 2007, all three seventh-generation video game consoles competed in the US and Canadian markets for the first time. While toy makers countered with ever more sophisticated electronic toys, such as stunt-performing aerial planes and hydrogen-fuelled, remote-controlled cars, their efforts were not good enough to boost sales of traditional toys and games. • In North America, activity/construction toys was the only subsector to register reasonable growth during the review period. Parents across the region attempted to give their children a head start in terms of educational success and healthier lifestyles. This, in turn, helped to drive demand for educational and activity-based toys among younger children. • This was not the case in Latin America, where both sectors enjoyed good growth. Growth of traditional toys and games in the region was driven by demand in Brazil and Mexico, the two largest markets. While the sector in Brazil enjoyed a CAGR of 21% during the review period, in Mexico the rate was a more muted 12%. • Dolls/figures are the leading subsector in the Latin American traditional toys and games market, accounting for more than 16% of the total market in 2008. It is in this product category that licensed characters play the strongest roles. Because of their high sales, these products enjoy high levels of advertising and other publicity investment. As a result, the favoured sales tactic in recent years has been to launch a large number of dolls and help the brand by adding a series of accessories, with the intention of getting close to the “girls’ world”, by associating products with certain subjects of interest to them, such as fashion, costume, jewellery, mobile phones and make-up. Boys’ figures follow the same sales tactics. • Pre-school and infant toys have generated strong demand in both North America and Latin America, as many parents seek to give their children early educational stimulation and a head start. In Latin America, increasing disposable incomes are leading parents to spend more on these products. • In the video games subsector, software sales outstripped hardware sales in 2008 in both North America and Latin America. However, the nature of sales in the two regions was somewhat different. In North America, console games like Grand Theft Auto IV and Nintendo’s Wii Fit created a buzz among consumers. In the US, Grand Theft Auto IV generated a record US$500 million in sales in its first week in the stores. This beat the previous first-week record of US$300 million set by Microsoft’s Halo 3 in 2007. As for Nintendo’s Wii Fit (released in May 2008), product shortages hampered potential sales. In fact, product shortages led to grey market sales of Wii Fit with pricing 62% above the market suggested retail price, indicating a sizeable gap between supply and demand. • In Latin America, console gaming has made a mark mainly in Mexico, where video game hardware per capita spending of US$14.2 is significantly higher than in the rest of the region, where per capita spending is below one dollar. An important reason for this is that console companies like Sony, Nintendo and Microsoft have installed their operational offices in countries that have focused more on sales and support. • Software piracy is a significant problem in Latin America, with both governments and manufacturers initiating actions to eliminate the illegal products. There are several advertisements on TV and in magazines related to fighting illegal products. Some take a very aggressive approach in appealing to consumers’ moral values. In Argentina, 90% of PC video games titles sold in 2007 were reported to be counterfeit.
Competitive Landscape • Traditional toys and games manufacturers have struggled in North America, none more so than Mattel Inc., which saw sales dip in 2007 after a number of product recalls. Sales from their Fisher-Price brand were very important to the company between 2005 and 2008, as the brand addressed the growing demand for pre-school and infant toys in the Americas. Mattel has done well in Brazil, where its Polly Pocket brand has been a big hit.
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• Hasbro’s market share increased in 2007 based on its strong Littlest Pet Shop range and the success of its movie-related figures, such as Transformers and Spiderman. Hasbro was also lucky enough to have largely escaped the negative impact of the recall scare in 2007. • Mattel Inc launched several electronic toys in the Latin American markets and, together with sustained advertising and store-based promotions, managed to stay on top in this region. The Latin American region has some strong domestic manufacturers present on the scene, such as Ditoys in Argentina, Gulliver and Estrela in Brazil and Salver in Mexico. Besides these companies, there are a whole host of importers and distributors who are flooding the market with inexpensive toys imported from China. • In the video games hardware subsector in 2007, Sony maintained its grip in the Latin American markets while, in North America, Nintendo has surged ahead to take over the leadership position. The 2006 launch of the Wii and the continued popularity of the DS helped Nintendo gain market share in NA. At the same time, its software titles have also been popular. With low price points and a strong assortment of games to attract buyers, the only issue with the Wii was that there were not enough of them to go around. If the company had been able to supply more systems to US retailers, there is little doubt that its unit sales would have been much higher. • Sony’s PS2 is still a very popular console in Latin America. Modifying the console so that it reads illegally copied game discs has managed to make Sony’s device even more popular. • In video games software subsector, Electronics Arts Inc is the leader in both of the Americas. However, the success of Activision’s Guitar Hero and Call of Duty 4, which were among the ten best-selling games in 2007, helped Activision increase its market share. Nintendo saw its retail sales of video games software double in 2007 over prior year.
Prospects • Sales of video games overtook sales of traditional toys and games in North America for the first time in 2008. The same is expected to occur in Latin America by 2010. • Video game software is likely to raise its share of total retail sales in the sector from 26% in 2008 to 30% by 2013, as sales grow in both North America and Latin America. Between 2008 and 2013, video games software sales are expected to rise at a cumulative rate of 76%. Console manufacturers are all looking to lengthen the operating life of their respective new-generation consoles. These efforts should encourage the purchase of more software per console. • Above average growth is expected in the infant and pre-school toys subsector as well as in the activity and construction toys subsector. These will both be affected positively by parents increasingly choosing learning toys for their children. The line between toys and advanced consumer electronics will become even more blurred over the forecast period • The user base for video games is expected to grow as more women and more casual gamers join the fray. The target age for traditional toys and games, however, appears to be decreasing as children move away from traditional toys and games at earlier ages.
Summary 6 Regional Trends by Sector 2008 Sector(s) Trend/Development Region Traditional toys and games Shrinking consumer base North America Video games Software piracy Latin America Source: Euromonitor International
ASIA PACIFIC
Headlines • Unlike in other regions, traditional toys and games continue to enjoy strong growth in the Asia Pacific.
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• In 2008, retail sales of toys and games in China caught up with sales in Japan, reaching nearly US$8.2 billon, representing growth of 22% over prior year. • Retail sales of pre-school toys in the region grew by nearly 22% in 2008, making this the highest growth subsector. • In 2007, mergers helped Namco Bandai and Takara Tomy of Japan take leadership positions in a fragmented toys and games market. • Retail sales of toys and games are projected to grow at a CAGR of 8% over the forecast period, reaching US$37.5 billion in 2013.
Trends in Key Sectors
Trends • The Asia Pacific region has some well-developed and mature markets, including Japan, Singapore, South Korea and Taiwan, where per capita spending on toys and games is high. On the other hand, there are also fast-growing underdeveloped markets like China, India and Malaysia. • Per capita spending on toys and games in Japan was estimated to be US$64 in 2008, the highest in the region. However, in local currency (Japanese yen) terms, per capita spending has fallen from its peak of 2000. An ageing population and a mature market have led to almost all subsectors, in local currency terms, experiencing shrinking sales in 2008. (A weakening dollar gives a different picture in dollar terms.) The only subsectors where some growth was seen were soft toys and model vehicles, where demand came from adults, as well. • As a result of increased demand from younger women, soft/plush toys in Japan emerged as the most dynamic subsector. Their passion for character plush toys, courtesy of Disney, Studio Ghibli (Tonari no Totoro) characters and Pokémon, for example, proved to be the biggest contributor to the subsector’s overall positive performance. It was recently reported that 85% of Japanese women considered plush toys as additional fashion items, especially women who considered colour and attractiveness as integral components of fashion sense. • Sales in the traditional toys market accelerated in China in 2008, boosted by toys related to the Beijing Olympic Games. In China, more than 90% of buyers of traditional toys are children. It is estimated that some 80 million children live in cities, so there is a huge potential market that remains unexploited at a time when most families have greater disposable incomes to spend on their children. Pre-school toys saw the fastest growth in 2008, since most people in China believe that pre-school toys can increase children’s intelligence and improve their cognitive ability. Similar trends, though on a smaller scale, were seen in India as well. • Retail sales of video games hardware in Singapore grew by 40% in 2008 compared to prior year. This growth was based in part on all three “next generation” video game consoles, the Xbox360, the Nintendo Wii and the Sony PlayStation3 being available. At the same time, Microsoft Singapore and Sony Electronics slashed prices of their previous generation line of video game consoles, the Xbox and PlayStation2, to clear remaining stocks. The combination of eagerly anticipated new hardware, plummeting prices of old hardware and falling prices of high-definition TVs and home entertainment systems contributed to the very robust growth of retail sales in the video games subsector. This growth in hardware brought increased interest in software, as well.
Competitive Landscape • The toys and games market in the Asia Pacific region is highly fragmented, with leading companies in most countries having single-digit market share. The exception is Japan and, to an extent, South Korea. With large rural populations, branded toys remained an urban phenomenon in countries like China and India. • Japanese companies lead retail sales in the region. Namco Bandai and Takara Tomy head the toys and games market due to their strong presence in the Japanese market and to the success of their mergers and acquisitions between 2005 and 2007. Sony and Nintendo follow, with much greater presences in other countries in the region. • Namco Bandai is present in both the traditional toys and games market and the video games market. In video games software, Tamagotchi Connexion: Corner Shop range for the Nintendo DS surpassed one
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million units in 2007. Super Robot Wars 3, Tales of the Abyss and Dragon Ball Z Sparking! (all for PlayStation 2) were also popular in the Japanese market. In 2007, the company released Tekken 6, one of the most highly anticipated games for the PlayStation 3. Other innovative games included Bomberman Stadium, Wangan Midnight Maximum Tune 3 and Mario Kart Arcade GP 2. Namco Bandai maintains its market share in a mature market, and it is seeking to increase sales by expanding the international distribution of its products through sister companies in the US and Europe. • Recent product launches in the traditional toys sector include Bandai Co Ltd’s Masked Rider collectible action figures. Bandai also showcased Soul of Soft Vinyl, which highlighted action figures like Batman as its highest-quality vinyl items. Square Enix introduced collectible “keyblades” based on the popular video game series Kingdom Hearts, while Takara Tomy focused on collectible miniature cars to promote its toys. The unique selling points of Japanese toys and games are based on their “collectability”, aside from their popularity and design. • After the merger of Takara Corp and Tomy Co Ltd in 2006, the combined Takara Tomy Corp aggressively launched various action figures and popular anime characters. Sales of soft/plush toys and action figures underpinned the company’s sales growth. • In the video games subsector, Sony had the advantage of strong company presence in more countries of the region compared to Nintendo. With its strength in consumer electronics as well as in mobile phones, Sony was well-positioned to distribute and market its Playstation. Similarly, Microsoft launched the Xbox 360 in several countries in the region and used the company’s strong presence in information technology to distribute and sell the product. The Xbox has enjoyed strong growth in India and Malaysia. • Nintendo is present in only a few countries. In South Korea, Nintendo entered the market in late 2006 with the aim of gaining a foothold in the country’s video games market. It introduced the Wii only in April 2008. Nintendo of Korea used TV commercials and newspaper and magazine advertisements to drive aggressive marketing campaigns. This effort reinforced the brand’s image among South Korean consumers. Nintendo used top South Korean celebrities, including Won Bin and Song Hye-Gyo, in its marketing efforts, approaching consumers with faces with which they were already familiar. On the other hand, Nintendo is not officially available in India, even in 2008.
Prospects • The Asia Pacific region is expected to continue to see growth in the traditional toys and games. By 2013, 60% of sales in the overall toys and games sector are expected to come from traditional toys and games. Countries like India and China, with their large rural populations, are expected to continue to drive demand for traditional toys and games. In contrast, countries like Singapore, South Korea and Taiwan, with large urban populations, are expected to see sales of video games overtake sales of traditional toys and games over the forecast period. • In India, retail sales of toys and games are projected to grow at a CAGR of 18% over the forecast period. It is expected that the Indian overall economy will grow by 8% to 9% per annum, with salaries of members of the Indian middle classes growing by 14% per annum over the forecast period. With this rise in salaries and declining family sizes, consumers will find they have more to spend on their children. Strong growth is also expected in the pre-school toys subsector as well as in the nascent video games subsector. • The growing distribution of game consoles in the region is expected to help grow sales as the number of middle-class consumers increases. At the same time, PC and mobile gaming, seen as cheaper and more accessible options, are likely to dampen runaway growth. As a result, sales of video game hardware are projected to grow at a CAGR of 10% over the forecast period. • Software sales are likely to be negatively affected by widespread piracy and online gaming activities in the region. As a result, software retail sales are thus expected to grow at a CAGR of 8% over the forecast period. • Chinese toy manufacturers are experiencing troubling times as the global recession depresses demand from the developed markets. At the same time, the product recalls of 2007 are still fresh in the minds of many European and American importers and retailers. An estimated 75% of toys sold worldwide are made in China.
Summary 7 Regional Trends by Sector 2008
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Sector(s) Trend/Development Region Traditional toys and games Large rural populations Asia Pacific Traditional toys and games Beijing Olympics China Video games software Software piracy Asia-Pacific Source: Euromonitor International
BRICS (BRAZIL/RUSSIA/INDIA/CHINA)
Brics in the Global Context • Among the countries researched for this report, the BRIC countries all enjoyed above average growth in the toys and games sector, in both traditional toys and in video games. China led in toys and games sales with 2008 retail sales of US$8.2 billion. China was followed by Brazil with US$2.1 billion and by Russia with nearly US$1 billion. India had the lowest sales among BRIC countries in 2008 with just over US$842 million. • Brazil experienced the most dynamic growth during the review period, with toys and games retail sales growing at a CAGR of more than 32%. This growth was driven by the strong performance of the traditional toys and games subsector. As for video games, sales in China grew at an impressive CAGR of 43% during the review period. • Per capita spending on toys and games was the highest in Brazil in 2008, registering US$ 10.7. Per capita spending in China and Russia was similar in 2008 at US$7and US$8, respectively. Per capita spending branded toys and games in India, on the other hand was very low, coming in at less than one dollar in 2008. • By 2013, India is projected to overtake Russia in overall toys and games retail sales. India is expected to see the highest growth in the sector over the forecast period, with retail sales growing at a CAGR of 18%.
Brics: Criteria for Success • Among the BRIC countries, the market for toys and games is strongly an urban market, with rural consumers serviced by hand-made toys and the cottage sector. However, during the review period an explosion of low-priced toys made in China came on to the market, and these items began to penetrate the semi-urban markets and, via wholesalers and street markets, the rural populations, as well. The availability of low-priced toys has driven volume sales growth in the retail markets of all the BRIC countries, as more consumers were able to afford to buy more toys for their children. • The toys and games industry sector developed quickly in China during the review period. However, the inland areas and smaller cities were almost negligible in terms of the distribution. Shanghai, Beijing and Guangzhou are leading cities for sales of traditional toys and games, in terms of market size and the speed at which consumers take an interest in new products. Mixed retailers and convenience stores account for the bulk of sales in these cities. In contrast, the retail market in inland areas is very limited due to consumers’ low purchasing power. • Urban consumers in the BRIC countries are aware of global trends, and their increasing disposable incomes have helped drive growth. Members of the urban middle classes have become aggressive consumers, and their aspirations are high. At the same time, however, a feeling of realism remains in many of their minds regarding what they can really afford. As a result, consumers in the BRIC economies are often willing to settle for “me too” products and brands that provide the social satisfaction but are less expensive. As a result, retailers know that, in order to succeed in these economies, pricing strategies are crucial. • The high demand created by increasing product and brand awareness coupled with consumers’ needs to maximise their purchasing power have been factors in the rampant piracy in the BRIC markets, particularly in the video games subsector. It is likely that, in the future, online and mobile gaming, which are less expensive, will be the consumers’ choice rather than console gaming. Video game companies, in both software and hardware, will need to be prepared to introduce significant price drops in the legal market in order to address losses generated by piracy.
