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International Introspective: China’s budding merch market proves a tough nut to crack

With 299 million kids ages zero to 14 and a commercial market that is rapidly opening up to foreign investment and goods since joining the WTO in November 2001, China seems like a ripe licensing plum ready for the picking. In fact, in the last 18 months, licensors have been announcing plans to bring their kids properties into the country with some regularity. But having surveyed the nascent licensing scene in mainland China, the fruit is not likely to start raining down anytime soon without some vigorous tree-shaking.
May 1, 2004

With 299 million kids ages zero to 14 and a commercial market that is rapidly opening up to foreign investment and goods since joining the WTO in November 2001, China seems like a ripe licensing plum ready for the picking. In fact, in the last 18 months, licensors have been announcing plans to bring their kids properties into the country with some regularity. But having surveyed the nascent licensing scene in mainland China, the fruit is not likely to start raining down anytime soon without some vigorous tree-shaking.

There’s no doubt that China is a burgeoning licensing market, with the Hong Kong Trade Development Council estimating that it generated around US$600 million in 2001 and is on target to reach US$1.5 billion by 2010. According to Brian Zheng, president of Playhut Entertainment and Toys, which has offices in Guangzhou and is the Chinese licensing agent for Porchlight Entertainment property Jay Jay the Jet Plane, the licensing market is growing by 10% a year right now, and he doesn’t foresee it slowing down. China’s overall economy is making similar gains, and a genuine, disposable-income-earning middle class – cropping up primarily in cities in the Pearl and Yangtze River Deltas and in the capital city of Beijing – is becoming a formidable consumer force.

For licensors of kids properties, there’s also the 22 million children being born each year to consider. While many of them are born into poverty, an increasing number of children belong to middle-class parents – the beneficiaries of the ‘one mouth, six pockets’ phenomenon that resulted from a one-child-per-couple policy that the central government instituted in the 1980s. Zheng says there are currently more than seven million children with two sets of relatively affluent grandparents and one set of equally well-off parents.

China’s new little emperors are indeed a lucky bunch of kids. Six adults fuss over each one’s needs and shop accordingly. What licensors (particularly entertainment licensors) should keep in mind is that pester power doesn’t hold much sway with Chinese parents. ‘A vast percentage of purchasing decisions are based on whether the items will help a child in the future, in a way that simply isn’t common in most countries outside of Asia,’ says London, England-based Chorion’s CEO Nicholas James.

‘It’s all about learning, learning, learning,’ explains Raymond Mok, president of Hong Kong-based RM Licensing, who’s been representing Western properties such as Peanuts and Betty Boop in mainland China for the past decade. Mok says parents will spend on their children’s education and language, piano and dance lessons, but they aren’t inclined to buy toys. James agrees, adding that Chinese parents are rather suspicious of play for play’s sake and see it as an impediment to education.

In fact, James says appealing to parents’ desire for their children to learn English is the best way for a kids property to make a go of it in China’s licensing market. Accordingly, Chorion’s publishing efforts that include the ‘Learn English with Noddy’ program – an ESL kit comprised of a video, book and other learning materials designed to teach kids 400 English words – will form the backbone of the property’s presence in China. Chorion partnered with Beijing-based academic publisher the Foreign Language Teaching and Research Press in March to extend Noddy’s reach as an educational brand.

The joint effort will focus on producing more ESL books, landing a TV presence for 100 episodes of Noddy, and then moving into educational PC games, puzzles, toys and school-related apparel and consumer product categories.

Playhut’s Zheng foresees a similar plan of attack for introducing Jay Jay into the Chinese market: TV first, followed by a licensing program that’s not driven by play toys. He says better categories for licensed kids products in China include anything educational, nutritional food and drink-related items, and apparel, as parents are more inclined to see the value in these types of products. And with apparel, RM’s Mok says royalty rates run a healthy 8% to 10%, with guarantees falling between US$30,000 and US$100,000 for a well-known property.

Toys are problematic. Zheng notes that in addition to the roadblock of parental disdain for non-educational toys, profit margins are so low on toys sold in China that there aren’t many licensees willing to take the risk. There are huge retail hurdles to overcome as well (see ‘The wild, wild East: Retail in China,’ page 31).

Then there’s the very real issue of intellectual property theft. Pirated goods pervade local marketplaces across China’s 23 provinces, and the black-market players have a well-established underground network for moving goods. That said, Mok maintains that pirated merchandise is of very poor quality and does not make it into major shopping malls in the large cities.

Chorion’s James, for one, isn’t put off by the prospect of piracy. He says the key to addressing the problem is to avoid pricing legitimate product out of the stratosphere. While working as a video distributor in Hong Kong and China in the 1990s, James observed that people would pay for legal, high-quality product if it was priced for just a few dollars more than the pirated fare. Besides, he says, if your property’s not pirated, there’s most likely no market for it in China. ‘If pirates can’t sell it, you’ll have no chance of selling it in legally.’

And therein lies the biggest challenge to breaking into China’s embryonic licensing scene – building brand awareness and creating resonance for your property in the hearts and minds of the country’s children. Very few Western properties have made an impact in China, and James says Chinese kids are more likely to embrace Japanese properties because there is a shared cultural sensibility between the two countries.

The only way in, it seems, is through TV. Finding a terrestrial broadcaster is crucial to launching a successful licensing program. Even Mok, who says Peanuts has sold more than US$300 million at retail largely as a kids and women’s fashion brand without a TV presence, explains that he would not consider launching a consumer products program for his newest kids property Teenage Mutant Ninja Turtles without a broadcast deal. Chloé van den Berg, sales director of London, England’s Entertainment Rights, who is looking at launching incarnations of Postman Pat and Basil Brush into China, agrees, adding that a partner who knows the ins and outs of dealing with the state-owned media is essential.

China is something of a jigsaw puzzle when it comes to television. There are roughly 280 million TV-watching households there, and the country is heavily wired for the medium. But with the exception of CCTV (the national broadcaster operated by the central government), China’s other 1,000-plus regional stations based in the larger cities have limited reach – in fact, only 400 of them have slots open to children’s and educational shows.

On top of that, all programming is vetted and approved by the central government, which places relatively stringent quotas on the amount of foreign content permitted to hit the airwaves, creating reams of red tape to cut through.

The good news is that broadcast and foreign investment restrictions are loosening up, and the situation is changing – albeit slowly. In recent months, Disney has launched a branded programming block on CCTV-6, and the central government has given the greenlight to broadcast giant Viacom. The owner of MTV and Nickelodeon is now beaming an MTV feed into seven million homes in Guangdong province (home of the wealthy Pearl River Delta) and hitting a total of 150 million homes with syndicated programming blocks.

More importantly, though, Viacom has entered into a co-production agreement with one of China’s larger media outlets, Shanghai Media Entertainment Group, to produce children’s animated programming that will be piped into the eight million homes serviced by SMEG. The hope is that the deal will pave the way for other Western kids properties and the creation of viable merchandising programs.

‘Viacom is starting up and it will take a while,’ says Zheng. ‘Let them spend some money and educate the market; then we can go in and pick up some solid market share.’

About The Author
Lana Castleman is the Editor & Content Director of Kidscreen and oversees all content for Kidscreen magazine, kidscreen.com and related kidscreen events. lcastleman@brunico.com

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