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International Introspective: Britain’s market maturity breeds heated competition

It's quite possible that 2005 will go down as the year that Star Wars: Episode III - Revenge of the Sith took over the U.K. entertainment licensing market. According to Frederique Tutt, who heads up industry researcher The NPD Group's U.K. License Tracker service, action figures based on the third installment contributed 55% of the category's total sales in May and June. And overall, Star Wars toy sales are on track to make up 6.5% of the US$3.6-billion U.K. toy market by year's end. Tutt adds that Sith sales have bested the heights reached by Pokémon during its peak in 2000.
September 1, 2005

It’s quite possible that 2005 will go down as the year that Star Wars: Episode III – Revenge of the Sith took over the U.K. entertainment licensing market. According to Frederique Tutt, who heads up industry researcher The NPD Group’s U.K. License Tracker service, action figures based on the third installment contributed 55% of the category’s total sales in May and June. And overall, Star Wars toy sales are on track to make up 6.5% of the US$3.6-billion U.K. toy market by year’s end. Tutt adds that Sith sales have bested the heights reached by Pokémon during its peak in 2000.

However, when you scratch the surface of the Star Wars success and take a deeper look at the U.K. licensing landscape as a whole, the picture isn’t as rosy. It would be misleading to say that one of the largest licensing markets next to the U.S. is suffering, especially when NPD puts the region’s overall retail market at US$3.6 billion (excluding housewares and food), up 6% in Q4 2004 over the same period in 2003. But licensing in the U.K. is a very sophisticated and maturing industry. And like America, it’s feeling the brunt of what that maturity entails, particularly in terms of property proliferation and tight times at retail.

When asked for a snapshot of what it’s currently like to operate in the region, 4Kids International managing director Simon Philips notes right off the bat that there are now 21 dedicated kids channels across terrestrial, cable and satellite services, as compared to just four terrestrial homes for kids content five years ago. In short, that means a lot more competition for licensee and retailer attention. Vickie O’Malley, managing director of licensing agency Copyright Promotions Licensing Group, adds that this growth of TV outlets has fragmented audiences considerably, making it harder to pull in the number of viewers needed to sustain a big merch program.

While royalty rates have remained relatively unaffected and sit in the 10% to 14% range, this abundance of choice seems to be changing the deal structure in the U.K. Philips says the size of minimum guarantees and advances are being driven down – there’s so much competition that leading licensees are often spoiled for choice and able to offer less. And Philips is realistic about it. ‘You need licensees to invest in marketing and [product development],’ he says. ‘There’s no point in crippling them with a massive minimum guarantee.’

Another trend on the TV front is the absence of a blockbuster preschool property in the market since HIT Entertainment’s Bob the Builder peaked in 2001. Big preschool properties have traditionally been a strong feature of the U.K. licensing scene, says NPD’s Tutt. But according to her analysis, the market hit a high in 1998 with Teletubbies (licensed by BBC Worldwide), and subsequent crests have not matched that performance. ‘To some extent, the market is getting saturated with preschool concepts,’ says Tutt. ‘So is shelf space, and properties don’t get the same visibility.’ Entertainment Rights head of consumer products Claire Shaw says she counted more than 80 preschool properties that could potentially impact the U.K. market while she was assessing the competition for Postman Pat at Licensing Show in June.

That said, preschool might be in for a bit of growth this year. Tutt says HIT’s classic Thomas & Friends is having a good year so far, with toy sales rebounding from a decline in 2004 to a 14% rise in the first half of ’05. And Nick Austin, CEO of toyco Vivid Imaginations, says the sell-in for the company’s Fifi and the Flowertots range (based on the CGI TV series created by Keith Chapman that debuted in Five’s Milkshake block and on Nick Jr. in May) is six times higher than originally forecast. The lead Fifi talking plush doll and the Forget-Me-Not Cottage playset are on track to sell more than 100,000 units each. And HIT’s Bob will be back in full force this fall with a new TV series and merch for Project Build It.

Of course, retail performance will be the yardstick against which everyone will measure these properties. Like the U.S., the British retail market is highly competitive, with only a few key players equipped to move large volumes of licensed product – and so far, it hasn’t been a great year for retailers on the high streets. Rising interest rates in 2004 (which have leveled off for now) curbed consumer spending, and sales have been steadily declining since February. According to the British Retail Consortium trade organization, this past July was the worst since July 1995 for U.K. retailers. While the Tube bombings earlier in the month certainly undercut consumer confidence, the organization largely blamed the dip on cool, wet summer weather that dampened the sale of seasonal goods.