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• Sustained economic growth and increasing job opportunities coupled with social changes in the BRIC countries has resulted in more women entering the work force and, in turn, parents having less time to spend with their children. Nevertheless, parents are ambitious when it comes to their children’s future, and they look for toys and games that might give them a head start towards success. This has driven the growing demand for educational toys and games in these countries. • Marketers have also had to deal with relatively underdeveloped retail markets for toys and games in BRIC countries, particularly with the strong presence of street markets and the informal sector. Growth is coming from department store chains and mixed retailers, who are looking to import products directly and sell them under private labels. There is, therefore, a strong threat to toy manufacturers from private labels in the BRIC economies.
Brics: Competitive Landscape: Who Moved First • The BRIC markets are all highly fragmented with respect to toys and games sales. For example, the leading player in China, Bandai, had a 2% market share in 2007 as imports and domestic manufacturers split the market. Each BRIC country has a whole universe of domestic small-scale players. For example, in India, the city of Delhi and its suburbs are home to more than 100 small-scale manufacturers, each of which have 50–60 employees and generate revenue of Rs 30–50 million per month. Some reputable players in the area are Creative Educational Aids Pvt Ltd, Khazana Toys, Papu Toys and Toyo Toys. In China, there are more than 8,000 toy-makers, employing more than 3 million workers, of which almost 5,000 are based in Guangdong Province. Competition among Chinese suppliers is not very intensive, and the development of the traditional toys industry has been unbalanced since it is concentrated in coastal regions. Growth in most inland areas has been relatively weak. • Multinationals like Mattel, Hasbro, LEGO and Sony have all grew their shares in BRIC markets during the review period. Mattel could be considered strongest multinational in the toys and games market, as it is present and has a top five ranking in all the BRIC countries, with estimated retail sales of US$613 million across the four markets. It is strongest in Brazil, where it also enjoyed strong growth during the review period. The doll/figures subsector is very strong in Brazil, and Mattel has cashed in with its Barbie and Polly brands. • Domestic heavyweights in China include Bandai. As one of the longest-standing toy-makers in China, Bandai held the largest market share throughout the review period. The company provides nearly the complete range of traditional toys, based on different cartoon characters and designs. Bandai’s products are marketed under a number of well-known brands in China, including Gundam, Ultraman and the new Dianxin Xiongmao. • Hanung Toys in India is a relatively new entrant, and it is only present in the soft toys subsector. Hanung reported consistent growth during the review period, and its Muskan and Play-n-Pets brands were well received in the Indian market. Hanung is expanding its distribution into suburban areas and non- metropolitan cities, and it is also opening its own retail outlet in an attempt to increase volume sales. • One of the main Russian manufacturers is Zvezda, which is the domestic leader in such subsectors as action/military figures and model vehicles. The company is also developing a niche market as a producer of special dolls, with characters chosen from Russian fairy-tales. The toy manufacturer Ogonek is taking significant share in the activity/construction, model vehicle and “other traditional toys and games” subsectors. Its factory produces more than 600 types of children’s toys, all made from ecologically safe materials using advanced technologies and modern equipment. • In the video games subsector, the companies that are strongly positioned to tap into future growth are Sony and Microsoft. With sales growth hindered by high duty costs and competition from strong “grey markets”, the two companies have nevertheless established a presence for their video game consoles and software, riding on the distribution and retail strengths of their other product lines. • Nintendo has a weak presence in the BRIC countries. In Brazil, the Wii was officially imported by Latamel, a Panamanian company. Sales remained low, however, since video games cost 3.5 times more in Brazil than in the US. In India, there is no official distributor for Nintendo, but some importers are doing sporadic business. • In the traditional toys and games subsector, Hasbro and LEGO are well-positioned for future growth. Both have a strong presence in activity/construction and learning toys, subsectors that are growing in the BRIC countries.
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Brics: Prospects • All four of the BRIC economies are expected to perform well over the forecast period. Though the current economic recession in the US and Europe will have an adverse impact on international economic growth, the BRIC economies are nevertheless expected to show reasonable growth as their domestic economies remain in growth mode. • The abysmal per capita spending on toys and games in India indicates that there is potential for future growth there, particularly as more households enter the growing middle class. Sales of toys and games are projected to grow at a CAGR of 18% over the forecast period. • Unlike the developed markets, the BRIC economies are expected to see continuing steady growth in the traditional toys and games subsector. Video gaming remains out of reach, both in terms of technology and affordability, to many members of the mass population in these countries • Piracy is likely to continue to be an issue hindering sales of video games in BRIC countries. To address piracy, there will need to be a change in tax structures and reductions in price reflecting lower manufacturing costs.
EMERGING MARKETS (SECOND TIER MARKETS)
Emerging Markets in the Global Context • Countries like Romania, Turkey, Chile, Poland and South Africa could be considered emerging markets in the global context. Toys and games sales in these countries were below US$800 million. On the other hand, sales grew by a CAGR of 10% during the review period. • Eastern Europe countries like Romania and Poland are considered strong potential markets for growth. The opening up of the economies in these countries, combined with steady economic growth over the review period, has brought more households into the middle class, and these consumers have increased their spending on toys and games. These economies have also sent a great number of workers overseas, and these workers often send money back to their families back home, again generating increased consumer purchasing power. • Turkey is a relatively “young” country with around one-third of its total population aged under the age of 14. This implies considerable untapped potential in the country’s consumer markets and that growth in those markets will continue over the forecast period. With increasing urbanisation, rising GNP and an unsaturated market, the toys and games sector in Turkey continues to grow. The changing demographics of Turkish households, with more awareness among families about raising children and with more women working, are also driving growth in the sector. • Chile has enjoyed economic stability and good economic growth. In 2008, retail sales of toys and games there were estimated to be US$408 million. Between 2003 and 2008, retails sales of toys and games in Chile grew at a CAGR of 20%. • South Africa is considered by many to be the foothold for entry into the African continent, and this perception is expected to provide the country with good long-term growth prospects. With retail sales in 2008 of US$124 million in the toys and games sector, South Africa is one of the smaller emerging markets studied for this report.
Emerging Markets: Criteria for Success • Currently, a great deal of the retail activity in emerging markets is restricted to a few large cities in each country, such as Istanbul in Turkey. Wholesalers are an important means of distribution into the hinterland, and an important criterion for success in these markets is to be able to find experienced wholesalers with a good understanding of the local environment. In the long run, companies will have to invest in formalizing the retail channel as well, or they’ll have to look to the better developed grocery retail chains distribution channels. In Chile, grocery retailers account for 12% of toys sales in 2008, up from 10% in 2003. • In urban areas in emerging markets, internet retailing has become very important distribution channel. In Poland, internet retailers had a 9% share in 2008, compared to 2% in 2003. Many online stores have begun
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operating in Poland recently because of the increasing value sales of the toys and games market. As well, the availability and variety of toys and the possibility to establish online shopping sites without specific restrictions or requirements means that it is easier for companies now to attract new customers. For this reason, a large number of toy retailers have opened new stores throughout the country. • In Turkey, internet sales of toys and games accounted for an 8% distribution share in 2008, up from 3% in 2003. Internet distribution helped consumers follow the latest trends in toys and then made it easy to purchase those toys, including toys they could not find in their local stores. Using the internet, parents saved time and effort by buying toys for their children without visiting stores or spending time shopping. Companies are developing a number of alternative payment methods in an attempt to increase consumer confidence in internet shopping and to increase their internet sales. These methods include allowing customers to order products on the internet which they pay for upon delivery; making credit cards available with flexible limits designed only for internet sales; and expansion of such sites as PayPal. Traditional toys are sold online on leisure product sites such as www.dr.com.tr, while books are sold on sites like www.ideefixe.com. Some sites, such as www.oyuncakal.com. Specialise in selling toys. • Emerging markets are characterised by strong sales of traditional toys and games sales. For the most part, video games sales are still in their infancy. Poland, on the other hand, has a highly developed IT infrastructure and, in turn, strong video game sales. • The primary target consumers for video games in emerging markets are members of the urban population with higher incomes. These consumers are less sensitive to the economic challenges facing middle- and low-income groups. As well, in these countries PC games are preferred to console games. Some 80% of Turkish players of video games use personal computers rather than the dedicated consoles, which are typically preferred by players in more developed countries.
Emerging Markets: Competitive Landscape: Who Moved First? • The competitive landscape in each emerging market is very different. In Chile, Turkey and Poland, the leaders in the traditional toys and games sector are Mattel, Hasbro and LEGO. In Poland during the review period, many innovative products were introduced by these companies, including a Barbie doll that speaks Polish and move its lips. The new Barbie can also sing three Polish songs and it speaks Polish when the telephone rings (the doll picks up the phone and the child can talk to her). While connected to an MP3 player, the doll can sing the songs and wave her head to the rhythm of the music. In Chile, Mattel’s increasing market share in the sector was bolstered by its wide range of products. The company focused on its Fisher-Price and Winnie the Pooh brands for infants, Barbie and American Girl for girls and Hot Wheels and MaxSteel for boys. • In South Africa, Just Fun Toys and Prima Toys and Leisure (Pty) Ltd held the largest shares in the market, followed by Polyotter (Pty) Ltd and the LEGO Group. Just Fun Toys and Prima Toys and Leisure (Pty) Ltd have been the traditional distributors of toys and games for many years, and they handle many world-class premium brands. Polyotter (Pty) Ltd and LEGO are making inroads into the growing subsector of activity/construction toys. • In Romania, importer Noriel Impex SRL attained market leader status in 2007 with a share of nearly 8%. Noriel Impex SRL is a versatile player that has adapted to the characteristics of the market. The company combines the distribution of directly produced toys (especially cardboard games) with the distribution of well-known international brands, including Spiderman, Transformers, Bratz, Littlest Pet Shop and others. Noriel is probably the best known national brand after the Aradeanca Dolls. The company uses the internet to promote its products, and it has created an online environment that allows site visitors to discuss the toys they like. • Due to its proximity to Western Europe, Turkish consumers have access to all of the latest new generation consoles. PS2 continues to dominate the market. Sony’s PlayStation 3, Nintendo’s Wii and Microsoft’s new Xbox were all launched around the same time. Nintendo supports its console with a range of accessories and games that are only suitable for the Wii, and which are all marketed very heavily through TV, magazine, newspaper and internet advertisements and by promotional events in the big cities. • In Chile, Nintendo is the most active company in introducing new products, but it is represented by Ecogar. Sony is also very active and recently launched its PlayStation 3. • In other emerging markets, software companies and distributors have a higher share of retail sales compared to hardware players. Best Distribution is the largest importer and distributor of video games in Romania.
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They are the official importer for Blizzard/Vivendi games, which means that they import World of Warcraft in Romania. One of the largest manufacturers and distributors of video games in Poland is CD Projekt. CD Projekt is the unquestioned leader in the subsector because it offers a wide and diverse product portfolio, and its prices are often cheaper than those offered by its competitors.
Emerging Markets: Prospects • South Africa shows the most promise for retail sales growth over the forecast period, with sales projected to grow at a CAGR of close to 16%, driven by strong growth in the nascent video games subsector. The traditional toys and games subsector will continue to reflect consumers’ resilience to unfavourable macroeconomic conditions, and its growth will probably be boosted by the introduction of eco-friendly toys, which will rejuvenate demand and boost volume sales. Overall, however, demand for traditional toys and games is expected to be, at best, tepid compared to demand for video games. • The video games software subsector in emerging markets is expected to experience faster sales growth over the forecast period. This growth reflects both growth in the size of the markets and increased competition as new companies enter the markets. The barriers to entry in the subsector are low, and it is expected to attract more players as the product concept diffuses into the market. The three major players in video games hardware have demonstrated the potential for building sales volumes by creating effective brands. The PlayStation series has been a success, the Xbox 360 has recorded phenomenal success since its launch, and Nintendo has been immensely popular, building a sizeable following in a relatively short time. Over the forecast period, product innovations, new products and focused efforts to enter into the mass market with the relevant products at the right prices will drive sales in this subsector. • In Romania, on the other hand, there is likely to be uniform demand from all subsectors of the toys and game market. The traditional toys sector is expected to continue to grow over the forecast period due to consumers’ increasing disposable income and to the orientation of consumer demand toward branded products. It’s projected that there will be more international brands appearing in the Romanian market coupled with stronger performances by domestic brands. At the same time, the video game subsector is expected to grow due to declining piracy and an increased demand for brand name products and games. • In Turkey, the increase in the number of young consumers and the unsaturated market are factors that are expected to drive future sales growth. Sales of higher-priced toys to urban and better-educated parents will increase, but at the same time sales of low-cost toys to middle- and lower-income households are expected to grow, as well. The target consumer group for the new hardware incorporating additional features now includes women. • Compared to other emerging markets, Poland and Chile are expected to experience below-par growth in the toys and games sector over the forecast period. In Chile, there are concerns about future macroeconomic conditions. As well, the move by urban consumers towards video games is unlikely to boost the video games subsector enough to compensate for the slowdown in sales of traditional toys and games In Poland, demographic issues concern marketers, as the number of children in the key 0 to 14 year old age group is expected to decline slightly between 2010 and 2013.
Key Drivers
Headlines • Internet retailing was the most dynamic distribution channel in 2008, with global sales of toys and games increasing by nearly 26% over prior year. • Mixed retailers continue to be the largest distribution channel for toys and games. • In Eastern Europe, sales of traditional toys and games via internet retailers grew by more than 61% in 2008 over prior year. • By the end of the review period, grocery retailers increased their distribution share in the toys and games sector.
Global Trends • Toys and games marketers are looking at increasingly diverse distribution formats, including convenience stores, drug stores and digital product stores. Their aim is to make toys and games easily available in all
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shopping venues. They hope to capture more impulse purchases for low-priced toys as well as increase awareness and visibility for high-priced toys like game consoles. • Buying toys and games over the internet has caught on all over the world, though of course in varying degrees. Shoppers have embraced the convenience and time-savings of e-shopping. Buying over the internet is also seen as a good way to beat tensions of the holiday rush. • Mixed retailers settled into a steady growth pattern during the review period after the heady period of growth the channel enjoyed in the early 1990s. Large chains like Wal-Mart and Target continue to be strong channels for sales of toys and games in all of the countries in which they are present. • Toy specialists (classified as leisure and personal goods retailers) made a comeback during the review period, as they embraced video games sales. Game specialists, ranging from chain stores in developed markets to smaller operators in Asia Pacific, are also exhibiting strong growth. • Grocery retailers have become significant players in this sector during the holiday season, distributing toys at bargain prices. Their market share grew from 12% in 2003 to 14% in 2008.
Regional Trends • In North America, mixed retailers account for close to one-half of toys and games sales, a much higher percentage than that in the rest of the world. This is due to Wal-Mart’s dominant role in retail markets in both the US and Canada. However, during the review period video games sales through leisure and personal good retailers grew at an above average rate, and these retail venues ate into the share of mixed retailers. Internet retailing showed strong growth, and it has taken share from store-based retailing. • In Asia, grocery retailers have a 24% share of toys and game retail sales, a much higher share than in the other worldwide markets. This is a reflection of the strong growth of organised food retailing in the region, (well ahead of non-food retailing) and the effective use of this channel by toys and game manufacturers and suppliers. • Internet sales of toys and games in Australia grew by 67% in 2008 over prior year, and it now accounts for over 6% of overall toys and games sales. Consumers in the region rarely use grocery retailers to buy toys and games (1.4% distribution share in 2008), and these products mainly channelled through mixed retailers who accounted for 36% of sales in 2008. Discounters such as Kmart, Big W and Target dominate the mixed retailer channel in Australia. • In Eastern Europe, leisure and personal goods retailers are the main distribution channel for toys and games. In 2008, their share was nearly 39%. In the larger cities of Russia, such as Moscow, St Petersburg and Yekaterinburg, distribution is mainly through specialist children’s shops, with Detsky Mir being a strong chain. In Poland and Romania, as well, toys specialists are popular with parents. • In Western Europe, distribution of toys and games did not change much during the review period. Non- grocery retailers, the most popular channel, maintained a steady 53% distribution share in 2008. Internet retailers took share from all other distribution channels. Their share doubled, going from 3% in 2003 to 6% in 2008. • Supermarket chains are well-developed in Latin America. Lower-income groups prefer to buy toys in super/hypermarkets, and the entire family often shops together. This is also one of the reasons why these retailers gained market share during the review period. Grocery retailers in the region saw their share of toys and games sales grow from 24% in 2003 to 28% in 2008.
