Entertainment licensing: Short burn falls out of favor as market wakes up

After a year of near stagnant growth, and dire predictions for the licensed toy biz, 1999 marked a major comeback. U.S. toy sales jumped 7% last year, from US$21 billion in 1998 to US$22.5 billion in 1999, according to the NPD...
February 1, 2000

After a year of near stagnant growth, and dire predictions for the licensed toy biz, 1999 marked a major comeback. U.S. toy sales jumped 7% last year, from US$21 billion in 1998 to US$22.5 billion in 1999, according to the NPD Group. And despite rumors and media reports that licensing was on the rocks, in large part that increase can be attributed to the popularity of toys derived from entertainment-based properties. According to NPD data, for the period from January to October 1999, two such properties, Star Wars and Pokémon, ranked second and third respectively in terms of overall dollar share (Barbie ranked first), controlling 4.9% and 3.5% of retail sales in the toy category respectively. More than that, taken together, they nearly doubled the combined market share of the two top licensed properties of 1998, Winnie the Pooh (2.4%) and Sesame Street (1.9%). LIMA, the Licensing Industry Merchandisers Association, estimates that licensed toys accounted for 40% of all toys sold last year, up 5% from five years previous. It’s all welcome news for those who still view licensing as an effective driver of toy sales.

Still, toycos are not rushing back in to license every property they lay their eyes on. Instead, they are slowly reinventing the business by shifting their property portfolios away from shooting-star blockbusters towards more reliable properties, which are often supprted by TV, more established features or books. Along with this new conservatism comes more realistic expectations regarding the performance of high-profile properties and more careful consideration of which properties to invest in.

‘There’s no way we set out and say that 20% of our business must be licensed, because that would be setting ourselves up for failure,’ says Joanna Reesby, senior VP of business affairs, Hasbro Properties Group. ‘It’s more a question of figuring out what is hot and what we think will drive our business. In 1997, when we ran toys for Jurassic Park, Batman and Star Wars, it was a heavily licensed year, and in 1998 we had fewer licenses. Last year was very big again with Phantom Menace and Pokémon, but 2000 will probably be less so,’ says Reesby. She adds that last year Hasbro sold roughly an even mix of licensed and non-licensed boys toys domestically.

Leo Hauser, co-CEO of St. Louis-based Trendmasters, says his company produces a 50-50 split between licensed and non-licensed toys, and he views the rise in sales of licensed product as a reaction to the quality of the licenses in 1999 that the toys were based on. ‘I think toy companies will continue to look at entertainment-based licensing in exactly the same way they always have, on a case-by-case basis,’ he says.

Taking a pragmatic approach to licensing is an understandable position for toycos to adopt these days, especially when seen in the context of recent developments in the industry. Key among those changes has been a shift in the retail landscape, which is seeing retailers supporting fewer and fewer properties, even though there are more licensed properties vying for shelf space.

‘Ten years ago, you’d see one or two pretty high-profile properties come out in the summer and in the winter, now you have five or six coming out in each period,’ says Michael Tabakin, director of licensing and sales promotions at Toys `R’ Us.

Rich Brady, CEO of Play Co. Toys, a southern-California based retail chain, says his company gave wide support to only five or six properties last year, down from 30 properties five years ago. The reason for the reduction, says Brady, was because the company was absorbing too many losses in markdowns on licensed product that didn’t move.

Another industry change-perhaps the most important-is that the established vehicle for success in toy licensing, the theatrical event pic, isn’t paying dividends like it once did. Godzilla, Lost in Space and Tarzan all came out with high sales expectations then disappointed toycos and retailers when it came to merch sales. Such losing gambles show that it’s getting harder for toycos to gauge which films will spawn a winning license.

The two biggest entertainment hits of 1999, The Phantom Menace and Pokémon, underscore the increasingly precarious nature of entertainment licensing in the toy biz. One, the latest installment in the largest revenue grossing licensed toy franchise of all time, was expected to resurrect toy sales from the doldrums; the other, a Japanese property (albeit with a strong Asian pedigree) had a non-existent Q score in North America and was perceived as having meager prospects, as evidenced by the initial reluctance of retailers to buy in. At the end of 1999, though, it was the latter that had frantic parents casing toy stores, fighting over the last Pokémon Yellow cartridge, while walls full of Phantom Menace action figures ceased to excite. And though both properties generated in excess of US$500 million in traditional toy sales for the first three quarters of the year, by late November, no Star Wars items were registering on top 20 seller lists. Long before that, many in the industry were already holding their noses when talking about the Phantom Menace.