Taking a step back to look at the overall retail landscape, 4Kids’ Philips sees other forces at work. He believes the region’s large grocers are aggressively expanding into non-food categories and luring consumers with lower price points. So it’s not so much that sales volumes are decreasing; it’s that dollar value is being driven down. Arguably, grocer Tesco is beginning to affect the U.K.’s retail landscape in much the same way Wal-Mart has in the U.S. over the last decade.

Tesco’s 1,252 stores brought in US$53.5 billion in 2004, and non-food sales were up 17% to US$10.9 billion. It’s estimated that for every US$10.80 spent at retail in the U.K., Tesco corners US$1.80 of that business. Tutt says the retailer is the fastest-growing toy seller in the U.K. (it cracked the top five at the end of 2004′s holiday season), and is putting new heat on the top three – catalogue retailer Argos, department store Woolworths and Toys ‘R’ Us together control more than 50% of U.K. toy sales.

Not only is the toy market being driven by discount promotions, but retailers of all stripes are increasingly turning to private-label toys. Vivid’s Austin says buy-one-get-one-half-price promos are the flavor of the month right now, and private-label sales are approaching 25% of the overall toy take. And while grocery outlets such as Tesco bring in significant foot traffic, especially when business drops off at toy retailers post-Christmas, he says 65% to 70% of their shelf space is given over to low-cost, private-label toys.

For licensors and licensees, what this means is less room for their products and fewer chances of breaking a new property into the market. On top of this, the push for ever-lower prices is squeezing licensee margins, and as in the U.S., competition for limited shelf space has spawned supplier auctions. Some of the larger retailers are forcing U.K. licensees into bidding wars in which the lowest wholesale price will win placement, regardless of which license the product is sporting. ‘The implications of that are horrendous,’ says O’Malley. ‘Naturally, quality will suffer…and the retail marketplace will become more homogenous than it is now because everyone will be working to the lowest common denominator.’

As you might suspect given the situation, retailer outreach has become a crucial component of any successful licensing program in the U.K. ‘The conversations I’ve had lately with retailers have been around margins, promotional activity and value added,’ says HIT’s brand business director, Katie Foster. ‘Retailers seem to be very focused on making every last penny work for them.’ But it’s difficult to do cross-category displays or mount an in-store boutique presence, largely because of the physical space limitations of the stores. Woolworths does have a chain of large-format Big W stores outside of urban centers, but on the whole, the U.K. simply doesn’t have the land to devote to the big-box megastores found in North America.

However, with concerted effort to communicate continually and directly with the retailer and the ability to kick in a sizeable licensor/licensee-funded marketing pot, it is possible to make a splash. In August, for example, 4Kids put the Teenage Mutant Ninja Turtles on tour. The company launched a live Turtles show that traveled to Big W stores in 22 cities throughout the U.K. Each store created a TMNT product area to complement the 15-minute live show, which was performed several times a day, and the entire chain featured products for the month. At press time, the tour hadn’t quite wrapped, and 4Kids was in the midst of determining its impact on product sales at the retailer.

Population and media usage

Population: 60.44 million

Children 0 to 14: 10.7 million

People 15 to 64: 40.1 million

Birth rate: 10.78 births/1,000

GDP per capita: US$29,600

TV broadcast stations: 228

Internet users: 25 million

Internet hosts: 3.4 million

ISPs: 400-plus

TVs: 30.5 million

Radios: 84.5 million

Cell phones: 49.7 million

Telephone landlines: 34.9 million

Source: CIA 2005 World Fact Book

Top 10 Licensed Toys (January to June 2005)

1. Star Wars 3 Color Change Lightsabre Hasbro

2. Star Wars 3 Basic Figure (collection 1) Hasbro

3. Star Wars 3 Electric Lightsabre (wave 1) Hasbro

4. Star Wars Darth Vader Voice Changer Hasbro

5. V.Smile with Winnie the Pooh Hunny Hunt VTech

6. Power Rangers DT 12.5-inch talking figures Bandai

7. Power Rangers DT Raptor Cycle and figure Bandai

8. Power Rangers Thundersaurus Morpher Bandai

9. Star Wars 3 Deluxe Action Figures (asst’d) Hasbro

10. Power Rangers DT Thundermax Sabre Bandai

Source: NPD EPoS Retail Tracking, covering 68% of U.K. sales

Top 10 character licenses in the U.K. last year

1. Disney films

2. Barbie

3. Winnie the Pooh

4. Disney Princesses

5. Spider-Man

6. Bratz

7. Thomas & Friends

8. The Simpsons

9. Scooby-Doo

10. Shrek

Top five U.K. retailers of licensed merhandise in 2004

1. Woolworths

2. Tesco

3. Argos

4. ASDA

5. Disney Stores

Source: NPD License Tracker Consumer Panel

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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