Retailing Developments: Consolidation • Overall, there was not much retail consolidation in toys and games distribution channels during the review period, although there were key acquisitions early in the period. • In the US, Gamestop acquired rival Electronics Boutique in 2005. This was an important acquisition, in that GameStop is now the world’s largest retailer of video gaming software. The company operates 5,000 stores, with one thousand located outside the US. • In Chile, Cencosud, which already owned the Jumbo supermarket and Homecenter Easy chains, acquired the department store Paris S.A. in 2005. Among other things, this acquisition allowed customers to use Paris and Jumbo credit cards in either store.
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• In India, Trent Ltd, which owns the Westside fascia, acquired a 76% controlling interest in Landmark, the books, music and toys retailer.
Retailing Developments: New Trends • In Spain, brands such as Eurekakids, Imaginarium, Pelucharia, Estimulos, Poly and Gleis offer entrepreneurs the opportunity to buy and operate franchise stores. The average investment needed for these brands is not very high compared to other franchises. The average investment is €140,000 and the billing reaches €300,000. The number of franchises in the Spanish market is increasing every year. • Toys and games marketers are looking beyond the traditional distribution channels. Newsagents, video rental stores, florists, sweet shops and gift shops are all examples of retail outlets that now sell some kinds of toys. Targeting non-traditional toy retailers is a good strategy for driving growth in this sector. • In Italy, durable goods and consumer electronics retailers such as Media World, Darty, Euronics and PC World are very important for sales in the video games market, and they are increasingly dedicating large portions of their sales space to video games in order to integrate their offerings. • The pressures of the green lobby are having an effect on toy retailing and packaging. In 2006, mixed retailer Wal-Mart embarked on a five-year plan to ensure that their private label packaging adhered to better environmental standards. A packaging scorecard is maintained for suppliers and, from February 2008, this scorecard began to be used in the decision-making process for purchasing products and choosing suppliers. Wal-Mart is seeking to reduce the amount of packaging in the supply chain by 5% by 2013.
Private Label Trends • During the review period, most retail chains increasingly developed private label product lines. Private labels are seen as a way of ensuring better profit margins for both the retailer and manufacturer, while at the same time giving consumers the feeling of exclusivity. KB Toys has used the manufacture of private labels as a means of addressing its falling sales. • Wal-Mart’s Kid Connection is a well-established private label. Discount chain Target also developed a line of toys called Kool Toyz, aimed primarily at pre-schoolers. FAO Schwartz has been reported to be considering opening dedicated private label counters in Macy’s department store over the next two years. • During the review period, private label sales grew significantly in the plush/soft toys subsector. Examples include Animal Alley from Toys R Us, Cuddle Zone from Target and Soft Expectations from K Mart.
Prospects • Retail chains are expected to increase their distribution share as they penetrate more markets in Asia Pacific, Latin America and Eastern Europe. Domestic fascias are also likely to gain more importance in countries in Latin America and Asia. • In traditional toys and games sales, grocery retailers are likely to enjoy a growing influence as they tap into seasonal sales, using their strong purchasing power to source directly and sell novelty items. Discounters are also likely to continue to hold sway in the developed countries. • Leisure and personal goods retailers are expected to gain ascendancy as a channel in the video games subsector. While game specialist chains like GameStop increase their reach outside the US, other personal goods stores could become significant channels for consoles and accessories. • Internet retailers are expected to continue gaining share over the forecast period, as consumers seek lower prices and look to avoid the in-store rush.
Grocery Retailers
Headlines • In 2008, grocery retailers accounted for 15% of sales of toys and games in the markets under study, with 2008 sales increasing by more than 18% over prior year. • Sales of traditional toys and games continue to be the major contributor in the sector, with 2008 sales increasing by more than 14% over prior year.
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• In 2008, sales of video games through grocery retailers grew by 26% over prior year. • Organised retailing is still in the early stages of development in many countries in Latin America and Asia Pacific. It is expected that grocery retailers will gain share in the toys and games sector over the forecast period, particularly as the number of hypermarkets increase and as supermarket chains expand into more cities in these countries.
Trends • Suppliers in several countries in the developing markets of Eastern Europe and the Asia-Pacific are using grocery retail chains to distribute toys and games. In these countries, organised food retail has evolved more quickly than non-food retail and many chains, both domestic and transnational, already have the advantage of impressive distribution networks. • In Brazil, for example, supermarkets/hypermarkets are increasingly stocking wider ranges of toys, now typically offering about 1,000 to 1,200 items. They are making imported, cheaper toys available to consumers, via direct imports and private labels. • In South Africa, on the other hand, grocery retailers traditionally moved large volumes of toys and games because of their ability to reach a wider market base. Now, however, selling space in supermarkets is shrinking, and toys and games increasingly have to compete with other merchandise as stores’ widen their product ranges. • In Western Europe, chains like Carrefour and Tesco have strong sourcing capabilities and strong purchasing power. They are able to tap the manufacturing source directly, reducing distribution costs and offering toys and games at lower prices to consumers. These chains are also able to squeeze manufacturers like Mattel and Hasbro into offering promotions and price-offs, guaranteeing high sales volumes. • Grocery retailers generally increase their toys and games stock during the holiday season, and many argue that they heighten the seasonality of the market. In Eastern Europe, supermarkets place seasonal orders for toys mainly during Christmas and Children’s Day. There is pressure on producers to provide them with high discounts. Moreover, they focus on cheap and easy-to-sell toys. • Large chains are also striking special arrangements with local manufacturers. For example, in 2006 South Korean manufacturer Sonokong entered into a strategic deal with the major grocery store Samsung Tesco Homeplus. This alliance enabled Sonokong to display its products in 48 Homeplus and subsidiary stores. Sonokong expected to earn additional annual sales of Won4 billion to Won5 billion.
Prospects • As organised retail grows, grocery retailers are likely to capture an increasing share of toys and games sales in the markets of Asia Pacific and Latin America, as well as in Eastern Europe. • In North America and Australia, the dominance of discounters is expected to continue and to keep the share of grocery retailers in the toys and games sector at a low level. In Western Europe, on the other hand, strong hypermarket chains like Carrefour and Metro will ensure steady growth for this channel. • This channel is likely to continue to do well in sales of low-priced, impulse-driven toys, and they will also be successful catering to seasonal needs. Consumers still prefer specialists when looking for a wide array of high quality toys.
Mixed Retailers
Headlines • In 2008, mixed retailers accounted for 33% of toys and games retail sales in the markets under study, representing growth of 14% growth over 2007. • Sales of traditional toys and games constituted 40% of total sales in the sector in 2008. • Sales of video games though mixed retailers grew by 30% in 2008 over prior year, making it the fastest growing subsector. • In Russia, mixed retailers saw strong growth in the sales of toys and games. In 2008, sales by nearly 39% though these retailers.
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• Overall, increasing sales among mixed retailers has been driven by the success of Wal-Mart and other discounters.
Trends • Mixed retailers enjoy a hugely dominant position in North America, the single most important toys and games region in the world. In 2008, mixed retailers accounted for 49% sales in the US and 47% in Canada. Their share declined over the review period only because of the high growth of internet retailing. • Wal-Mart and Target arguably control toys and games sales in North America. They are larger than toys and games manufacturers who are pressured to sell their products at wafer-thin margins in order to be seen on the shelves of these influential stores. In 2007, Wal-Mart accounted for US$1 billion of Mattel’s sales, while Target accounted for another US$600 million. Similarly, Wal-Mart accounted for almost one-quarter of Hasbro’s net revenues and Target accounted for another 12%. • The Wal-Mart effect has spilt over into Mexico. During the review period, Wal-Mart de Mexico opened more discount formats in smaller cities and rural communities in order to penetrate into all levels of the Mexican consumer population. According to the trade press, in 2007 Wal-Mart de Mexico reported that it operated 983 business units, including 296 discount stores and 130 Wal-Mart Supercenters. • The growth of Wal-Mart’s market share slowed in 2007–2008 as supermarkets, drug stores, hardware retailers and online retailers widened their range of traditional toys. • Another national market with strong mixed retailer sales is Australia and, once again, sales there are driven by discounters, including Kmart, Big W and Target. Discounters aggressively compete in the toys and games market with lower prices. Australia has a very unique retailer dynamic, with a mix of supermarkets and discount stores owned by the same entity rather than hypermarkets as in other markets. Discount stores offer a much broader range of toys, as well as more support. • In Chile, sales via department stores increased during the review period. In 2008, mixed retailers accounted for 51% of toys and game sales. Consumers prefer to purchase toys and games in department stores, as their credit cards offer lower interest rates than bank credit cards and these stores can import a greater range of titles. Store credit cards also ensure store loyalty, and they can also be used in supermarkets owned by the same company. The availability of credit has also helped video game hardware sales, for which department stores are an important distribution channel in Chile. • In general, mixed retailers are a significant and growing channel for toys and games in the UK. This channel consists of such colossi as Marks & Spencer, Argos, Harrods and Asda. In 2008, Argos was probably the main driver of growth in this channel, due to the strong demand for flat-screen TVs and set-top boxes during the recent Olympic Games. Its business model is based on catalogues which customers can browse in-store before placing their orders and collecting the items, minimising the sales area. Argos has also adopted a multi-channel approach, expanding its business to include additional sales through telephone and via the internet as well as growing its home-delivery business. • In the Asia-Pacific markets, distribution through mixed retailers is uneven at best. In China, the presence and growth of Wal-Mart has led to the channel gaining close to a 35% share in 2008. In countries like Singapore and Japan, major department stores such as Takashimaya, Robinsons and Metro form a significant distribution channel for toys and games, and they have maintained a steady share. In South Korea, however, the balance has shifted towards grocery retailers and away from mixed retailers, based in part on the popularity of grocery retailer Samsung Tesco. In India, domestic department store chains drive top-end mixed retailer sales. These include Westside, Shoppers Stop, Lifestyle and Landmark. But smaller variety stores are still the norm in urban areas, and they drive sales in the mass market.
Prospects • It is expected that discount stores will continue to grow as a distribution channel for toys and games. There is no likely reprieve from their aggressive targeting of consumers. • Discount stores are strongly supportive of the Nintendo Wii. This product is more aligned to their strategies, consumer targeting and pricing. They have pushed and will continue to push this console strongly over the coming years.
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• The launch of Wal-Mart in countries like India could give a further impetus to the mixed retailer channel. But there could be a strong battle between the established hypermarkets and the discounters over the forecast period.
Leisure and Personal Goods Retailers
Headlines • In 2008, leisure and personal goods retailers garnered a 29% share of the toys and games sector in the countries under study. • The growth of video game specialists resulted in video games commanding a 54% share in 2008, up from a 33% share in 2003. • Sales of video games through this channel grew by 24% in 2008. • In Singapore, sales of video games sales through leisure and personal goods retailers grew by 61% in 2008. • Despite the strong growth of retail chains, small independent stores continue to flourish in this channel.
Trends • In the toys and games sector, the leisure and personal goods retailer channel comprises toy retailers like Toys “R” Us and video games specialists like Game Stop. In the early 1990s, North American chain toy specialists Toys “R” Us, FAO Schwarz and KB Toys went through difficult times, as they were swamped by the increasing presence of Wal-Mart and other discounters. In 2004, FAO Schwarz and KB Toys filed for bankruptcy. FAO Schwarz was saved from closing its New York store by a buy-out, though it did shut down many of its subsidiaries. KB Toys went bankrupt and announced it would close around 375 of its 1,240 stores. Then, in 2006, Toys "R" Us announced it would close 87 stores in the US, with 12 other stores converted to the Babies "R" Us format. • Since then, however, US traditional toy retailers have learned to compete more effectively against Wal- Mart. Toys “R” Us underwent a corporate restructuring, making it more efficient. Smaller independents focused on providing high levels of customer service, establishing stores in strategic neighbourhood locations and offering niche products, typically those not available at Wal-Mart. Over this period, this channel’s distribution share in the US toys and games grew from a low of 25% in 2006 to almost 27% in 2008. • In the toys and games sector, Wal-Mart is facing renewed competition from its main rival Toys “R” Us, a company that is becoming more aggressive in its pricing. The company is also introducing more private label toys to differentiate itself from the competition. Toys “R” Us accounted for US$700 million of Mattel’s sales in 2007 and about 11% of Hasbro’s sales. • At the same time, video games specialist GameStop grew from strength to strength in the US market. GameStop acquired rival Electronics Boutique in 2005 and created a retailer that rivals Wal-Mart in the subsector. In fact, some industry analysts believe that GameStop may have surpassed Wal-Mart in 2008 as the leading retailer of video games. In addition, with its more than 4,061 retail locations in the US, GameStop can claim a very broad distribution base. As well, GameStop offers a trade-in policy wherein customers can bring in their old games and gain credit toward the purchase of new games. • Another region where the leisure and personal goods retail channel is very strong is Western Europe. Consumers seem to prefer to shop for toys at these specialist stores due to the wider variety they offer. In France, the channel is growing well. The specialists provide consumers with year-round exposure to toys and games. France has numerous specialist stores, including Toys “R” Us, La Grande Récré, Fnac Éveil et Jeux, Maxi Toys, JouéClub, Joupi, King Jouet, Jouetland and Starjouet. In Great Britain, video games enthusiasts (who remain the biggest spenders in this sector) like to be able to choose from a wide range of products. They also often require advice and tips from knowledgeable staff, and this makes specialist stores an ideal sales channel for most video games consumers. • Shopping in Russia is becoming a leisure activity, and more consumers are shopping in big leisure centres with their children as the choice of goods on offer in these centres becomes better and wider. Detsky Mir is a household name with a strong tradition in the toys and games sector. Leisure and personal goods stores, such as Flamingo, Best Computers, UltraPRO and Diverta, remain the best retail channel for video games in Romania.
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• In the Asia Pacific region, Toys “R” Us made a strong entry into Malaysia where it now has 18 outlets. The chain also entered the South Korean market in 2008. The region is characterised by the presence of small neighbourhood independents that sell toys and games. The attraction of cheap imports from China led to the establishment of specialists like Toys Kemp in India, but poor inventory control and numerous product problems led to the closing down of several of these importer-retail specialists. • In Australia, retailers like JB Hi-Fi and Harvey Norman have been very successful by focusing strongly on gaming. Over the review period, there was a strengthening in speciality games stores, such as EB Games. These stores offer the best service and knowledge of gaming across all channels, and they are especially popular among serious gamers.
Prospects • Video game sales are likely to bring growth to leisure and personal goods retailers over the forecast period. Gamers continue to look for variety and choice, and they prefer shopping at specialist stores where the staff are well-versed in the products and are able to make knowledgeable recommendations. • The threat from online retailing will need to be countered by creating more excitement in stores, highlighting the attraction that touch-and-feel provides. • Specialists will seek to find ways to encourage sales in the off-season and non-festive season in order to reduce the seasonal effects in the market. • Over the forecast period, it is expected that there will be growth by other types of specialists, such as digital entertainment stores that sell MP3 players, LCD TVs and game consoles and accessories. Electronic/remote-controlled toys could also be sold through these outlets.
Vending
Headlines • In 2008, sales of toys and games via vending increased by nearly 14% over prior year, with sales in the key market in Japan increasing by 12%. • Less than one percent of global sales of toys and games in 2008 were via the vending channel. • Nearly 79% of toys and games sales via vending in 2008 were for traditional toys and games. • Sales of video game sales through the vending channel grew by 30% in 2008.
