A POSTIVE OUTLOOK FOR 2017 Toy Industry Poised for Strongest Growth in 20 Years by SEAN MCGOWAN, managing director, Liolios Group THESE ARE TRULY EXTRAORDINARY times for the U.S. toy industry. The NPD Group reported that U.S. toy retail sales rose 7.5 percent in the first half of this year, even faster than the 7 percent growth posted in the first half of last year. This is the strongest two-year year-over-year growth that the industry has posted in more than 20 years. I will discuss some of the factors driving the sales increase, the outlook for some of the stronger categories, and the lessons to be learned from the runaway success of Pokémon Go. CONTINUED STRENGTH The most surprising aspect of this year’s growth is the fact that it comes on top of last year’s rise in sales. Often in recent years, if a specific product or brand drove growth, the comparisons would be difficult the following year, and the product (and, by extension, the category or the whole industry) would see a decline. It’s apparent that a single category or brand is not driving the industry growth. One obvious source of growth in the first half of the year is a huge increase in sales of Star Wars toys and action figures. Indeed, Star Wars was the brand that contributed the most to the growth, but bigger dollar gains were also posted in the super-categories of outdoor and sports (Nerf, etc.) and dolls (Shopkins, Barbie, and others). This year’s growth is unique in that the success of some toys is not necessarily coming at the expense of others. Kids don’t always have to choose one toy over another—they can like and ask for more than one, or none, for that matter. Whatever the marketing folks in the toy industry are doing, it’s working. Another interesting factor in the industry’s growth is that multiple retailers are reporting strong sales. We believe that Amazon’s growth is outstripping that of its main competitors, but the others are also seeing increases. For example, Toys “R” Us reported modest increases in U.S. samestore-sales through the first 21 weeks of the year, compared to declines of 2 to 3 percent
last year, but the performance—excluding the entertainment category, which includes video games—was much stronger. We believe Walmart and Target are holding their own as well. Just like toy categories are growing without stealing from other categories, retailers are also growing without necessarily taking all the sales from other retailers. This type of scenario has not been seen in the industry since the early 1990s. It is due to a combination of strong licenses, creative use of those licenses with toy innovation, stronger consumer purchasing power (aided by low inflation, especially in gasoline prices), and the continued rise in online shopping, which makes the buying experience easier. In theory, a strengthening economy should help lots of product categories, but the toy sector is doing much better than other areas of consumer discretionary spending. The industry is offering compelling play patterns backed by attractive licenses in an environment where parents are happy to spend money on their kids. But can these licenses sustain the torrid pace? History suggests that trees don’t grow to the sky, and some of the properties that have seen the biggest increases may have difficulty anniversary-ing these growth rates.
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This is the strongest two-year yearover-year growth that the industry has posted in more than 20 years.
THE SUCCESS OF POKÉMON GO Now, let’s turn our attention to a property that pretty much nobody at last year’s Dallas Fall Toy Preview, or even this year’s North American International Toy Fair, predicted would sweep the nation: Pokémon Go. By now, unless you’ve been living under a cairn, you know that Pokémon Go, a mobile game launched in the U.S. on July 6, has become one of the most downloaded mobile games in history (more than 100 million downloads in early August), and is rapidly becoming one of the strongest players in terms of separating gamers from their money. Why is Pokémon Go a hit and why did nobody see it coming? Second question first: The engine of the game is based on an earlier game called Ingress, which was developed by Niantic when it was still part of Google. Ingress also featured augmented reality (AR), and required players to wander around the “real world” capturing AR images that would pop up on-screen depending on their location. Ingress was reasonably successful for
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Star Wars is up big in the first half of this year because there wasn’t much driving it in the first half of last year. In the second half of this year, we will see continued demand for products tied to The Force Awakens, but it will be up against last year’s surge, which began with Force Friday. The launch of Rogue One around the holidays will help this year’s growth, which means two relatively recent films will drive demand. However, next year, the comparison is likely to be more difficult, especially if carryover demand for Rogue One toys is less than the demand for Force
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Awakens toys in the wake of that film’s launch last December. But Star Wars isn’t the only factor driving licensed toy sales. Next year, there will be an impressive array of films that could drive and sustain strong toy demand: Beauty and the Beast, The Lego Batman Movie, The Lego Ninjago Movie, Wonder Woman, Justice League, Guardians of the Galaxy Vol. 2, Power Rangers, Cars 3, My Little Pony: The Movie, Transformers: The Last Knight, Smurfs: The Lost Village, Barbie, Spider-Man: Homecoming, Captain Underpants, Ferdinand, Wolverine 3, Despicable Me 3, and others. While some of the properties that have made for strong toy sales during the past 18 months may lose some steam over the next 18 months, there will be plenty of new entertainment content coming in strong. If growth in toy sales doesn’t sustain at current levels next year, it won’t be because of a lack of licenses.