The toy industry is quickly learning how to best respond to a changing market. The main issue cited is that women are starting families later in life and having fewer children. Further, the medium for children’s toys is changing: physical toys are being replaced with electronic versions. The changing market occurred faster than Hasbro and Mattel could respond, resulting in Hasbro’s year-on-year operating profit down 11% and Mattel’s net income down 24%. The Economist points out that despite the two companies’ losses, “global sales growth for all traditional toys and games was 5% in 2012.” This further underscores the market shift toward a technological medium. Smartphones and tablets have directly reduced the toy industry’s market share.
This shift does not mean that physical toys will become obsolete. Instead, characters will have to be integrated into multiple media – video games, iPhone apps, dolls, etc. – in order to ensure success. Sales for virtual renditions may be the catalyst for characters in other media, as the platforms that support applications and video games are far more robust than physical toys like dolls. Hasbro is gearing for this transition by purchasing a 70% stake in a mobile gaming company, Backflip Studios. Further, Hasbro is working to translate its board games into video games.
Of the two companies, Mattel is in a more stable condition. Mattel’s international sales grew at 4% last year while Hasbro lost 4% in sales. Mattel’s international position highlights its advantage over competition, as “North America is a saturated market, where toy sales are flat-lining,” which means that growth will likely have to happen on the international playing field.
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As the shift turns towards electronic games, manufacturers of toys in China will see reduced sales. In the picture montage in the Economics 274 class, pictures of the poor working conditions in China for toy mass producers struck an emotional cord. Could the music industry be a precursor to what children’s toys will be? If you produce 1 copy of a game what stop that person from putting it on the web and allowing everyone to download it for free? You can find videogames now for free which in the beginning were sold for upwards of 60dollars. Whether this is a good change or not is yet to be seen.
Branding issues arise: Hasbro has their in-house palette but may not be able to tie up with outsiders to sell toys tied to electronic games. Instead, such firms may try to contract directly with producers in China (not hard, lots of capacity and expertise in making molds) and do their own distribution (that’s probably the real entry barrier). Here Walmart may be their friend, you don’t need a huge sales force in you can get on their shelves.
The growth of the “traditional toy” industry, however slight, suggests that the Herfindahl index is shrinking. The industry is still growing, but to two major players, Hasbro and Mattel, are losing their grip on the market. The sale of “traditional toys” is still growing, which does not necessarily suggest that “smartphones and tablets have directly reduced the toy industry’s market share.” Perhaps the industry is growing at a smaller rate, but is this phenomenon driven by parents who are opting to buy games on their phones rather than buy toys for their children? I guess it depends on the definition of “traditional toys.” Where do video games and video game consoles fall in this equation?
It’s interesting that the article would cite the fact that women are having children later in life. The fact that they are having fewer children is important to note. But why are women having children later in life? Could it be that they want to save money? If so this would not necessarily explain the shrinking toy market.
It is interesting the way technology and tablets seem to be replacing old fashioned toys. I know from personal experience that my sister and her family chose to go with a tablet as entertainment. The argument against this technology goes something like “Tablets take away a child’s need for imagination.” Did this article speak at all to that issue?
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