Trends • Namco Bandai of Japan are the leaders in the toy vending retail channel, and they have attempted to launch their vended miniature toys in Europe, as well. The Gundam and Digimon toys are sold in vending machines in Japan. • Toys-with-sweets are an important component of vending sales. Also referred to as capsule toys in Japan, these items are usually based on anime characters or local children’s animation heroes. However, the craze for collecting these little rubber toys has waned over the past few years, and it has been replaced by toys targeted at adult women, which are considered more like fashion accessories. There are also some adults who buy vended toys for nostalgic reasons.
Prospects • Prospects for vending sales from Japan appear positive due to cultural and pricing reasons. At ¥100 per capsule doll, these can definitely be defined as impulse purchases. Success is dependent upon the creativity of toy designers and their ability to develop a series of collectibles. • In other parts of the world, vending as a distribution channel for toys and games has not caught on and there is little expectation that it will catch on.
Homeshopping
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Headlines • Selling toys and games via homeshopping remains a niche market. In 2008, it accounted for 1% of sales across the markets under study. • Catalogue sale of toys is more prevalent in Western Europe than in other regions.
Trends • Catalogue shopping is common in China, the US and in India, where homeshopping accounts for more than 2% of overall toys and game sales. This is in contrast to the 1% penetration on average in the countries under study. The popularity of catalogue shopping depends on companies looking to sell via this channel. • In Germany, Geobra Brandstätter, the manufacturer of the Playmobil range of toys, distributes millions of consumer catalogues twice a year, an effort it considers an efficient means of advertising. With 52 colourfully illustrated pages, the catalogues serve as an appetite-whetting “picture book”. Geobra Brandstätter is one of the few German companies that still manufacture its products entirely in Europe. Because of this and its scandal-free, reliably non-poisonous figures, it benefits from a high level of consumer trust. The company receives numerous ethical kudos from German consumers, who are willing to pay extra for better quality. • Geobra is also a significant player in France and The Netherlands, where it uses the same catalogue distribution strategy, mainly for advertising, but also for garnering sales. • Swedish company Brio uses catalogues to provide exposure to their product line. Brio is a high-end brand representing quality, safety and high educational values. Their products are relatively expensive compared to competitors’ brands. • In the US and in Australia, Toys “R” Us distributes catalogues that list its infant products. The rationale is that many mothers are quite often too busy to visit and browse through a shop, but they may look through catalogues at their leisure at home and be encouraged to make purchases. In addition to toys and games, these catalogues include clothes, accessories and strollers. • Australia has a strong retail catalogue culture. Discounter Target launched a toy catalogue in 2000 in an attempt to develop a “second season” (besides Christmas) for toys. Its success led to the launch of catalogues from other retailers, such as like Big W and Kmart. • In India, homeshopping is less organised. Credit card companies offer their customers a monthly or quarterly catalogue with special prices or niche market products, and these often include a fair share of toys and games, especially electronic learning toys.
Prospects • Retailers and marketers will continue to use mailed catalogues to increase awareness about their products, give customers details about new products and publicize promotions such as special trial offers. However, homeshopping will continue to be a small, fringe channel over the forecast period. • The convenience of internet retailing has made that the first choice for stay-at-home shoppers. • Teleshopping may be attractive to consumers seeking other kinds of products, housewares or furniture, for example, as they can be given detailed product demonstrations via their televisions. But toys and games are unlikely to benefit from teleshopping.
Internet Retailing
Headlines • In 2008, sales of toys and games via internet retailing grew by 27% over prior year. • Internet retailing has the highest penetration in South Korea, where toys and games sales through this channel accounted for 14.5% of overall sales in 2008. • Video games accounted for 55% of internet sales in 2008, representing growth of 39% over 2007. • Large retail chains and small stores often now operate e-shops to complement their brick and mortar stores.
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Trends • The developed markets of Western Europe, North America and Australia have seen the growth of internet retailing in general and the growth of toys and games sales, in particular. Consumers take to the convenience and value the time they save using this channel. The growth of internet infrastructure and PC penetration in households is, obviously, key to the growth of this distribution channel. • The giant among internet retailers is Amazon, which receives an estimated one million orders a day (all products) in the UK alone. Its low prices and good reputation for delivery has led to monstrous growth for the American e-tailer. In addition to the UK and US, Amazon operates in Canada, Germany, Japan and China via country-specific portals. • One region where internet retailing continues to lag is Latin America. In 2008, only 2% of toys and games sales were via internet retailers. Many consumers continue to use the internet solely to search rather than to buy. Typically, they first search the internet for products and prices and then subsequently purchase the product in traditional brick and mortar stores. As well, children often like to select toys and games themselves, so they can see how they work and decide on colours and other details. • In Mexico, buying video games via the internet has become popular. Companies like El Palacio de Hierro have noted that internet sales are increasing and that the channel has become an important tool for increasing sales by providing information on promotions, advertisements and product details. • Internet retailing played a role in a recent consumer battle in Canada. With growing consumer resentment over the wide discrepancies between Canadian and US retail prices, many Canadians turned to the internet to do their shopping. (Those that could got into their cars to do their shopping in the US.) Price discrepancies were particularly apparent in the toys and video games markets. Long lines at the US/Canada border and high levels of cross-border internet sales forced traditional retailers like Wal-Mart Canada, Sears Canada and Future Shop to roll back their prices in order to keep Canadians buyers at home. During the busy 2007 Christmas shopping season, Wal-Mart Canada lowered prices of hundreds of video games, including the popular Guitar Hero 3, to the levels charged in the US. For example, Wal-Mart Canada priced Halo 3 at C$59.83, about C$10 less than other Canadian retailers. • In the Asia Pacific region, internet retailing has not yet made a mark in Malaysia. The high level of credit card fraud in that country has kept consumers away from buying online. Internet retailing accounts for less than 1% of sales of toys and games sales in Malaysia.
Prospects • The ability of consumers to make quick and easy price comparisons and the low cost of shipping contributed to the growth of buying online. Internet retailing is expected to grow over the forecast period. • Greater household penetration of PCs and broadband will lead to increased internet commerce in general, and this will have a positive impact on toys and games sales over the forecast period. However, there needs to be tight controls to keep fraud to a minimum in order to ensure no loss of consumer confidence. • Video game sales via the internet are likely to grow at a faster rate than sales of traditional toys and games as consumers look for specific titles and the best possible prices.
Direct Selling
Headlines • Sales of toys and games via the direct selling channel declined by 3% in 2008 compared to prior year. • Traditional toys and games accounted for 59% of sales via direct selling in 2008.
Trends • Mattel sells its American Girl range of dolls/figures via the direct selling channel in the US. In 2007, however, Mattel reported that the brand’s sales were down by 2% compared to prior year due to poor performance in the direct sales channel.
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Prospects • Direct selling of toys and games has never been effective, and it is unlikely that this will change over the forecast period. With Mattel having little success in the direct selling channel with its American Girl products, it’s unlikely that other companies will consider using it.
Corporate Strategies
Headlines • In the thirty countries researched for this report Nintendo recorded considerable growth in sales over prior year. • The market has seen some consolidation as the top five players accounted for 33% of value sales in 2007. • On the M&A front, in 2008 it was announced that Vivendi Games would merge with Activision. • Companies in the video games subsector enjoyed more growth than companies in the traditional toys and games subsector, and this trend is likely to continue over the forecast period as more people become accommodated to the online world.
Major Player Comparative Performance
Comparative Sales Performance
Nintendo successfully increases its user base • Beginning with 2007 and through 2008, Nintendo, with the launch of the Wii and its existing hand-held console DS, successfully grew the user base of gamers, bringing a large number of casual gamers into the market. In North America, Western Europe and Australia, this included an increasing number of women, baby boomers and senior citizens. • As a result of the growing base, Nintendo enjoyed huge growth in retail sales. Wii, with a price lower than its competitors PS3 and Xbox 360, became a favourite gift for Christmas 2007. • Nintendo has also developed popular software for its consoles. In March 2008, the company reported worldwide volume sales of over 148 million units of Wii software and close to 370 million units for the DS. • Nintendo retail sales in the thirty countries under review increased considerably in 2007, propelling the company a ranking of fourth in 2005 to the leadership position in the overall toys and games sector in 2007. • In the financial year ending March 31, 2008, Nintendo reported that it had shipped 18.6 million Wii consoles to distributors and retail customers worldwide. Net sales for the year were US$16.7 billion with profits of US$4.9 billion, up 116% compared to the prior financial year. • Further growth in sales was hampered by production constraints and non-availability, as well as by Nintendo not being present in several key markets in Asia Pacific, including India, China and Malaysia.
Despite winning the format war, Sony struggles with PS3 • In January 2008, Sony’s Blu-ray format became the industry standard for high-definition content. It was assumed that this would adversely affect the fate of Microsoft’s Xbox 360 for the rest of the year through to 2009, as the Xbox 360 uses the now-defunct HD DVD format. • While retail demand for Xbox plunged momentarily, reports indicated that, overall in 2008, the PS3 lost sales momentum vis-à-vis the Xbox in the US and in Western Europe. Strangely, the PS3 seemed to have the competitive edge in 2008, being a more reliable product, coupled with a US$200 price reduction and a built-in Blu-ray player. Regardless, in initial holiday season sales for November 2008, Microsoft claimed that the Xbox 360 had outsold the PS3 by a ratio of three to one. At the same time, software sales were very healthy, and titles such as Gears of War 2, Fable II and Lips proved popular among Christmas consumers. • Xbox 360’s strong point is the number of games its users buy. In 2008, Xbox users bought an average 8.1 games per console.
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• The Sony PS3 also suffered because Japan, its strongest market, exhibited apathetic and recessionary tendencies, resulting in poor sales in both 2007 and 2008. The variety and range of software for the PS3 was also considered weak. Sony’s effort to push the Gran Turismo 5 launch to Christmas 2009 also put off new customers. • Based on final 2008 retail sales, Sony is in danger of falling behind Microsoft in the leadership table. Only strong sales in China and India will allow the company to keep its position. For Sony, the PS2 still has some value, especially in Latin America and parts of the Asia-Pacific region. As well, the PSP has potential since the hand-held market is seeing robust growth.
Barbie and Bratz have a face-off • Mattel, leader in the toys and games sector until 2006, dropped to third place in 2007 as it was hit by worldwide recalls. Mattel’s three massive recalls in the summer of 2007 involved more than 20 million units of Mattel’s products worldwide, including products under the company’s stalwart brands Barbie, Fisher-Price, GeoTrax and Dora the Explorer. High levels of lead and small, potentially digestible magnets in the products were the culprit. Mattel’s product recall woes were followed in 2008 by a long, drawn-out legal battle with MGA Entertainment over the latter’s Bratz doll. • For a number of reasons, Mattel’s other key global competitors were not so badly hit. LEGO having only 3% of its total production in China turned out to be an advantage for the company. Hasbro was relatively unscathed, as it generates over one-third of its sales from board games. • As a result, annual retail sales in Mattel’s core US market fell by 6% in 2007. The US market accounts for close to one-half of Mattel’s annual sales, and this decline was only partly compensated for by strong sales in Latin America and Eastern Europe. • However, Mattel regrouped and regained some of its lost ground, reporting growth of 11% in net sales in the second quarter of 2008, driven by demand for new popular licensed merchandise, such as Batman, Speed Racer and Kung Fu Panda. The sales growth reflects customer confidence that the company now has better quality checks in place. Mattel’s core strength of a wide range of brands held it in good stead, as did it lucrative licensing deals. • In its legal battle with MGA Entertainment, Mattel asked the court to impound all Bratz dolls. At the same time, the company attempted to win the license to make these dolls in the future. Mattel claimed that the designer of the Bratz, Carter Bryant, was under exclusive contract with Mattel and, as a result, all of his designs belong to Mattel. The jury awarded Mattel US$10 million in damages for copyright infringement and another US$90 million was awarded based on MGA’s interference with the employment contract of Carter Bryant.
Hasbro bets successfully on licensing • Hasbro Inc put itself in a strong position on the licensing front, especially with films. The company has future agreements related to several potentially successful films, such as the Star Wars’ animated TV series, GI Joe and Transformers 2, all to be released in 2009, and Iron Man 2 and Spiderman 4, due for release in 2010. The company is hoping that these deals will bring growth to combat the recessionary economic conditions in the developed world. • The company’s Transformer range of action figures have been a hit worldwide, and they helped the company see 2007 sales grow 14.5% over 2006 in the 30 markets researched for this report. The continued success of its Littlest Pet Shop animals as well as Spider Man and other movie-related action figures also helped grow sales. Unlike Mattel, Hasbro largely escaped the impact of the recall scares over Chinese-made toys in 2007. • In October 2008, Hasbro reported third quarter net revenues of US$1.3 billion, an increase of US$78.9 million (or 6%) compared to US$1.2 billion reported in the previous year. The company’s international sales grew 9% while its North America sales grew 6%.
LEGO keen on expanding its customer base • In the thirty countries under review for this report, Danish toy major LEGO enjoyed above average growth, with 2007 retail sales growing by 16% growth over prior year. Bionicle is the company’s biggest selling product line. Other major lines are the classic products like LEGO City, LEGO Vikings and LEGO Technic, as well as the pre-school products in the DUPLO line. In addition, two of the company’s licensed
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products, the Ferrari models in the LEGO Racers series and the LEGO Star Wars products, featured among its top sellers. • LEGO has traditionally “owned” the building bricks toy subsector, part of the activity/construction sector. However, LEGO, a seventy-five-year-old company, saw many of its patents expire in 2008, and now other companies are free to make imitation LEGO bricks, taking away some of LEGO’s business. Mega Brands is one such player, and there are several others in developing markets like India and China. LEGO has launched numerous legal challenges against Mega Brands, arguing that the company is infringing upon LEGO’s unique construction brick trademark. The Supreme Court of Canada dismissed LEGO’s challenge in Canada in November 2005, and the US courts have done the same. • At the same time, LEGO is facing competition from electronic toys. These competitive pressures have prompted LEGO to take its famous bricks online to "LEGO Universe", a virtual world expected to be launched in 2009. It will be a multiplayer online game that will allow players to create online versions of themselves and interact with each other. • LEGO is also looking to strengthen its position in the girls’ toys segment. It is expanding its line to include kits tailored for girls, featuring princesses, horses and castles. • Currently dependent on the Western Europe market, LEGO is looking to expand into the US after having successfully built a loyal customer base in Latin America, Eastern Europe and Asia Pacific, regions bringing good growth. The relocation of production to Eastern Europe and Mexico has also given LEGO strategic and cost benefits. It has been able to launch an inexpensive range of products in Latin America, allowing a wider range of income groups to buy LEGO products for their children.
Video game software companies face piracy threats • Software piracy eats into video games software sales. The high price of genuine software is arguably the main cause driving piracy in developing economies. It is unlikely that this piracy can be stamped out, as for most local governments it is not a high priority effort. Software companies will need to rethink their marketing and pricing policies to combat this problem.
The rise and rise of private labels • With the large number of mass-produced inexpensive (typically Chinese-made) toys now available, big-box retailers and distributors are relying on imports to supply their retail markets, keep their prices down and keep their customers interested. While there is a movement towards better quality products, the growth of low-end unbranded and private label toys has been immense. • This situation has led to the growing importance of the distributor/importer. In several countries, rather than a brand or a NBO being the market leader, it is the distributor/retailer that has the largest market share. In Chile, for example, private labels accounted for almost 23% of retail sales in 2007. In Singapore, Sheng Tai Toys, a distributor, had close to 8% share of sales. In Poland, CD Projekt Sp Zoo is a large distributor, and with a 14% share it leads a very fragmented market.
