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U.S. toycos make good on currency gap

They say every cloud has a silver lining, but in this case, it may be cut from a different metal entirely. While the U.S. dollar continues to lag against the Euro and the British pound, American toycos are using the depressed currency to increase their foothold in the European market. A favorable exchange rate means European retailers are getting what amounts to a 20% to 30% discount off the top on U.S. goods. Combine that with the immense popularity of American brands and licenses, and it puts U.S. products in higher demand than ever before.
November 1, 2005

They say every cloud has a silver lining, but in this case, it may be cut from a different metal entirely. While the U.S. dollar continues to lag against the Euro and the British pound, American toycos are using the depressed currency to increase their foothold in the European market. A favorable exchange rate means European retailers are getting what amounts to a 20% to 30% discount off the top on U.S. goods. Combine that with the immense popularity of American brands and licenses, and it puts U.S. products in higher demand than ever before.

Many U.S.-bred companies say Europe is offering the biggest opportunity for international growth these days. For its part, L.A. toyco Small World Kids recently signed new distribution deals in France, the U.K., Italy and Germany, with an eye to increasing its international business from 2% to at least 6% of overall sales this year. And the goal is to eventually bring this figure up to between 10% and 15%.

Herb Mitschele, director of licensing and international business development for Playmates Toys, says his company has experienced a huge increase in overseas volume–from 10% of its total business in 2002 to a whopping 26% so far this year. While he stresses that having the right product and properties always determines how much merchandise moves through any international territory, the low price-points made possible by the U.S. dollar’s drop in value have largely fuelled Playmates’ European expansion.

‘It’s not something American companies are used to dealing with,’ notes Mitschele wryly. In fact, a strong U.S. greenback has typically made it difficult to set international prices low enough to attract retailers without narrowing margins to the point of zero profit. Markets such as South Africa and Latin America, which have weak currencies and consumer bases with small disposable incomes, are particularly problematic.

Nick Austin, CEO of U.K.-based toy distributor and manufacturer Vivid Imaginations, says this pricing strategy has allowed several of his State-side clients to build a stronger base in Europe. ‘It makes them more competitive,’ he says. ‘Suddenly, an item that was selling for £12 is now priced at £9.99.’ A manufacturer can hit price-points that drive volume in ways that simply couldn’t be achieved before. Indeed, Mitschele says Playmates’ Amazing Amanda doll, which retails for US$99 in North America, would have been difficult to price as attractively in Europe were it not for the low dollar. The toyco is currently in the process of redeveloping the talking toy with language tracks for Spain, France, Italy, Germany and Scandinavia.

Austin adds that while the pressure from retailers to drop price-points is strong, some companies are instead taking advantage of the low cost of landing goods in the territory to up their marketing spend. Others are using it as an umbrella to offset the increasing cost of manufacturing in China caused by rising oil prices and a shrinking labor pool.

But relying too heavily on something as volatile as currency fluctuations can be dangerous – a sudden spike in the value of the U.S. dollar could wipe out profit margins in short order. For this reason, most small to mid-sized companies choose to hook up with a local distributor rather than opening a branch office, says Austin. As testament to that tendency, Vivid has picked up product from U.S. powerhouses like Jakks Pacific, Toy Biz, MGA and Playmates over the past five years, effectively doubling its total business. In fact, Vivid recently became the first U.K. company to rank as the region’s top toy manufacturer in 25 years, according to the NPD Group’s retail audit from July.

Though it may not exert a long-term influence, the currency shift has definitely made things more competitive in the here and now. Not only are U.S. toycos going up against each other for global shelf space, but European and U.K. retailers are also trying to get in on the action.

Now that it’s more affordable to work with U.S. companies and source from China, Small World Kids CEO Debra Fine says several retailers have approached her about manufacturing private-label lines. While private-label toys are often modeled on a toyco’s existing product and therefore cost virtually nothing to develop, she explains that producing them can chip away at the company’s efforts to build up its own proprietary brands. Sometimes, though, it might not be worth turning the retailer down. ‘If it’s something that we know the retailer is going to produce anyway, and it’s easy to do, then we’ll consider it,’ she says.

Fine adds that because many toycos pay for their product at the factory level in Hong Kong or U.S. dollars, generic items such as puzzles and non-licensed toys are now cheaper and easier to come by for European companies. For American competitors, this means that having the right license or branded toy can be crucial in this market.

And before anyone rushes off to conquer Europe, it’s also worth keeping in mind that the European Union is made up of 15 states, each of which has unique market strengths and gaps. For example, the German market is known for manufacturing high-quality goods and has a strong wooden toy industry, so trying to move into the region with competitive wooden SKUs just doesn’t make sense. On the other hand, Fine says the tween accessories market in the U.K. hasn’t been fully tapped yet.

Then there are the considerable costs associated with breaking into a new region. Along with conducting extensive market research, there’s the expense of repurposing product to meet language and cultural requirements, as well as testing to ensure that the toy conforms to local regulations. For example, the amount of phthalates that are allowed in preschool products is much more strictly regulated in Europe than in the U.S.

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