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Japanese toycos seek new revenue streams to ride out a market drought

As Japan continues to be battered by a decade-long recession, entrée into the world's second-largest toy market is no easy task. The slowdown in the American economy, record unemployment levels in 2001 and a sluggish stock market have all contributed to lackluster consumption, forcing retailers to hack prices and toy companies to look for new distribution channels and demographics. Consumer prices recorded their largest fall since the end of the Second World War last year, and the Japanese toy industry contracted by 15% to 20% and failed to generate any notable hit products.
September 1, 2003

As Japan continues to be battered by a decade-long recession, entrée into the world’s second-largest toy market is no easy task. The slowdown in the American economy, record unemployment levels in 2001 and a sluggish stock market have all contributed to lackluster consumption, forcing retailers to hack prices and toy companies to look for new distribution channels and demographics. Consumer prices recorded their largest fall since the end of the Second World War last year, and the Japanese toy industry contracted by 15% to 20% and failed to generate any notable hit products.

The focus on price has triggered stiff competition for shelf space in department and specialty stores, while Toys ‘R’ Us and other large discount chains like Ito-yokado and Daiei are expanding to meet the increased demand for goods with a lower price point. Michitoshi Sugimoto, marketing director for Warner Bros. Consumer Products Japan, estimates that the mass market accounts for 80% of toy sales right now, with specialty stores like Tokyo-based Kiddyland controlling what’s left. Convenience store chains such as

7-Eleven and ampm have also done well with small licensed toys under US$15.

As Tomy president and CEO Kantaro Tomiyama outlines in the company’s 2002 annual report, the market control of large retail chains has increased dramatically over the last five years. ‘Now, in a bid for survival in a challenging operating environment, these major chains are preparing seasonal sales strategies and annual business plans much earlier than before,’ he says, adding that this has forced many manufacturers to bump product development up by a few months to meet ordering deadlines.

While new retail trends like brand merchandising, in-store boutiques and promotions are catching on in Japan, the main focus – particularly in hypermarkets – is still on offering the lowest price. ‘There’s been some boutiquing, but not to the degree you see in other countries,’ says Maura Regan, Sesame Workshop’s VP of international licensing and new business development. ‘Even though it seems like a logical thing to do, it’s difficult to convince some retailers to [bring licensed merchandise from several departments together].’ Since Japan’s market is so license-heavy, brand merchandising is less effective. ‘If you’ve got a hot property and it’s everywhere anyway, the department store doesn’t need to generate extra buzz,’ says Regan.

Recent data released in July by the Japanese government shows that the country’s unemployment levels fell 0.6% to 5.3% in June, the first real decrease in three months. But that positive economic sign doesn’t seem to have encouraged consumers to open their pockets; retail sales fell in June for the 27th straight month, dropping 2.3% from a year earlier. However, the entertainment industry (including anime and movies) is Japan’s second-strongest economic sector, trailing only the auto industry, says Tokyo-based toyco Bandai’s spokesperson Miki Taneda. This bodes well for any toyco that leans heavily on licensing.

Currently, Taneda estimates that 90% of Bandai’s slate of toys is licensed. Some of its biggest sellers are: Gundam model kits, figures and video games; Kamen Rider role-play items (known as Masked Riders in the U.S.); PrimoPuel (an electronic plush); and Gashapon (vending machine items), especially those featuring preschool property Anpanman.

But despite the popularity of its licenses at home and on the international market, Bandai’s domestic sales remained relatively stagnant into 2003, growing only 2.3%, compared to 26.3% in the Americas, 68% in Europe and 9.7% in the rest of Asia. ‘Comparatively, Bandai Group had its highest consolidated net profit ever in the first half of 2003,’ says Taneda. ‘We think this is because we focused on developing our business globally based on character merchandising.’

Tomy also experienced a difficult year ending in March 2002, recording a 28.4% drop in net sales. But the company attributes some of this lag to internal factors. ‘We experienced difficulties in supplying timely products that sufficiently matched market conditions, mainly due to a misalignment between the time it took us to develop and ship new products,’ says Tomiyama.

To iron out this glitch, the company undertook a major restructuring in 2002 and early 2003, adding two new development departments to focus on creating hit products, opening an engineering center in Shenzhen (close to China’s toy production region), and reorganizing and integrating its planning and sales divisions to speed up the company’s ability to respond to market shifts.

Japan’s declining birth rate and aging population have also forced toycos to look outside their traditional target demographics. Sesame Workshop has been expanding beyond its core demo of preschoolers and young children to include teens and young adults with clothing, accessories and what Regan calls fancy goods (knick knacks and stationery-type items). Japanese youth are more likely to wear licensed apparel than their American or European counterparts, and styles and graphics are given edgier treatments to appeal to older demographics, she adds. ‘Teens are fickle and you need to be fast – things come and go really quickly. Japan is a country where they want everything to be very, very new.’

Sesame is not alone in aging up its core demo. Bandai’s strategy is to develop long-running characters such as Gundam, Masked Rider and Power Rangers into merchandise that spans two or three generations. The toyco has already started marketing Barbie merchandise to teenagers (thanks to a distribution deal with Mattel), and it scored a direct hit with talking doll PrimoPuel, which has been popular with both kids and adults. Starting this year, Bandai will focus on products that appeal to consumers between the ages of 10 and 40, including visual software, content for mobile phones and arcade game software.

It’s a tough market for international properties, considering the sheer dominance of local powerhouse franchises like Pokémon, Digimon and Anpanman, to name just a few. But Regan says Sesame has a point of difference in its educational focus, a comparative rarity in Japan. ‘There are maybe one or two other educational programs, but we’re really unique in how we approach informal learning,’ Regan says. ‘There are lots of anime and high-tech toys, but there is dearth in the market of toys that tie into educational properties.’

Tomy, which signed a master toy deal with Disney in 2001, has been attempting to grow its character business by setting up sub-licensee deals. Tomiyama says the toyco plans to release 500 to 600 new Disney products each year, with the goal of establishing the line as a Tomy mainstay and generating consolidated sales of US$235 million by 2005. ‘We are looking to revitalize Mickey’s image and develop the popularity of many of the other characters under the Tomy brand,’ says Tomiyama. Morphing toy-based characters like Zoids into books, CDs and other media iterations will also be a key part of the toyco’s strategy to grow its character-based business. Zoids was expanded into comics in 2002, and the Bakuso Robo (a two-legged robot toy released in early 2002) will soon spin off into comic books and an animated TV show. A foray into the candy toy market in 2001 proved profitable, adding approximately US$8 million to the toyco’s bottom line. Tomiyama says Tomy will continue to grow its candy line, hoping to nab a larger share of the US$630-million business in Japan.

But one of the biggest areas of potential growth, according to Tomiyama, WBCP’s Sugimoto and Bandai’s Taneda, is mobile phones. ‘The fact is that even kids are now spending more money on mobile phone entertainment,’ says Sugimoto. Major animation studios like Disney, Universal and Warner Bros. are all creating or licensing content to mobile phone providers. In 2000, Bandai launched Bandai Networks to market mobile phone animation and games, and the network currently attracts more than four million users, representing 8% of the total market. The company is looking to mobile phones as a breeding ground for new properties, given the emergence of hit properties like Shige Shige Shigeo, which started life as a mobile phone character. Tomy is working on plans to market a mobile phone for kids, though details were sketchy at press time.

But new technology aside, both Regan and Sugimoto say having traditional media support from TV or magazines is still extremely important to break into the Japanese market, and developing personal relationships with partners is key. (For a more in-depth look at making the partner connection, see ‘Traversing Japan’s licensing divide,’ page 39.)

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