Major Players by Regional Presence and Main Area of Activity • The top six players in the toys and games sector have a presence in all regions of the world, though the levels and shares vary in different regions. This global presence has helped bring growth from more dynamic markets of Asia Pacific and Latin America, and volume share growth in the mature markets in North America and Western Europe. • Arguably, LEGO is the odd one out, in that the company is present in only a single subsector of the traditional toys and games subsector, activity/construction. Regardless, it has still made it into the top ten list. As well, it is the only top-ranked player based outside the US or Japan. • With the exception of LEGO, the top ten list is made up of companies based in Japan or the US. All companies must maintain a strong presence in the US to succeed globally. The toys and games markets in developing regions are so fragmented and unstandardised that there are no domestic players with significant country share, let alone regional share. • Nintendo, Sony and Microsoft earn most of their video game revenues from console sales, though they all have a significant presence in software. Nintendo and Sony have the advantage of being present in both stand-alone and hand-held consoles.
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• Mattel and Hasbro are similar in that both these traditional toys and games companies have a wide presence in the market and a presence across all regions with their many popular brands and subbrands.
Summary 8 Major Toys and Games manufacturers 2007 Manufacturer Country of origin Regional presence Main area of activity Nintendo Co Ltd Japan All regions Video games hardware and software Sony Corp Japan All regions Video games hardware and software Mattel Inc USA All regions Traditional toys and games Microsoft Corp USA All regions Video games hardware and software Namco Bandai Holdings Japan Asia Pacific Toys and games Inc Hasbro inc USA All regions Traditional toys and games Electronic Arts Inc USA All regions Video games software Activision Inc USA All regions Video games software LEGO Group Denmark All regions Activity and construction toys Source: Euromonitor International from company reports
Major Players by Sector • The traditional toys and games and the video games sectors are inhabited by completely different sets of players. Only one leading company, Namco Bandai of Japan, has tried to be present in both sectors of the toys and games retail market. Other leading players earn their revenues in a single sector. • Video games hardware companies Nintendo, Sony and Micros0ft all moved up in the rankings in 2007. They are highly dependent on sales in the US, the UK, France and Japan. For these companies, hardware sales bring in more revenue than software sales, though volume sales of software are higher. • This is true, as well, of software players like EA, Activision and Ubisoft. Sales come mainly from well- regulated and developed markets. High levels of piracy, illegal software and a flood of low-priced PC games have depressed their sales in Asia Pacific and Latin America. • Traditional toys and games manufacturers Mattel and Hasbro are present in a wide range of subsectors, and they are able to mop up volumes from whichever sector happens to be doing well in a region or country. Licensing arrangements have helped both companies increase sales in the large dolls/action figures market. • A subsector witnessing a great deal of change and growth is pre-school toys. This subsector has been most influenced by effort to integrate electronic and online features into educational toys. A leading example of this effort is Leapfrog Enterprises of the US. LeapFrog’s principal competition in this segment comes from Mattel and its Fisher-Price brand, Hasbro with its Playskool division and VTech. As well, dozens of other smaller players are also active in the subsector. As a result of the increasing competition and the ageing of its product lines, LeapFrog experienced a 14% decline in sales in 2007.
Summary 9 Top Three Manufacturers by Sector 2007 Sector 1st ranked 2nd ranked 3rd ranked Traditional Toys and Mattel Inc Hasbro Inc LEGO Group games Dolls/figures Mattel Inc Hasbro Inc Namco Bandai Holdings Activity/construction LEGO Group Mega Brands Smoby Toys
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Pre-school LeapFrog Enterprises Inc Mattel Inc (Fisher-Price) Hasbro Inc (Playskool) Video Games Nintendo Co Ltd Sony Corp Microsoft Corp Video games hardware Nintendo Co Ltd Sony Corp Microsoft Corp Video games software Electronic Arts Inc Nintendo Co Ltd Activision Inc Source: Euromonitor International
Major Players by Region • Nintendo has blazed ahead in Western Europe and North America, which are strong console-gaming regions. It leads the toys and games market in both regions, and it is ranked second in Australia. • However, other regions, such as Eastern Europe, Latin America, Africa and large parts of Asia Pacific are PC-gaming markets and Nintendo, though growing, has a smaller share in these regions. The same is true for other console companies, such as Sony and Microsoft. • Sales in the PC gaming regions are also affected by piracy and by imports, and shares are very fragmented in these regions. • Mattel, the leader in the traditional toys and games sector, tops the market in Latin America, and it has a strong presence in Western Europe and North America, as well. However, Mattel has been pipped by its American rival Hasbro in Eastern Europe. Hasbro has been more active in the region, and its Transformers line had a very successful run there. • For its part, Sony is relatively stronger in Australia and Latin America than Nintendo. This is based in part on the relative absence of Nintendo in these regions.
Summary 10 Top Three Manufacturers by Region: 2007 Region 1st ranked 2nd ranked 3rd ranked Western Europe Nintendo Co Ltd Sony Corp Mattel Inc Eastern Europe LEGO Group Hasbro Inc CD Projekt Sp Zoo North America Nintendo Co Ltd Mattel Inc Sony Corp Latin America Mattel Inc Sony Corp Electronic Arts Inc Asia-Pacific Namco Bandai Holdings Takara Tomy Corp Sony Corp Australasia Sony Corp Nintendo Co Ltd Microsoft Corp Africa and the Middle Just Fun Toys (Pty) Ltd Prima Toys Ltd Toys R Us Inc East World Nintendo Co Ltd Sony Corp Mattel Inc Source: Euromonitor International
Marketing and Brand Building • Nintendo spent US$1.1 billion on advertising in the financial year ending March 2008, building the brands Wii and Nintendo DS worldwide and promoting the games that go along with the consoles. Many of the games come under the umbrella brand Wii, such as Wii Sports, Wii Fit, Wii Play, etc. As well, there are other iconic brands like the Super Smash brothers. For the DS, Nintendo’s Pokemon range of games has been a winner, carrying over from its Gameboy Advanced, giving the company a certain continuity in brand building and brand awareness. There are still more GameBoy Advanced users worldwide than users of any other console, making the GameBoy brand still saleable. • Sony’s Playstation brand has been developed well. PS2 is still enjoying success in many parts of the world due in part to its lower price when compared to the newer PS3. • While the video games players have strong umbrella brands, traditional toys and games players like Mattel and Hasbro have developed a host of sub-brands aimed at various markets and target consumers. Mattel owns the famous board games Scrabble, Pictionary and Uno, the successful dolls and figurines Barbie and
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Polly Pocket and Hot Wheels, the highest selling brand of model vehicles in the world. In the infant segment, Mattel owns the Fisher-Price brand. The company also holds some of the most popular licenses, including Cars, Winnie the Pooh, Dora and Batman. Owning these famous brands enables Mattel to distinguish itself from other players in the marketplace. In 2007, the company spent US$709 million or close to 12% of sales revenue on advertising and brand building activities. • Hasbro’s brands include Playskool, Tonka, Super Soaker, Milton Bradley, Parker Brothers, Tiger and Wizards of the Coast. Recognising the strength of its consumer franchise in the toys and games sector, Hasbro is now seeking to enter into new product categories to expand its sales. The first example of this was the 2006 launch of “Tooth Tunes”, a musical toothbrush that uses patented denta-mandibular sound transmission technology which makes it fun for children to brush their teeth. Sound vibrations stream from the bristles through the child’s teeth so that the child actually hears the music inside its head. A parallel strategy, aimed at maintaining interest in Hasbro’s games products, is to co-brand popular lines. For example, Hasbro developed “Candy Land: Dora Edition” and “Monopoly: Star Wars Edition” in an attempt to appeal to a broader consumer base. Similarly, in 2006 Hasbro offered DVD versions of many of its traditional games. In 2007, launched a number of other innovative new games, including “Twister Dance”, a DVD-based game and “Giga Pets Combo”, which combined features of both hand-held and plug-and-play games. • Over the coming years, there is likely to be more efforts to bridge the gap between traditional toys and video games, and manufacturers will attempt to build their brands around this convergence.
Strategic Activity
Merger and Acquisition Activity • During the review period, a great deal of M&A activity took place in the toys and games sector, and it did not slow down in 2008. Perhaps most significant was the deal announced in December 2007 that took the gaming industry by surprise, i.e., the merger of Activision and Vivendi Games. The combined company, now known as Activision Blizzard, Inc., hopes the different strengths Blizzard and Activision brought to the table will enable them to forge a business that is powerful on all gaming platforms. Blizzard is widely known for its online games, including the immensely popular World of Warcraft. As part of the merger plan, Blizzard will invest US$2 billion in the new company, with Activision putting up US$1 billion. • Edusoft is being acquired by Synergex Corporation, a large multinational software producer. The acquisition process began in mid-2008, and it is expected to be complete by the end of 2009. The company is also planning to expand its production of games for children under 14 years-old, as this segment has experienced only minor incidences of piracy. As well, the company is expected to undertake efforts to attract online multiplayer gamers, despite an initial effort in 2006 which didn’t produce positive results. • The American traditional toys and games company Mega Brands announced its intention to explore the sale of its Rose Art stationery and activities business. This would not only generate much-needed cash to help reduce the company’s existing debt, but also allow it to focus more closely on its core toy business. This strategic sell-off is in addition to Mega Brands’ Value Enhancement Plan (VEP), which is intended to improve the company’s future financial performance. The VEP will see 3% to 4% of annual sales revenue directed towards R&D and marketing, and it will strengthen the company’s operations and supplier base in China, which will help to generate an additional annual savings of US$12 million. • Another American multinational, Hasbro, Inc., announced in March 2008 that it has purchased all of the intellectual property rights related to the Trivial Pursuit brand from Horn Abbot Ltd. and Horn Abbot International Limited. Hasbro paid the Horn Abbot companies US$80 million (aggregate purchase price) for their intellectual property. Hasbro has developed, marketed and sold Trivial Pursuit under license from the Horn Abbot companies since 1983. • The European market has seen some consolidation across country borders as ailing companies have been bought over by rivals. One such important acquisition was that of ailing French company Smoby Toys, which was bought in 2008 by German toy manufacturer Simba Dickie. Simba Dickie beat MGA Entertainment to the deal. Simba Dickie had worldwide sales of US$560 million in 2007. Smoby, on the other hand, had filed for bankruptcy in France and its sales were down to US$49 million in 2007. Simba Dickie will try to create synergies between Smoby Toys and its own brands, especially in areas such as products design where there is an overlap of product ranges.
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• Iconic German train maker Märklin was acquired by UK investment company Kingsbridge and re- positioned in the market as a more child-friendly brand. Märklin also took over a number of other competitors in order to consolidate its position in the toys market. • Flair Leisure Products plc (UK) recently became part of the Giochi Preziosi Group, which acquired 95% of the UK toy company in March 2008. Italy-based Giochi Preziosi is a very successful European toy group with subsidiaries in France, Spain, Greece and Germany. It is the market leader in Italy and one of the biggest players in the worldwide toy industry. The Group’s businesses include not only its wide range of toy products but also snack foods, shoes, back-to-school products and other consumer products aimed at the youth market. • In Chile, there has been M&A activity on the distribution front, with main department stores acquiring supermarket chains and completely changing consumer purchasing patterns. For example, department store credit cards can now be used in other retail venues. For example, Falabella’s CMR credit card can be used in Homecenter Sodimac, the supermarket chains Tottus and San Francisco and in the pharmacy chain Farmacias Ahumada, all of which are owned by Falabella. On the other hand, the huge conglomerate Cencosud, which already owned the Jumbo supermarket and Homecenter Easy, acquired the department store Paris S.A. in 2005, allowing the use of the Paris and Jumbo credit cards in either store. • In April 2008 in Japan, Namco Bandai acquired the video game operations of Banpresto, which were then absorbed into Namco Bandai Games and Namco Tales Studio. As a part of this merger, two of Banpresto’s subsidiaries, Pleasure Cast Co Ltd and Hanayashiki Co Ltd, became subsidiaries of Namco Bandai Holdings Inc.
Summary 11 Toys and Games: Merger and Acquisition Activity 2004-2007 Year Acquirer Company acquired Strategic benefit/Outcome 2007 Centric Multimedia SA, ECN Management Entry into the online Greece gaming market 2007 Dionic SA, Greece Shenzen Top Lead Ltd To produce and distribute its own branded products in a better position with video games. 2007 Digital Bros Group, Italy RCS media Group To develop more into online gaming 2006 Tomy Co Takara Corp To focus on the online distribution of toy-themed software 2005 SCI Entertainment Eidos Interactive Ltd Eidos stands for the main Group, UK company brand and consumer identity of the business. Eidos Games are still released, promoted and marketed as Eidos products. 2005 Namco Ltd Bandai Co Ltd To expand its consumer base and meet the challenges of lowering development costs and thus introducting products that are competitive on price. 2004 Sammy Holdings Inc Sega Corporation To maximise the sales of its core toys and games products and ensure its profitability. Source: Euromonitor International from company reports
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Strategic Alliance Activity • In an attempt to bridge the divide between traditional toys and video games, companies are entering into strategic alliances to develop well-known traditional brands into online or video versions. • Hasbro and Electronic Arts are one example of this. The two companies are working together to create digital versions of some of Hasbro’s games and toys, including Monopoly and Littlest Pet Shop. The strategic partnerships that Hasbro has entered into with Electronic Arts and Universal indicate that Hasbro may be on the verge of transforming itself from a mere toy manufacturer to a diversified entertainment group. This will be a great challenge for the company but, if successful, it will allow the group to gain market share over its key rival Mattel. • In 2007, Sega Sammy of Japan concluded a basic agreement on a comprehensive business alliance with Sanrio Company Ltd. As characters are an important factor in the company’s ability to leverage synergies among its operations, the agreement enabled the company to focus on launching games based on Sanrio’s products such as the popular “Hello Kitty” range of soft toys. Sega Sammy expects to combine its wide- ranging entertainment capabilities with Sanrio’s characters. As well, there will be opportunities to develop new characters and produce live entertainment. These synergies will improve the recognition and popularity of Sanrio characters and generate new entertainment content, facilitating further growth for both companies. • South Korean HanbitSoft’s strategic cooperation agreement with Sony has provided it with a competitive advantage, since it can now distribute popular video and console games worldwide. In addition, its rights to distribute Mega Bloks and Bandai products in South Korea have brought additional value to the company. By distributing character products, HanbitSoft is entering new sectors and extending its product portfolio.
Summary 12 Toys and Games: Existing Strategic Alliance Activity: 2007 Country Participating companies Strategic benefit/Outcome UK Vivid Imaginations Ltd; TV New licensing benefits Loonland Worldwide Mattel with Universal Studios New licensing arrangements for Home Entertainment; Cartoon toys and games Network; Disney Channel High School Musical; Benetton; Adidas; Elan; HEAD/Penn; Oregon Scientific; Puig Beauty and Fashion Group; Britax; Somerset Entertainment Russia/Italy Digital Bros, Italy; IC Company, Intended to assist the entry of the Russia two companies into each other’s markets. Agreement lasts for three years and is valued at around EUR15 million, with the first effects realized in the financial year beginning June 2008. Source: Euromonitor International from company reports
Degree of Consolidation • The toys and games sector is highly fragmented worldwide. Companies in the category “Others” (mostly domestic companies) account for as much as 79% of sales in China, 67% in Turkey, nearly 60% in Brazil and as much as 50% in Eastern Europe. • However, the leading international brands have gained share over the years. In 2007, the top five companies, Nintendo, Sony, Mattel, Microsoft and Hasbro, accounted for 33% of retail sales in the thirty countries researched for this report. In 2006, that figure was 30%. • The growth of organised retailing is leading, in turn, to the growth of private labels that offer consumers a wider range of products. Most often, these private label products are imports, and this has led to distributors assuming an increasingly important role in many of the toys and games markets.
