Toy Licenses: How Important Are They?

Studying market data including diagrams

By Lutz Muller :

The licensed toy segment is large and continuously growing. According to the NPD Group, the overall toy market in the U.S. declined by 1% last year, while toys carrying a license grew by 3 percent and now represent about 31 percent of the U.S. toy market in value.

The reason why the licensed segment grows at the expense of all other products is that licenses provide a number of major benefits. A good license is a key that opens important doors. It gets you into the major retailers and onto their shelves, which you might otherwise not accomplish. It exploits consumer awareness of a movie or TV character, and hence enhances the appeal of a product. It is also about 50 percent more likely to lead to an impulse purchase in the store.

While top licenses are expensive, they tend to produce sales, market shares and profits for the licensee. Second-rate licenses tend to be more costly in the long run, because they typically do not provide the same benefits - they do not necessarily get you into the right retailers, and they do not give you the same built-in sales and market shares.

The benefit of a first-class license is best demonstrated by looking at the Amazon best-selling toys. In late April, 22 out of the top 100 toys were license-based, and of these 22, 13 were for Frozen , the fantastically successful Disney ( DIS ) adaptation of the "Snow Queen" fairy tale:

Source: Klosters Retailer Panel

What is not shown in this table is the Jakks' ( JAKK ) Frozen ice gown, which has been sold out since January.

This reinforces the view held by the national buyers that the main drivers for licensed toys are movies screened in cinemas. One major reason for this is that audience numbers for kids of the ages of 2-11 years old have held reasonably steady between 2009 and 2013.

The same cannot be said of Cable. Cynopsis Media reports audience numbers of the 2-11 age group, and these are its statistics for comparable weeks in mid-February between 2009 and 2014 for the top 10 basic cable ad-supported networks:

(click to enlarge)

Source: Cynopsis Media

There is also considerable evidence suggesting that a TV serial will not produce the same toy sales volumes compared to one blockbuster movie - e.g. Transformers: Dark Of The Moon in 2011 produced nearly three times more action figure sales than last year's TV production of Transformers Prime Beast Hunters , according to Klosters Retailer Panel data. Another way to look at this is by reviewing web searches, which suggest consumer interest levels. The chart below compares three licensed brands during the 12 months preceding April 12, 2014: - The Hobbit: The Desolation of Smaug released on DVD on April 8; Teenage Mutant Ninja Turtles , shown on Nickelodeon, and Frozen on the big screen:

Source: Google Trends

It is therefore no surprise that toy licenses based on movies shown on the big screen are increasing in number, whereas those from TV movies and serials are declining. While there were five TV offerings last year ( Transformers , The Hulk , The Avengers , Max Steel and Scaris ), there is now only one scheduled this year - Slugterra . In contrast, there were 13 toy-related movies shown in cinemas last year, and 17 are scheduled this year:

Source: Box Office Mojo

Note that the number after the title indicates the fact that the movie is part of a series, counted from the year 2000. For instance, the "2" after Smurfs tells you that it is the second Smurfs movie since the year 2000 whereas the "1" after Captain America tells you that it is the first.

This is relevant, since there are indications that the box office result of a movie tends to decline after the second entry in a series, while there is very clear evidence that this is also the case for the related toy sales. While a kid may want to see the third Hobbit movie, this does not mean that he or she will also want to get the action figures to go with it, because those from earlier movies are likely still sitting in the toy box. There is also considerable evidence that too many movies in the same time slot tend to cannibalize each other. Both factors are of concern to buyers this year, and their ordering patterns reflect this.

The Downside of Licensed Toys

Apart from the possibility that licenses could, over time, become less effective as toy sales drivers, there are other drawbacks as well. One of them is cost. A top license typically goes for about 10 percent to 15 percent calculated on the manufacturer's sales. There also are sales minimums to be attained which, if not met, can be prohibitively expensive. Also, a license is given over a fixed period only, and may not be renewed at the end of it, so a manufacturer may find itself in a position where it has built a large part of its business around a license, which then gets taken away. In short, the licensor is in the driver's seat, and the licensees pay for it. There are two exceptions to this rule: Lego, in the Construction toy category, and Hasbro ( HAS ), in Board Games. Both have such a dominant position in their markets that they are in the driver's seat, and it is the licensors who come calling. As a result, these companies can pick and choose, and the terms at which they accept a license are much less onerous than what would otherwise be the case.

With these two exceptions, toy licenses based either on TV or on movie series may have whiskers on them, and there is little doubt that some toy companies are actively working on lessening their dependence on them. Mattel ( MAT ) is a case in point. The toy manufacturer bought HIT Entertainment, a move which not only brought Thomas the Tank Engine, previously licensed by Mattel, into its portfolio, but also added a slew of characters, such as Bob the Builder, Mike the Knight, Sam the Fireman, which will allow future product developments without the need for in-bound licensing. Mattel also created the successful Monster High, followed by the Ever After High line extender, which again lessens its dependence on outside licenses. Mattel also bought Mega Bloks, which will allow it to roll all of its own brands into the rapidly growing construction toy category. With American Girl, Mattel went one step further - it not only created the brand, but built its own stores in which to sell the products. Some companies, such as Melissa & Doug and MGA Entertainment, do not enter into any license relationships at all.

In essence, while licenses have a place in toy marketing and will not go away, these may often be a Trojan Horse gift to be treated with great care and circumspection.

(This article was first published by the Toy Book on June 13, 2014.)

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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