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Consumer Products

From the mag: State of flux at US retail

While US retailers continue to navigate the tricky confluence of traditional and digital consumption models, kids licensors and licensees are finding new ways to go with the flow. Kidscreen investigates in this lead feature story from our new Licensing Show-focused issue.
June 4, 2015

As technology continues to shake the traditional retail model to its core, bricks-and-mortar retailers are searching for  ways to beef up their e-commerce businesses to reach new customers and drive sales. On the flip side, a clicks-to-bricks counter-movement is cropping up in which online-only retailers are testing the value of establishing physical locations. Caught in the middle of this topsy-turvy state are licensors and licensees focused on the kids entertainment space.

“I think everybody is still trying to figure out the juxtaposition and the relative roles played by online platforms and physical retail, and how to make these things work on a continuum,” says Martin Brochstein, SVP of industry relations and information for the International Licensing Industry Merchandisers’ Association (LIMA). “How do they mesh? How do they co-exist? How do they feed off each other, and are there solid learnings that can be applied going forward?” he asks.  “I think it’s still a very fluid situation.”

Add to that the persistent issues of shrinking shelf space, fierce competition for consumer attention, and a middling economy, and the US retail landscape on its surface does not appear to be particularly inviting for the entertainment licensing crowd. Despite all that, however, licensed merchandise continues to play a key role in driving bottom-line sales at retail. In the key kids category of toys, for instance, US retail sales of licensed toys grew by 7% last year, and licensed products now account for 31% of overall toys sales, according to market research firm The NPD Group. And Toys ‘R’ Us, for one, is betting on global, large-scale licensed in-store executions to keep its recent turnaround on track.

So where does this leave entertainment licensors and licensees? The jury is out on whether or not they are working in a better, worse, or similar mass-market retail environment stateside compared to five years ago. But one thing came through loud and clear from the consumer products execs we interviewed—the importance of investing in quality storytelling and content cannot be underestimated if you’re looking to succeed in the kids entertainment licensing biz right now.

The top shops in a shifting landscape
Sticking with the all-important toy category at mass market, Klosters Trading, the Williston, Vermont-based market research organization focused on the toy and video game industry, shows Toys ‘R’ Us edging out Amazon (19% to 17.4%) for top market share of toy sales in 2014. But notably, Amazon made the biggest overall gains, with its share climbing up 4% from 2013.  On the other hand, Walmart dropped from first in 2013 with 19% market share to fourth in 2014 with 16.8%, while Target held steady in third at 17%.

There’s no question online shopping and the growth of e-tailers like Amazon are putting the heat on classic bricks-and-mortar retailers, but it’s now pretty clear that having a strong presence in both spaces is essential. While Walmart plans to spend US$2 billion on growing its e-commerce business this year by 30% to US$13 billion, it also recently announced massive international expansion plans—115 new stores in China over the next three years, and 29 new stores in Canada by early 2016.

In the US, Target plans to expand its smaller store presence with more CityTarget locations (which range from 80,000 square feet to 160,000 square feet in size), convenience store-like Express locations, and up to 200 new Neighborhood Market stores by the end of 2015. The retailer also plans to spend US$1 billion this fiscal year to improve its e-commerce business and boost online sales by up to 40%.

For its part, Amazon, which experienced a 16% hike in revenues last year to US$89 billion, is testing out its first bricks-and-mortar drop-off/pick-up location at Purdue University in Indiana. The store opened this past February, and three more locations are expected this year.

Toys ‘R’ Us, meanwhile, appears to be stabilizing its business operations following the implementation of a company-wide transformation strategy in early 2014 to address net losses of more than US$1 billion in 2013.  The company tightened up operations, expanded internationally, paid down US$1.4 billion in debt, and managed to make US$61 million in profit in fiscal 2014, despite a Q4 earnings decline  of 1.8%.

The toy retailer also updated its transformation strategy earlier this year and plans to continue improving operational efficiency, optimizing its US$1.2 billion e-commerce business and expanding internationally, particularly in China and Southeast Asia.

“One of our goals is to identify key licensing partnerships and trends that we can amplify in Toys ‘R’ Us stores worldwide,” says Richard Barry, TRU EVP and chief merchandising officer, who will be a panelist at Licensing Show’s opening keynote on the future of retail.