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KEY DRIVERS AND PROSPECTS
Headlines • In 2008, retail sales of traditional toys and games were estimated at more than US$75 billion in the thirty countries under study, representing growth of 8.3% over prior year. • Successful movie license deals brought above-average growth to the sector in 2007 and 2008. • The highest sales growth in 2008 came from pre-school toys, where value sales grew by 13.3% over prior year. • Dolls/figures continued to be the largest subsector with 2008 retail sales of US$13.4 billion. • Recession in key markets and competition from video games are expected to dampen sales of traditional toys and games. The subsector is projected to grow at a CAGR below 4% over the forecast period.
Decreasing Consumer Spending and Recessionary Economies
The US, the world’s largest economy, slid into recession in 2008, with its two straight quarters of declining growth and subsequent shrinking consumer spending having a domino-like effect on the other economies in the world. Consumer spending in the US was down by 3.7% in the third quarter of 2008. An increasing number of lay-offs and job cuts have been announced.
Elsewhere, Japan’s GDP shrank and exports declined as companies there cut production and overseas consumers cut back on their spending.
Western Europe was also affected. The British government confirmed that economic output had fallen by one- half of a percent in the third quarter of 2008.
Outlook
The International Monetary Fund (IMF) now predicts the US, European and Japanese economies will all contract in 2009. Hopes to keep the world economy afloat are pinned on the performance of the BRIC nations. While China’s retail sales grew by 22% in October 2008 over the prior year, it is nevertheless apparent that there will be slowdowns even in the BRIC economies over the next few years, as the global economic linkages are stronger now than in the past.
Impact
The impact on the toys and games sector is expected to be adverse. While many analysts argue that the sector is recession-proof, as many parents will not cut back on gifts for their children, it is nevertheless likely that parents will downgrade, buying lower-priced items and looking for bargains.
Price cuts are expected as retail chains look to attract customers with discounts and bargain deals. In the US, Wal-Mart, Target and Kids “R” Us have all announced slashed prices, with Wal-Mart looking at a psychological price of $10 for many of its toys.
In China, manufacturers will need to tap more into the domestic market export markets dry up.
Product Recalls Hit the Industry
The year 2007 could be described as the “year of the recall” in the traditional toys and games market. Millions of toys were pulled off the shelves of stores across the world. One of the first major recalls was the worldwide, voluntary recall of 325,000 Chinese-made Thomas the Tank Engine wooden railway toys. The recall, issued by the US-based RC2 Corp in June 2007, was the result of excessive levels of lead found in the toys’ paint. Other toy makers followed suit.
Market leader Mattel issued three significant recalls during a single month in 2007. More than 20 million units of Mattel’s products world-wide were recalled, including the company’s stalwart brands Barbie, Fisher-Price,
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GeoTrax and Dora the Explorer. In Mattel’s case, high levels of lead and small, potentially digestible magnets were the culprit. Other notable recalls included Chinese-made toy beads supplied by Aqua Dots that contained a substance that could have the same effects as “date-rape” drugs if swallowed.
Outlook
While both industry and government moved to address these issues in 2008, lingering doubts remained about the safety of Chinese-made toys.
With increased industry and government vigilance over Chinese-made toy products, the issue of excessive lead is expected to fade in 2009. Regardless, the incident has tarnished China’s image as the leading supplier of low- cost and reliable consumer products, and some consumers may continue to shun toys made in China regardless of increased scrutiny. Overall, the lead scare has made many parents rethink their ideas about what their children should be playing with.
Impact
The impact has been more significant in the developed countries of North America, the EU region and in Australia, where unsafe toys have become a sensitive political issue. The EU is looking at developing a mandatory global safety standard for toys to prevent unsafe products reaching consumers. Top toy manufacturers are backing this initiative, and representative from the EU commission and the US are due to hold talks to reach a trans-Atlantic agreement that they hope could pave the way for a global safety standard.
The US Congress is still considering ways to regulate safety in the toy industry, while in Canada the government tabled a new Canada Consumer Product Safety Act that will include higher fines for transgressors and an increase in the number of product safety inspectors.
Recent toy safety concerns have given Chinese products a stigma. The Chinese government moved quickly to address the issues about excessive lead levels. In September 2007, China signed a product safety agreement that prohibited the use of lead paint on toys exported to the US. In addition, China’s General Administration of Quality Supervision, Inspection and Quarantine suspended the export licences of the three Chinese companies linked to the recall of Mattel toys.
Production may move from China to other destinations, with domestic producers likely to get a boost, especially in Europe and the US. “Lead-free”, “Made in the USA” and “Phthalate Free” (a chemical compound used to make plastic flexible) are likely to grow in significance as key selling points for toys.
Licensing Deals Drive Increased Sales
Licensed toys and games continue to increase in popularity, especially among children, and they are increasingly found in all subsectors of the toys and games sector. Companies use licensing as means of making “easy money” as the success of a movie or a cartoon almost always ensures that the licensed toys and games associated with it will generate substantial income streams.
Companies no longer hesitate to produce licensed products. They look to whatever is available, including celebrities, movie superheroes and even fictional characters. Licensed toys and games have become extremely profitable for key market players that readily agree to pay large sums in order to acquire the licences to manufacture or sell toys portraying well-known or popular characters.
In the UK, for example, according to the NDP Group/Toy Retailers Association, licensed products accounted for around 26% of total value sales in the traditional toys and games subsector in 2007, up from 24% in 2006. More than £180 per year per child is now spent on licensed products for children aged 0–14, indicating that the UK licensing business is worth more than £2 billion per annum. GFK figures suggest that licensed products now represent about one-half of all toys sold in Australia.
Outlook
As both parents in the family often now work, they find that they have less time to spend with their children. As a result, children spend more time in front of the television, watching cartoons and movies targeted at them.
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When both parents work, there is more disposable income available. In addition, because the toys and games sector is expected to mature further over the forecast period, companies are likely to trade more in licensed products as they remain very profitable.
Toy manufacturers are looking to acquire more licensing properties and looking to exploit them, and licensing is shaping up to be the wave of the future. Studios holding new licenses are being more selective about the toys that bear their name. Now, studios and property owners are focused on which company has the best synergy with the licensed product. They ask themselves what innovation that toy manufacturer can bring to the license that will align it best with its brand image.
Impact
Over the 2006-2008 period, there were a number of significant movie license arrangements that drove tremendous sales in the toy sector. The Star Wars movie was supported by much hype, which LEGO capitalised on with its Star Wars range. The Cars movie was supported by Mattel’s range of toy cars that were a perfect fit for the film. Hasbro, through its property rights with the Transformers movie, saw increased sales of its action figures. On the other hand, although licensed toys have generally been successful in driving sales, licenses almost always provide only a small window of opportunity, and it is typically hard to generate long-term sales from licensed properties.
Movie tie-ins and licensed properties will continue play a major role in the worldwide toy industry. In a sector based on innovation and new ideas, licensing will provide new ideas when genuine product innovation is lacking. It is estimated that, by 2013, licensed toys will represent more than 60% of all toys sold in Australia.
At the same time, regional and local licensing deals are likely to be struck. The popularity of Japanese animation has made characters like Pokemon among the biggest licensing stories other than Star Wars. In China, the popularity of the Olympic mascots drove huge growth toy sales. In India, there was growing demand for lines of domestic action figures based on folk tales and legends and on local Indian celebrities.
With the growth of the video game subsector and the great popularity of certain games, it is likely that there could be licensing deals that lead to dolls/figures based on Halo, Lara Croft and other video game characters.
The creation of alternate virtual world identities could lead to a potential market for tailor-made dolls/figures. This scenario has huge potential, and it would enlarge the customer base for dolls/figures tremendously.
Adult board games based on such films as The Da Vinci Code could also find a market. Sports collectibles will continue to be a big draw.
Seasonality and Competition
Retail sales of traditional toys and games have historically been driven by seasonality and gifting. Today, the picture is more complicated by the competition from video games and from entertainment electronics, as well.
In Spain, around 65% of sales in the sector occur during the Christmas period. The Italian market in toys and games is also highly seasonal, with peaks in sales in three key periods: Carnival, Easter and, above all, Christmas, with the November–December period accounting for about 55% to 60% of total annual sales. So too in Portugal, where there is strong seasonality, with the Christmas period accounting 70% to 75% of total sales. Some of the main players have tried to balance sales throughout the year with promotions and branding manoeuvres. However, most Portuguese family incomes are augmented by holiday bonuses, so for most Christmas remains the best time to shop for non-essential items.
Players in Latin America also face strong seasonality issues. Generally, more than 70% of sales for both domestic and multinational companies in Argentina take place during the Christmas period, while in Chile it is 60% of sales. In the US, approximately one-half of annual sales are generated during the holiday season between Thanksgiving and Christmas.
Outlook
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For the traditional toys and games subsector, the gifting season will continue to be the most important driver of sales, and it is, therefore, unlikely that seasonality will be taken out of the marketing and competitive equation. The significant increase in the number of wealthy grandparents is likely to keep the demand for toys and games high during holiday season.
Competition for the gifting dollar is likely to become more intense over the forecast period, with items such as consumer electronics products, computer games and video games and fashion items, such as sports gear, attempting to grab an increased share of expenditure.
Manufacturers of traditional toys will be faced by the challenge of adapting their products to this changing market.
Impact
Continuing special holiday deals, combination offers and new product launches will be needed to keep traditional toys and games competitive and in the minds of consumers. Toy manufacturers will look at licensing as an attractive way to bring in new young consumers.
Coping with seasonality will also have an impact on the supply and distribution and inventory management systems of manufacturers and retailers. Companies will need to be able to gauge which products are likely to be “winners” that season and to ensure that these are not in short supply. In the US, where so much is imported, distributors have learned to increase the number of ports they use for imports.
Retailers are looking to expand the season through early promotions. This tactic is being attempted by e-tailers, as well.
Age Compression
Whether it is the result of savvy marketing, the growth of the internet or the increasing popularity of video games and other entertainment options, there is little doubt that children today are playing differently than they did ten years ago. “Kids getting older younger” and “age compression” are phrases used in the toys and games sector to explain the changing play patterns of urban children across the world.
With so many entertainment options to choose from, particularly now with video games and MP3 players, children are simply less interested in playing with dolls and plush toys. For older children, there is also a stigma attached to playing with more traditional toys while their friends are listening to music on their iPods.
Outlook
This trend will continue and is likely to grow, especially as children now enter the world of electronics at an early age. With video games now overtaking traditional toys as the leading product segment and with exposure to iPods, MP3 players and digital cameras increasing, children now want digital technology in their toys.
Sales in the pre-school toys and games sector are growing at a faster rate than sales in the overall traditional toys market. A convergence between toys and electronics can be expected in this subsector.
Impact
Age compression has led to the growth of high-tech toys and games, as well as to the shortening of product cycles.
Educational toy makers, such as VTech and LeapFrog, were the first to recognise this trend, bringing electronic educational toys to pre-schoolers. Now, mainstream traditional toy manufacturers, such as Mattel and Hasbro, have jumped on the electronics bandwagon, offering a wide selection of products.
According to recent market research, in Australia technological toys account for approximately 20% of all toys sold, with the most popular toy in 2006 and 2007 being Funtastic’s virtual pet Tamagotchi V3 and V4 respectively. In France, this trend was represented by the success of the Petshops by Hasbro, which saw demand
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grow by 18% in 2007 and 25% in 2008, thus enabling Hasbro to record a 16% rise in turnover in 2007. Petshops are little figures that are assigned a code, and they enable children to create a virtual life for them on the internet.
The Internet also played a role in the increased sales of traditional toys, as a number of companies took the industry by storm in 2007, most notably Ganz with its Webkinz. Once registered on the internet, these plush toys open a whole new virtual world for children. There has been a flurry of new Webkinz-like products, such as Mattel’s U.B. Funkeys. These toys often represent children’s first experience of the internet.
GLOBAL AND REGIONAL COMPETITIVE LANDSCAPE
Headlines • Mattel remains the market leader as Fisher-Price brings strong growth. • Hasbro is unaffected by product recalls and gains from popular licensing deals. • LEGO exhibits the strongest growth among the leading players as it takes advantage of a corporate restructuring and greater consumer interest in activity/construction toys. • Private labels and regional brands continue to grow, leading to a fragmented market. • Manufacturers make gains through the development of innovative technology-enriched toys.
Fisher-price Drives Growth for Mattel
It appears that Barbie’s lustre has waned in the global toy sector. A combination of product recalls and “old age” seem to have affected Mattel’s star brand. In the US, gross sales of Barbie fell by 15% in 2007. Internationally, real sales (taking into account currency exchange benefits) for Barbie were down 3% in 2007.
Strong worldwide growth for Mattel came from its Fisher-Price brand, whose retail sales, driven by infant and pre-school products, were estimated to grow by 16% in 2007. The brand has become crucial to the overall financial health of Mattel, and it is a strong indicator of the financial health of the overall toy industry in the US.
Fisher-Price was the preschool toy brand leader in 2007, followed by such other brands as Playskool from Hasbro, V Tech and Leapfrog. However, V Tech exhibited strong growth in 2007, and this prompted Mattel in 2008 to launch several new innovative products that combined electronics, entertainment and kid-friendly content.
Elmo, the Sesame Street character, has been always been a high growth ambassador for Fisher-Price. In 2007, Elmo TMX was the must-have Christmas gift for preschoolers. This was followed by Elmo Live in 2008.
The new product line that Fisher Price is now pushing is the Kid Tough range. These include DVD players, cameras and MP3 players that are highly durable, presented in bright and attractive plastic colours with large buttons so that children aged 3+ can have their own range of electronic entertainment.
Hasbro’s Playskool brand seems to be following a different path, not attempting to develop electronic toys for preschoolers. Instead, Playskool seems to be looking to expand its brand into the infant market, introducing a line of non-toy products called Playskool Baby Care that are available through the CVS chain in the US.
Hasbro Is “transformed”
For the most part, Hasbro escaped the tribulations of the 2007 product recalls, emerging relatively unscathed. At the same time, their fortunes have been literally transformed through licensing deals and the tie-ins with Hollywood film studios. In the markets researched for this report, Hasbro’s retail sales grew by an average of 14.5% in 2007. This above-average revenue growth was based in part on strong sales in both Eastern and Western Europe.
Hasbro’s CEO, Brian Goldner, is credited for having the vision to convert Hasbro’s Transformer toy line into a licensing property that generated more than $700 million in a 2007 movie, to be followed with a sequel in 2009.
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The Transformers brand has also been extended into a children’s television show, and it has become an important element of several online and interactive games.
As well, a GI Joe movie will be released in 2009. In 2008, Hasbro agreed to a six-year deal with Universal Pictures that calls for at least four films based on Hasbro properties to be produced.
Strategic agreements with Electronic Arts have led to the development of digital games based on Hasbro properties, including Monopoly. As well, Nintendo has developed Nerf N-Strike. Hasbro intends to increase its activity in the video games market over the forecast period.
Lego Shows Strong Gains
During the review period, LEGO has reaped rich dividends from a number of worldwide initiatives. These include a corporate restructuring, changes in its supply chain and a realignment of its product mix. LEGO has also benefited from a renewed interest among many parents in construction/activity toys. LEGO retail sales in the countries researched for this report grew by nearly 16% in 2007 over prior year.
Sales growth has exceeded company expectations, and the company has taken comfort in the fact that recent growth has come from classic LEGO products like LEGO City, LEGO Technic and Creator. The more recent Bionicle product line showed no growth in 2007, though it was one of the company’s best-selling product lines overall.
LEGO sales in Europe have grown much faster than sales in North America. The smaller markets of Australia, New Zealand and Mexico recorded double-digit growth for LEGO in 2007. With the opening of its first store in China, the LEGO Group has indicated that it believes its future growth lies in the Asia Pacific region, as well.
As more parents look to provide their children learning exercises through play, the outlook for LEGO looks positive. The company has focused on robotics to grow sales in the developed markets, organising competitions and events centred on their Mindstorm range of products.
The LEGO Group is also looking seriously at non-retail sales, pushing their bricks through schools, especially in Europe.
