Private Label-the cure for what ails retailers?

Tired of riding the rollercoaster of kids entertainment licensees? Slim margins got you down? Many retailers have found a solution to these woes: produce your own toys, collect nearly all of the profit and never worry about inventory shortages again....
July 1, 2000

Tired of riding the rollercoaster of kids entertainment licensees? Slim margins got you down? Many retailers have found a solution to these woes: produce your own toys, collect nearly all of the profit and never worry about inventory shortages again.

That’s the ideal version of private-label production. And while kids aren’t likely to riot in the toy aisle at Wal-Mart over a generic action figure any time soon, increasingly, for certain categories, toy retailers are looking to produce their own toys to diversify revenue streams and distinguish themselves from the competition.

‘You have a toy industry right now, in which licenses aren’t as hot as they should be. If we can make a better profit by importing our own product, then we can be more price competitive on our licensed and promotional merchandise. It gives us the best of both worlds,’ says Rich Brady, CEO of San Marcos, California-based toy chain Play Co. Toys. Last month the chain began shipping the first of its PL product, a range of plush animals, to its 40 locations, and next month a line of Beanie Baby-sized tigers follows. Brady says his company is starting small with its own product lines, but thinks the sector can account for 15% of the chain’s overall profits within the next three years.

Money is the main incentive for merchants producing private label product. Retailers often source the merchandise directly from factories in Asia, which effectively cuts out the middle-man, a U.S. marketing company, which might be using the same Chinese factories anyway, says Sean McGowan, a toy analyst at Gerard Klauer Mattison.

Margins for PL toys can run in the 70% to 80% range, which is higher than the 50% margins for product from the Orient, and significantly higher than the 30% margins on hot licensed toys. Retailers can also charge a higher price for store-branded merch, says McGowan, because-in theory-the product is exclusive, so there’s less competitive price pressure.

For years, large retailers, like Wal-Mart, Target, FAO Schwarz and Toys `R’ Us, have reaped the monetary benefits of producing their own toys and other products for kids. Ten to 15% of FAO’s revenues, for example, currently come directly from sales of the company’s own lines, which includes toys, apparel and home furnishings. This area of FAO’s business has increased significantly over the last decade, says company spokesperson Alan Marcus, and it’s poised to grow even more with the launch this month of FAO University, a new apparel and accessories line for tween-aged boys, which includes sweatshirts, T-shirts and knapsacks.

Toys `R’ Us has quietly developed its own burgeoning private label business as well. Sales of TRU’s private label merch, in addition to its branded licensed exclusives, which includes recent deals for items like Home Depot toys and Animal Planet plush, tallied US$300 to US$400 million last year, representing approximately 3% to 5% of the chain’s revenues. According to Ursala Moran, a TRU analyst at Sanford C. Bernstein, TRU CEO John Eyler has said he would like the company to increase that number to 20%.

‘In the next three or four years, we will be the third largest toy manufacturer in the U.S.-and that scares the you-know-what out of a lot of people,’ said a source at the company who agreed to speak on condition of anonymity.

Whether that’s wishful thinking or not, the more success TRU and other retailers encounter producing their own product-licensed or generic-the more they run the risk of alienating the toy manufacturers whose products compete for shelf space in their stores.

But David Leibowitz, a toy analyst at Burnham Securities, says toycos shouldn’t worry about TRU or other retailers landing the merchandising rights to premiere kids entertainment properties anytime soon. ‘TRU controls only 16% of current toy retail sales. So, it’s unlikely it could generate the same amount of licensing revenues for a licensor that a Hasbro or Mattel could, who would be selling to all retail accounts,’ says Leibowitz.

The other factors which keep the private label phenom somewhat in check is the difficulty in creating no-name products that today’s entertainment and brand-savvy kids will want instead of Pokémon or Star Wars toys. Then there’s always the risk of the private label merch not moving. Whereas toycos will often try to compensate retailers when their lines don’t sell, when a chain’s own products flop they have to eat the loss fully.

Still, such drawbacks haven’t discouraged merchants from dabbling in private label production. Even e-tailers are getting in on the act. In May, eToys announced to shareholders that it would start producing its own toys and home furnishings, as way to try and fatten the company’s bottom line. McGowan is dubious of the e-tailer’s chances of succeeding, however, because of its small share of the overall toy market. ‘If Hasbro, for example, has a new doll that they want retailers to carry, and they see eToys pushing its own private-label doll on their site, they might be inclined to cut back shipments of their hot products to eToys. They’re not likely to take as hard a line with Toys R Us or Wal-Mart, because they need those retailers more,’ says McGowan.

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