Retailers and toycos have no shortage of explanations as to why the Phantom product didn’t live up to its billing from a merchandising sales perspective: The movie wasn’t good enough, the toys were too pricey, Star Wars was cool for parents, ergo it wasn’t cool for kids. In the end, most point to the unrealistic market expectations that preceded the film and the toys’ release.

While licensing has always been a part of the toy biz, Star Wars was the first property to demonstrate that the right entertainment could drive toy sales to dizzying heights. Before the release of Phantom, Star Wars action figures and other licensed merch reportedly grossed US$4.5 billion-twice as much as the first three movies tallied in box office receipts worldwide. Retailers, understandably, were operating on the belief that the Phantom Menace product would yield similar success.

‘Buyers had a mental picture of what happened the first time around with Star Wars, and how short the product was, and so they based their purchases on what they felt they lost in sales 20 years ago,’ says Play Co.’s Rich Brady. Unfortunately, when the product didn’t fly off the shelves as everyone anticipated, it left some retailers with inventory problems. By late December, Play Co. had moved only 20% of its Star Wars merch, and had to mark down all of its Star Wars product by 50%, swallowing a loss of US$500,000 to get it off the shelves.

Though Reesby says Hasbro met its sales predictions with Phantom, what the toyco didn’t do was explode them, which in many corners of the toy biz translates into failure. ‘It’s only when you achieve 20% to 30% above what you said you’d achieve, when people sit back and say `wow.’ The licenses that are deemed successful are usually the ones that sneak up on people like Toy Story, like Power Rangers, and like Pokémon is doing right now,’ says Reesby.

Trendmasters’ Leo Hauser can fully relate to untenable expectations. As the master toy licensee for the 1998 theatrical pic Godzilla (arguably the second most-hyped movie of the last millennium), Trendmasters did US$150 million in retail sales. That was roughly two and half times what the company pulled in for Independence Day, for which it was also the master toy licensee. And yet, most people viewed Godzilla as a failure, says Hauser. ‘The expectations for Godzilla were higher, but with Independence Day, everybody was caught by surprise,’ he says.

While Hauser, Reesby and other toy execs agree that to attain a successful licensed toy line, you need to carefully manage the expectations associated with the film property, achieving that feat is becoming more difficult due to an ever-shrinking sales window and the often conflicting agendas of the licensor, the toyco and the retailer.

Most toys based on a theatrical pic have a six-week period in which to sell at retail, down from eight to 10 weeks five years ago. Licensors trying to get the most out of the shorter window can issue too many licenses in key categories like toys and ancillary categories such as key chains and T-shirts. While that situation works for retailers and licensors in the abstract, it can and often does fly in the face of an economic principle that seems to govern hit toys: Less supply equals more consumer demand.

‘Licensing so much merchandise can be a self-fulfilling prophecy for failure, because there’s too much product that gets out there, people can get sick of it, and the quality of that product is sometimes suspect,’ says Hauser.

Reesby agrees, adding that ‘in hindsight, there may have been some ancillary categories that Lucas should not have gone into [for the Phantom Menace].’ At the same time, she does sympathize with the situation licensors face in terms of licensing film properties.

‘Is it a cunning thing to ship short in year one and create heat around the toys? It’s a question we often knock around with licensors. It’s a real bind in that regard, because they’re forgoing dollars in hand for hopefully an intangible, longer-term benefit of making your product look hot,’ says Reesby.

Whether or not licensors will become shrewder in licensing theatrical properties in the future may be academic in the coming year. At least one retail buyer, Play Co.’s Brady, says his stores will be taking a much more conservative approach to movie-based products.

Trendmasters is also less bullish on theatrical properties. At press time, the company had no licenses this year to produce toys for movie pics, as compared to 1998, when it produced lines for two movies (Lost In Space and Godzilla) and 1999, when it produced a line for The Iron Giant. Instead, the company has shifted its focus to TV. This year, it will release product based on Cartoon Network properties such as The Powerpuff Girls, Dexter’s Laboratory and Johnny Bravo, as part of an agreement it signed with Warner Bros. last year making it master toy for select original Cartoon Net shows.

‘I believe movie events are a riskier proposition than they were five or ten years ago,’ says Hauser. ‘They have a shorter burn. Kids aren’t watching them five days a week. With a movie, they go and see it once, maybe twice if you’re lucky, but the chances are the next time they’ll see it again is as a video release. A TV show is a 22-minute commercial that’s out there five days a week to drive your product. If you look at the top performers right now, they’re all on TV.’

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