Private Labels Continue To Show Strong Growth
In the countries of Latin America and the Asia Pacific, the growth of imports and big box retailers has led to the direct importation and distribution of a whole host of toys and games, sourced directly from small manufacturers in low-cost production destinations. In Chile, for example, the share of private label traditional toys and games grew from just 2% in 2004 to 25% in 2007. In India, private label sales grew by nearly 45% in 2007.
In Western Europe and North America, however, there has been a growing trend towards a different kind of private label. Safety concerns coupled with environmental concerns have led to an increasing demand by consumers for locally manufactured toys or toys made from natural materials.
In 2007, private label retail sales grew 24% in Portugal, 14% in the Netherlands, 11.5% in Germany and by nearly 7% in Canada.
The Vedes Group, one of the three key buying cooperatives for specialist toys and games outlets in Germany, reports that the share of private label products in its overall sales stands at 12%. This share is likely to be similar for the other major buying cooperatives, Idee + Spiel and Ardek.
Will Bratz Survive?
Mattel’s iconic Barbie doll spent a good part of the review period staving off the challenge from the new doll on the block, MGA Entertainment’s Bratz. In 2008, however, much of the battle was played out in the US courts, with Mattel alleging that the designer of Bratz, Carter Bryant, was under exclusive contract with Mattel. Under those circumstances, Mattel claimed that the Bratz doll and its license belonged to them.
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In early 2008, a federal jury decided in favour of Mattel and decreed that MGA Entertainment pay $100 million in copyrights infringement to Mattel. Mattel was far from happy with that verdict, considering it a slap on the wrist. This led to Mattel appealing to a US district court, where it asked that all Bratz toys be impounded while claiming the license to make these dolls in the future.
In December 2008, the court ruled in favour of Mattel. The company was given ownership of Bratz, but the judge allowed the sale of Bratz dolls by MGA during the 2008 Christmas season. There has been a great deal of speculation regarding what Mattel will do with the Bratz line If they do kill the brand, then the existing Bratz dolls could become collector’s items. More likely, Bratz dolls will be added to the Mattel range to shore up Barbie’s declining sales.
REGIONAL TRENDS AND PROSPECTS
Headlines • Increased legislation on toy safety in the wake of product recalls. • New low-cost production facilities likely to grow in Eastern Europe and Asia Pacific. • Households see increasing disposable incomes as more women enter the workforce in Asia and South Africa. • Parents in the North and Latin America spend more on their children to give them a head start.
EU Region Passes New Regulations on Toy Safety
Toys have been subject to EU toy safety directives since 1990. These state that toys may not contain dangerous substances and must be designed and constructed so that they do not present health hazards or risk of physical injury.
The UK has incorporated this EU legislation into its own national law, but the EU’s objective of forming a single market in which industries such as toys and games are regulated by one set of European legislation remains to be achieved.
In 2007, more than 2 million counterfeit toys and games were seized by the customs authorities of the EU member states. Toys and games ranked fifth on the list of most counterfeited products, after cigarettes, medicine, clothes and electrical equipment and coming ahead of cosmetics, foodstuffs and computer equipment. In 2007, it was estimated that 85% of counterfeit toys and games originated in China.
According to the EU’s General Product Safety Directive (GPSD), producers and distributors of products intended for consumers have a general duty to place only “safe” products on the market. The GPSD applies to all products unless there are other more specific EU legislative requirements that govern a product’s safety.
In reality, these rules are difficult to implement because member states often differ in culture, system, legislation and in the ways they ensure legislation is upheld. As a result, many toys and games that do not comply with EU standards nevertheless reach a wide range of distribution channels.
The EU is also looking at introducing a mandatory global safety standard for toys to prevent unsafe products from reaching consumers. Top toy manufacturers are backing this initiative, and the EU commission and their counterparts in the US are due to hold talks soon to hammer out a trans-Atlantic agreement that they hope will pave the way for a global safety standard. Despite most consumers soon likely forgetting about the faulty Chinese imports, product safety will remain a top priority among governments. This has been confirmed by the recently introduced ban on magnets and the increasing emphasis on chemical safety in the 2007 European Chemicals Agreement, REACH. From 2009 on, manufacturers will be obliged to declare any health risks contained in their products, including materials that may have an effect on genetics or that may cause cancer. This information must be passed on to retailers, who must pass it on to consumers concerned about any products that may be dangerous to children.
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Western Europe Moves Production Facilities To Eastern Europe
Due to the recent expansion of the EU and its open economy, there are now more opportunities available to both manufacturers and distributors in the toys and games sector. There is also much more competition among industry players, especially at the lower end of the market.
This situation has forced many key players to restructure their operations. Large manufacturers, such as Mattel UK, Hasbro UK and LEGO UK, invested large sums during the review period relocating some of their factories to Eastern Europe, where the cost of labour is far lower.
The lower cost of labour in Eastern Europe should enable these key manufacturers to reduce their production costs. As well, distributors hope to be able to increase their margins as unit costs decline. In the race to cut unit prices, many manufacturers now find themselves under great pressure from distributors and retailers to continue providing cheaper products, especially in customised and electronic toys and games.
European companies are beginning to understand that China may be too far away, compared to Eastern Europe, to easily maintain quality checks. As well, labour costs in China are on the rise, bringing down the historical cost advantages.
The forecast period is likely to see this trend away from China continue, as more low-cost locations develop in Eastern Europe and South America.
Olympics Drives Demand in China
The growth of retail sales of traditional toys and games accelerated in China in 2008, boosted by the Beijing Olympic Games and the sales of Olympics-related traditional toys. Retail sales of traditional toys and games grew more than 29% in 2008 over prior year, an above-average growth rate.
Plush toys resembling the manga-like Olympic mascots helped drive sales to both Chinese consumers as well as to visiting tourists and attendees.
In China, more than 90% of consumers of traditional toys are children. It is estimated that some 80 million children live in cities, so there is a huge potential market in China that remains unexploited at a time when most families have greater disposable incomes to spend on their children.
On the other hand, over the forecast period it is likely that Chinese consumers will move from traditional toys to electronic toys, items that are seen by children as more attractive and more modern. Remote-controlled and battery operated vehicles are expected to drive demand for model vehicles between 2008 and 2013.
North American Parents Increasingly Look To Play As A Learning Tool
Activity/construction toys enjoyed above-average growth in 2008 in North America as parents moved away from dolls and figures, buying instead activity-based toys that they hoped would encourage learning among their children.
The lead scare did, indeed, depress some of the demand for dolls. At the same time, many new parents also looked for toys that would intellectually stimulate their children stimulus and encourage the development of basic skills. Parents across North America are striving to give their children a head start in terms of educational success and healthier lifestyles, and this is helping to drive demand for educational toys among infants and pre- schoolers.
In addition, with the increasing rates of obesity among North American children, parents are beginning to demand toys and games that help improve their children’s physical well-being.
The activity/construction subsector is expected to continue to drive sales in the traditional toys market in North America. This will no doubt be the fastest-growing subsector over the forecast period, as the fusion between toys and advanced electronics results in a wide range of new innovative products.
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Emphasis on Family Time in Eastern Europe Couples With Strong Economic Growth
Eastern European birth rates are declining rapidly, and many governments in the region, particularly the Russian government, are becoming increasingly concerned about the future demographics. In Russia, the government has implemented policies that encourage mothers to have more children. The second and third child in a family generates a financial bonus from the government. There are also social initiatives that encourage the improvement of family time. The Russian government has a policy of building strong families, and this is evident in efforts ranging from advertising campaigns to financial bonuses.
These government incentives tend to drive volume sales of toys and games sales in the region, as parents spend more on more children. The indoor games subsector has benefitted from these efforts, as families tend to buy indoor games in order to play them together.
In 2008, retail sales of indoor games grew by 27% in Eastern Europe and by 50% in Russia, compared to prior year. Over the forecast period, sales of indoor games in Eastern Europe are projected to grow at a CAGR of almost 14%.
The Eastern European region is expected to experience continued strong economic growth that will drive growth in disposable household income. This trend will keep sales of traditional toys and games on a growth path.
Latin Americans Spend Money on Their Infants and Toddlers
In 2008, retail sales of infant toys in the Latin American region grew almost 17% over prior year, the highest growth rate in any region.
The region enjoyed relatively stable GDP growth during the review period. This led, in turn, to increasing disposable incomes. As more women joined the workforce, there was also strong growth in the number of urban double-income households. These and other factors have influenced the spending behaviour of Latin Americans in the toys and games sector.
The feeling amongst many parents that they are spending less time with their infants and young children has driven spending in the sector, as parents look to provide toys that stimulate children and compensate for them being absent from the home. At the same time, the increase in the number of imported products has widened the range of products available on retailers’ shelves. Products that can help infants learn motor skills are very popular.
Fisher-Price, Megablocks, LEGO, Imaginarium and Playskool have pushed marketing efforts in the region in order to cash in on this trend. In Chile, sales of infant toys are projected to increase at a CAGR of just over 8% over the forecast period compared with just over 11% during the review period. This is a subsector where many innovative toys enter the market and where prices are generally affordable. This trend will continue to grow, as infant toys generally have a short life cycle.
In Mexico, the construction/ activity subsector is expected to see the fastest growth over the forecast period. This is due to more parents looking to provide their children with toys that will help them develop their learning skills.
Increased Disposable Incomes in South Africa
The sustained economic growth in South Africa during the review period led to a rise in household disposable incomes, and new consumption habits had a positive effect on the sector’s performance.
Increased urbanisation has led to changes in consumer lifestyles, including an increase in the number of working mothers and a decline in the average family size. As a result of these changes, many parents are spending less time with their children and trying to make up for it by buying them more toys and games.Increasingly, many absent parents are relying on purchasing toys to demonstrate their love for their children. On the other hand, they are also interested in adding value to their children’s playtime by purchasing toys that will enable their children to develop their skills and to learn while they play.
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The subsectors recording the highest growth in 2008 included pre-school and activity/construction toys and indoor games. Growth is projected to continue over the forecast period.
Soft/plush toys is a subsector that expects to experience modest growth, as these toys appeal to infants, children, tweenagers, teenagers, students and young adults. Sales of activity/construction toys will increase rapidly over the forecast period because of their developmental character. These toys provide a learning experience through play, and they are, therefore, a favourite choice among parents.
KEY DRIVERS AND PROSPECTS
Headlines • In 2008, retail sales of video games grew by more than 26% over prior year, reaching US$66.5 billion. • New-generation consoles generated buzz and excitement around the world. • Software sales grew nearly 31% in 2008 as players looked for more titles. • With 55% share of expenditure in 2008, video games software was the larger subsector compared to hardware. • Nintendo, Sony and Microsoft sell by far the most hardware, while the software market is very fragmented with Electronic Arts the leader in 2008. • Retail sales of video games are projected to grow at a CAGR of 12.4% over the forecast period.
New-generation Gaming Consoles Become Available
In 2007, all three seventh-generation gaming consoles (PlayStation 3, Xbox 360 and Wii) were available on the market for the first time. While these consoles had been launched regionally in 2005/06, it was only in 2007 that all three became available in all of the important international markets.
Outlook
The traditional five-year life cycle that has characterised sales of video game consoles over the years appears to be changing. Sony officials have projected that the life cycle of its current PlayStation 3 will be ten years, while Microsoft is looking at a seven-year life cycle for its current Xbox 360. Nintendo may also extend the life cycle of its Wii depending on the future pattern of consumer demand.
Extending life cycles beyond the typical five years is intended to take advantage of the products’ full market potential. By extending life cycles, console manufacturers will ensure that the reduction in prices that occurs over time will attract a broader spectrum of consumers.
Impact
New-generation consoles generated good retail sales growth in the video games hardware subsector. Between 2003 and 2008, the sector grew at a CAGR of nearly 23% worldwide. Per capita spending on hardware grew from US$1.4 in 2005 to US$3.2 in 2008.
The success of any new eighth-generation release will depend on the future sales performance of the current seventh-generation consoles as well as on the research and development of the next generation of consoles. They will will need to offer an entirely new and much more sophisticated gaming technology experience.
Game console life cycles will also be critical in determining the level of software sales. As the life cycles of consoles grow and as prices decline, the majority of software sales will during the latter part of the life cycle. Given the high costs of developing software titles, many game publishers wait for console sales to pick up in order to ensure they will have access to a critical mass of buyers.
the User Base Widens
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A growing number of women, baby boomers and seniors joined the ranks of gamers in 2007 and 2008, particularly in the well-developed markets like the US, Canada, Australia, UK and Japan. Women and older consumers have been the fastest growing demographics in gaming, adding to the core segment of young males.
One of the key attractions for the new gamers was the Nintendo Wii, which was easy to play and which had highly interactive gaming features.
Outlook
Wii’s broad software line-up, which focuses on sports and “family fun” games rather than “shoot-‘em-up” games that cater to a younger demographic, is expected to continue to grow the user base.
Future growth may also lie in developing video games with wide user profiles that can serve as the basis for social and family events. Nintendo, with its Wii, is targeting women with its low-cost, easy-to-use system that provides a wide range of activities and entertainment for the family.
Impact
As the user base has widened, so too has the market for casual gaming. Activision’s best-selling Guitar Hero III provided another example of how casual gaming has become the new norm. Casual gaming is helping software developers move further into the mass gaming market by offering user-friendly hardware and software, and this is expected to continue well over the forecast period.
Another impact felt in the sector has been the positive perception by consumers of these games. In particular, the Nintendo Wii is viewed as a tool that helps bring families together. As well, research by the Interactive Entertainment Association of Australia suggests that many parents view gaming as an important educational tool for their children.
The growth of casual gaming is expected to generate new investment in the gaming sector as it competes with other mass media, such as TV and film, for the attention of the audience.
Consoles Jump on To the Online Bandwagon
The growth of broadband worldwide has led to the craze for Massive Multi-player Online Role Playing Games (MMORPG) during the review period. MMORPG was originally perceived as a potential threat by hardware manufacturers, as players left their consoles to play online with a community of players.
In response to this trend, hardware manufacturers integrated online gaming options to allow consoles owners to play online with other players. Sony has made interactivity and personalisation a key component of the new PS3. Xbox 360 also offers an online gaming component to enhance interaction and to go beyond static gaming.
Outlook
To a large extent, the growth of online gaming will be determined by the growth of broadband worldwide. With their high broadband penetration rates, countries like the Netherlands, South Korea, Sweden and Denmark, despite their relatively small sizes, are among the largest online game markets in the world.
As broadband penetration grows in countries of Asia and Latin America, these regions will also grow into potential online gaming markets.
Impact
With the relatively high price of purely entertainment-driven consoles versus multi-use PCs, the growth of broadband in the countries of Asia, Latin America and Africa may not translate into strong hardware sales as users may look to play online PC games.
Console manufacturers may need to look at less expensive gaming options to attract users from these developing markets. The Wii, almost US$200 cheaper than the Xbox 360 and PS3, has made a good start in this direction.
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Mobile Phones A Growing Threat
Mobile phones are the most widespread digital product in the global market. Mobile phones have also become gaming devices, and they are now capable of downloading games with sophisticated graphics and displaying them on relatively large screens. Mobile operators typically include free games with their handsets to stimulate interest and to induce mobile subscribers to pay incremental fees to download additional games.
The popularity of video games via mobile phones provides software developers with an opportunities but it creates competition for hardware manufacturers, especially in the hand-held market segment.
Outlook
The outlook for the mobile phones market is promising and positive. The imminent rollout of 3G networks and the growth of smartphones that play video games will fuel the wireless video game market over the forecast period.
Nokia’s N-gage, Apple’s iPhone and Google’s Android are at the forefront of this trend for sophisticated smartphones, which are becoming handheld devices.
Impact
For video games software developers, mobile gaming represents another revenue stream. Characterised by high volume and low value and based on subscription revenues, this sales model is quite different from the traditional console-driven software sales model. Research agency In-Stat forecasts that by 2013 the global mobile gaming market could be worth US$6.8 billion.
For video game hardware manufacturers, the growth of mobile gaming could impact future sales, especially sales of handheld consoles like the PSP and the Nintendo DS. The pricing of the handheld consoles versus smartphones and the high-end multimedia players and the availability of games for each platform will be crucial to determining future trends. The iTunes App store already has some 1,500 games, compared to around 300 for the Sony PSP and 600 for the Nintendo DS.
Piracy Continues To Be A Significant Issue
Piracy continues to raise concerns among manufacturers, as pirated products account for a staggering 50% of sales in the video games software market. The current legal framework is very ineffective in targeting the guilty parties, most of whom are individuals operating in their own homes.
Piracy is in danger of becoming a habit among many teenager consumers who enjoy having particular games before everyone else, usually for free or very low price.
Outlook
High import duties are one of the reasons behind the strong demand for grey market software and for pirated CDs and DVDs. In Brazil, taxes constitute 257% of the f.o.b. price of consoles and 233% of games. In Chile, Nintendo reported that it had lost US$975 million due to piracy. Almost 70% of total games played by Romanians are either bought as illegal copies or downloaded from the internet.
During the review period, both governments and private companies took action against piracy, seeking to eliminate illegal products. There were several advertisements on TV and in magazines raising the issue of illegal products. Some were very aggressive, appealing to people’s moral values. Regardless, they seem to have had little impact in dampening the growth of pirated products.
The growth of purchasing power over the forecast period could help bring down piracy, as many consumers look for better quality, company-supported products.
Impact
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Piracy is having a significant impact in the sector, particularly in the countries of Latin America and Asia. The impact is not just on video game software producers but hardware producers, as well. Many original titles are sold at very high prices and brought into the country by individuals or small import companies.
Video game hardware companies like Sony, Microsoft and Nintendo don’t sell their products directly. Rather, they sell them through third parties. Counterfeiting levels are so high that even big retail stores sell ‘unblocked’ consoles with chips that allow them to read illegally copied CDs.
The wide distribution of illegally copied DVDs and CDs led to the popularity of PC games among members of the low-income segments.
Reduced import duty rates and the simultaneous growth in purchasing power could steer consumers away from pirated products towards legal products. In order to provide some kind of “plus” to encourage consumers to buy legal software and hardware, companies need to increase their presence in countries where they are currently only represented by distributors.
GLOBAL AND REGIONAL COMPETITIVE LANDSCAPE
Headlines • With a 21% share of retail sales in 2007, Nintendo was the worldwide leader in the video games market, pipping Sony’s 19% share. • In 2007, Sony clung on to its lead in console sales with a 33% share of retail sales in the video game hardware sector in the countries studied for this report. • Sony, Nintendo and Microsoft control almost 81% of sales in the video game hardware retail sector. In contrast, the video games software market is highly fragmented.
the Year of Nintendo
In the hardware sector, 2007 was arguably the year of Nintendo, as the company widened the gaming consumer base by attracting the middle-income groups with its lower-priced Wii.
In what might be considered a very confusing market for non-gamers, the simplicity of Wii managed to break through the clutter and break down barriers for new consumers. Nintendo attracted non-traditional users, such as women and those over 60 years-old, with easy-to-play titles such as Dr Kawashima's Brain Training and Wii Fit.
The Nintendo DS was also effective in promoting Nintendo’s Brain Training software among middle-aged people who sought to stimulate their memories and learning processes.
In the thirty markets studied for this report, Nintendo notched up retail sales of US$11 billion, outperforming Sony, the erstwhile leader of the video games market. Sales in 2007 more than doubled those of 2006. As of March 2008, the company reported selling a cumulative 81.1 million Game Boy Advanced, 70.6 million Nintendo DS, 24.5 million Wii and 21.7 million Game Cubes. Software sales totalled more than 1.1 billion units. For the Wii, FY08 saw sales of 18.6 million units.
Sales of the Wii have arguably been depressed by production shortages and a lack of direct company presence in countries like Brazil, India and Turkey.
Ps2 Continues To Outsell Ps3 for Sony
The 2006-07 launch of Sony’s new-generation PS3 console did not translate into the immediate success that the company hoped for. The PS3 was not as successful as the Wii, and PS2 sales in FY07 (ending March 2008) were higher than sales of the PS3. According to the company’s Annual Report, while PS3 volume sales in FY07 stood at 9.2 million units worldwide, PS2 sales continued to be strong at 13.7 million. The handheld PSP also enjoyed high sales of nearly 14 million units.
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Sony’s Game segment incurred operating losses of over US$1.2 billion dollars in FY07. This was not unexpected, as it is widely believed in the industry that the PS3 was priced below its production cost in order to remain competitive with the Xbox 360. In order to revitalise sales, Sony reduced the price of the PS3 in 2007/08.
However, it is possible that, in the coming years, the profitability trend could be reversed. Most importantly, the company’s production costs have fallen. At the same time, Blu-ray has become the industry standard for high- definition DVD, as HD DVD development has ceased. The PS3 is the cheapest Blu-ray DVD player on the market, and more consumers are likely to purchase the console to access its DVD player functions. A video service on the PS3 and PSP platforms is also to be launched to tap into this user segment.
Sony is hoping that the launch of new games such as Gran Turismo 5 and Grand Theft Auto IV will boost its sales in 2009. The shortage of software titles for the PS3 platform has dampened console sales thus far, and the company will look to address this issue. A licensing deal has been struck with FIFA, the world football federation, for football games. Online gaming is also being enabled.
At the same time, Sony will continue to promote the PS2 in the emerging markets of Africa, Asia and Latin America. Cumulative volume sales of PS2 reached 130 million units at the end of the review period, making it the largest selling platform.
PSP has also brought success to Sony, and a new slimmer version was launched in 2007 with Skype capabilities, linkages with the PS3 and other new services.
the Xbox 360 Continues To Have A High “game Attach” Rate
Microsoft continues to target the serious gamer with the Xbox 360. The Xbox 360 graphics, games and Xbox live internet gaming has been popular with the core user segment, almost entirely young and male. The US remains the most important market by far, accounting for close to one-half of overall Xbox 360 sales.
Xbox is also the console with the highest “game attach” rate. This is defined in the industry as the average number of games each console owner buys. For the Xbox 360, Microsoft managed a "games per console" average of 8 to 1, the highest in the industry, during the 2008 holiday season in the US. This was good news for third-party game developers, and it is likely to encourage more games to be developed for this platform.
The strength of Microsoft’s PC distribution network has also held the company in good stead, allowing Microsoft to have a presence in many more worldwide markets than Nintendo. Microsoft is very strongly positioned in countries like China, India, Malaysia and South Africa, all of which are high-growth markets, and this is promising for future sales of Xbox.
Software Subsector Witnesses Consolidation
While the hardware market is dominated by three players, the software market is more open and diverse with several regional players and local developers. However, the software market is currently undergoing a period of consolidation.
At the end of 2007, French player Vivendi Games acquired a 52% stake in Activision and created a new entity, Activision Blizzard, which in terms of size is close to that the market leader Electronic Arts. Electronic Arts, the current number one in the market, intends to acquire another software developer, such as Take-Two, to strengthen its position as market leader.
Activision Blizzard had a whole host of hits in 2008, including leading titles Call of Duty: World at War and Guitar Hero. Interestingly, Nintendo made huge strides in first-party video game software sales, as its own games for the Wii proved to be very popular.
Is Apple Going To Launch A Hand-held Console?
Apple has filed an application with the United States Patent and Trademark Office for a patent covering hand- held units for playing electronic games, hand-held units for playing video games, stand-alone video game machines, LCD game machines and electronic educational game machines and toys.
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If successful, this move could have a significant impact on the well-established positions of Sony, Nintendo and Microsoft, especially if Apple managed to create as much “buzz” with these new products as it did with the iPod and the iPhone.
REGIONAL TRENDS AND PROSPECTS
Headlines • The US remains by far the most important market for video games with retail sales of US$24 billion in 2008, representing close to 36% of overall global retail sales. • With the good holiday season in 2008, retail sales of video games in the US enjoyed above average growth of 31% over prior year. • Hungary, South Africa, and China have enjoyed high levels of growth over the review period, with retail sales of video games growing more than five-fold. • Console-based gaming is dominant in the developed markets of North America, Australia and Western Europe, with PC gaming being the most popular in the rest of the world. • Growth in purchasing power and better government controls could bring down piracy levels in Asia and Latin America over the forecast period, generating growth in the organised retail market.
New-generation Consoles Expected To Keep Video Games Sales Buoyant in the US
Despite worries about the economic recession in the US, retail sales of video games proved resilient. The NPD Group released data for November 2008 sales which reflected the start of the holiday season. Their figures indicate that hardware revenues were up 10% compared to prior year and that video game software sales grew by 11%.
For Nintendo, it was a crushing performance, with their Wii outselling Xbox 360 by three to one. Microsoft also took comfort in the fact that Xbox 360 outsold the PS3 at a rate of three to one. For Sony, it was dismal performance to say the least. Even taking into account that PS3 is the most expensive console, sales in November 2008 were below par. Sony may need to cut prices even further in coming years and shore up its software line, as well.
A price drop seems to have helped boost Xbox 360 sales in 2008, and its software sales were also robust. Gears of War 2 sold 1.6 million units in November 2008 (according to NPD data), making it the best selling game of the month.
By 2013, video game retail sales in the US are expected to reach US$35.4 billion. The key driver of growth over the forecast period will largely depend on the longevity of the current seventh-generation hardware consoles. Traditionally, the life cycle of gaming consoles is five years, but it is expected that the current generation may last much longer.
On the other hand, the economic recession in the US is an immediate concern to the sector, with the inherent job losses and the adverse effect the state of the economy will have on consumer spending.
Football Fever Hits Western Europe
The 2006 FIFA football World Cup, held in Germany, was followed up by the launch of several football-based video games. These were especially popular in Western Europe, and they helped widen the user base for consoles in the region.
In the UK, these video football games were targeted at both adults and children, thus encouraging family participation, particularly via the Wii and PS3. Nintendo gained the leadership position in the UK, unseating Sony, helped by the popularity of the Wii Sports software.
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In 2008, Italy witnessed growth of 37% over prior year in retail of sales video games, as the launch of the PS3 and the Wii tapped into the adult market.
It’s expected that the consumer base will continue to widen over the forecast period, particularly as young players take their favourites games and their handhelds and consoles into their adult lives.
Legislators Look To Further Regulate the Market in the Coming Years
The European Commission has invited member states and players in the video game industry to regulate the sale of products in shops by helping draft a retailers' code of conduct. This is due within two years.
The only control in most countries in Europe is the implementation of the PEGI (Pan-European Game Information) rating system, but the system is not backed up with legislation.
The introduction of the new code could have an impact the creativity of video games software designers over the forecast period.
Consoles Anticipated To Become Important Part of Family Entertainment in Australia
In 2008, retail sales of video games in Australia increased by more than 54% over prior year, as all three new- generation consoles were launched, revolutionising gaming and entertainment.
According to the Interactive Entertainment Association of Australia (IEAA), 15.4 million video games are sold each year in Australia, driving the household penetration rate of gaming consoles to 35% of all Australian households. According to the IEAA, while 60% of current gamers are male, women and older Australians are the fastest growing audience for interactive games and the average age of gamers is now 28 years-old. The face of gaming has changed quite dramatically over the review period. In Australia, it’s now expected that 50% of gamers will be women by 2010.
With the broad popularity of its Wii consoles, Nintendo has been the catalyst in driving this change in demographics. The Wii product is very much marketed toward the family and casual gamers. On the other hand, the PS3 has moved to occupy a niche as a complete entertainment system with its built-in Blu-ray player.
The increased number of families, women and the older consumers using video games is likely to lead developers to change the way games are developed and marketed. It’s expected that there will be more games launched that mum, dad and the children can play together, prompting social and family interaction.
Eastern Europe Takes To Online Gaming
The increased household penetration of PCs in Eastern Europe, together with the growth of broadband availability, has made the region a strong market for PC video game software. The growth of broadband has also led to an increase in online gaming in the region and, in turn, an increase in piracy. High prices (relative to purchasing power) have dampened sales of consoles. In 2008, growth of retail sales of video games in Eastern Europe region was 22% over prior year.
PC games continue to be most popular in the region for two simple reasons. First, the household penetration rate of PCs is growing, and the prices of PC games are much lower than games designed for consoles. Second, another generation of popular games (and, in turn, gamers) is entering the scene, based on online and subscription-based gaming services that charge players a small monthly fee to access hundreds of PC games. This is especially popular among casual gamers, many of whom are reluctant to pay for games they can play somewhere else for free.
It is estimated that 80% of the games sold in Poland come from the PC world, a situation that is opposite to what is happening in most other Western European markets. Almost 70% of games played by Romanians are either bought as illegal copies or are downloaded from the internet. Importers, distributors and retailers are attempting to stop piracy because, at the moment, pirated products are their biggest competitors.
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Japanese and South Koreans Gamers Appear Jaded
The two highly developed markets in the Asian region, Japan and South Korea, are beginning to show signs of saturation and maturity. They are also showing signs of “gamer drift”, as consumers find nothing to prompt them into purchasing new products.
In Japan, the 2006/2007 excitement of Nintendo and PS3 was followed by a sense of consumer lethargy in 2008. The Japanese market was saturated, and products had much shorter life cycles. In 2008, retail sales of video games grew 8% over prior year. Many gamers tended to drift as they were unable to find new software that sparked their excitement. Sequels and more sports games did not catch their fancy.
In contrast, in South Korea it’s the online market that is regarded as saturated, as the majority of online games enjoyed by players are those developed earlier, such as KartRider, Lineage II, World of Warcraft and StarCraft. The lack of new blockbusters indicates that the Korean online games market is in serious need of change. Because there has been no major sales drive, Korean companies are now risking huge investments to develop mega-scale products. As well, many games are considered to be very similar, a situation that arises when popular games are imitated by their competitors. Typically, little success is gained from imitation. For example, first-person shooter (FPS) games, such as GameHi’s Sudden Attack and Dragonfly’s Special Force, were very popular over the review period. Their success led to the development of a series of very similar products, all of which died immediately.
Chinese Forecast To Continue To Drive Growth in Asia Pacific
During the review period, video games developed quickly in China. Now, about 84% of video games sold in China are online games. MMORPGs (massively multiplayer online role-playing games) are very popular among domestic users, particularly among young people.
In 2008, retail sales of video games were US$2.2 billion in China, making it the second-largest market in the region, only behind Japan. Retail sales grew 30% in 2008 over prior year.
Chinese-themed and advanced casual games are expected to drive sales over the forecast period, as game operators enhance efforts to secure revenue from free-to-play games by encouraging a switch to the pay-while- play mode. For manufacturers, there will be new challenges relating to licensing and digital rights, and these must be resolved well before new games can be developed and implemented.
Console brands are seeking to establish themselves in anticipation of future sales growth. Microsoft’s Xbox 360 has been the early mover in China. There is a strong threat from online and mobile gaming. Console and software marketers will seek to increase revenues from diverse streams in order to tap into various forms of business.
Console Manufacturers Look To Increase Their Presence in Latin America
Currently, Latin America is a small market for video game manufacturers. In 2008, retail sales in the region were US$4.5 billion, of which 60% came from sales in Mexico. However, the region is exhibiting good growth rates; sales in 2008 grew by more than 41% compared to prior year.
The region has been traditionally dogged by piracy. Grey market sales are high as a result of high import duties. Since 2007, console manufacturers have been making a concerted push into the region via either authorised distributors or direct company presence.
Sony has a strong lead in Argentina and Mexico, while Microsoft has made a strong push in Brazil. In Chile, Nintendo saw its sales double in 2007 as a new distributor focused on improving sales there.
Sales of legal software and other mainstream products are expected to grow at a faster rate than sales of pirated and grey market products over the forecast period. However, sales of the latter will continue to be a force in the short term.
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