And in an attempt to differentiate itself from cost-cutting competitors like Walmart and Target—a move being trumpeted by execs across the toy industry—Toys ‘R’ Us has announced plans to incorporate a kids play space in its stores.

The impact of cross-platform retail
Bill Graham, VP of business development at Jazwares, a Sunrise, Florida-based toyco that is relatively new to licensing, says traditional retail still reigns supreme. It continues to drive a lot of the more macro-minded programs, but online is presenting a number of speciality opportunities for super-fans. “Things that might have traditionally been viewed as Comic-Con-like, where they were specialty opportunities within smaller shops, have become bigger parts of the conversation,” he says. “Online has definitely fanned those flames in terms of making them part of the overall conversation at retail.”

For Carol Spieckerman,  president of Bentonville, Arkansas-based retail consultancy firm newmarketbuilders, retail is at a fascinating inflection point as mass-market players learn how to leverage their physical locations to facilitate online purchases while pure e-commerce companies and technology platforms explore physical retail.

Regardless of what platform is used to reach customers, she argues entertainment licensing has become a content-first proposition, and has moved away from its traditional  product-first reputation with retailers. “Creating a compelling content platform and developing a clear point of view—how a property’s reach, content plans, user base and accompanying metrics support retailers’ goals for their own platforms—is far more important initially than signing a raft of licensees in various categories,” Spieckerman contends.

Because it’s getting increasingly difficult to define retail categories, content creators (such as licensors, broadcasters and publishers) should look more closely at direct-to-retail partnerships as some retailers may be better suited to execute specific brand statements in either the digital or physical space. “As the digital rethinking of physical retail begins to take hold, kids entertainment companies will have a greater opportunity to showcase digital and content innovations in-store,” she adds.

Many retailers, particularly multi-category mass-market ones, are in the later stages of cleaning up clutter in their physical retail locations, she notes, which could lead them to back away from aisle-blocking displays and rein in all forms of in-store digital content, including shelf-talkers and auto-play product tutorials. “A new era in which retailers introduce innovative and highly-engaging digital content into the store environment will follow,” Spieckerman predicts. “And there are many possibilities in terms of what that might look like.”

She says if Walmart’s new US$50-per-year subscription service (in direct competition with Amazon’s Prime) follows Amazon’s model of layering exclusive content into the service, it will be able to offer entertainment companies unique in-store content relationships that Amazon cannot because it lacks the physical scale.

The migration from the traditional bricks-and-mortar experience to a more frictionless, cross-channel approach for consumers means that the value of “rich media” becomes incredibly important in the buying experience, says Stephanie Wissink, managing director and senior research analyst at investment research firm Piper Jaffray.

“For many years, companies in the toy industry would focus on point-of-sale presence,” she notes.  “The merchandising displays and toy placement on the shelf (vertically and horizontally) would trigger you as you walked by. But in today’s world, you have to create rich media such as animation or 3D modules to compete for mindshare and to convince the consumer it’s a worthwhile purchase,” she argues. “It can’t just be a blank picture on the screen with a price next to it. It has to be far more interactive—specifically speaking to the youth space.”

Wissink points to Toys ‘R’ Us as a great example of how retailers are embedding video into the selling process. For instance, alongside pictures for Hasbro’s Nerf Rebelle Rapid Glow Blaster on TRU’s website, there is a video link that plays a 43-second clip of someone demonstrating how to use it and highlighting special features. While these kinds of videos could be produced by either retailers or toycos, they “bring the product to life outside of the box,” she explains.

Incorporating interactive features is especially important for younger kids. Although they are more tech-savvy than ever before, they still can’t associate pictures of their favorite characters that they see online with the product they see on-shelf, where they can pick it up and play with it, adds Klosters Trading CEO Lutz Muller. “At brick-and-mortar, it’s the small guys who pick the products, and the parents tag along and eventually fork over the money,” he says.

Care Bears owner American Greetings Properties, for one, processes its entertainment licensing partnerships at retail through the perspective of the individual retailer. “It’s important to understand what each retailer is trying to accomplish, and part of that is doing what we can to give them unique items, special attention and retail offerings so they have differentiation and can stand out from competitors,” says AGP president Sean Gorman. “In terms of Care Bears, we want to do a lot more co-branding and DTR efforts so that the brand itself is associated with other brands within a retailer’s store, and then you can give certain retailers in some categories pure, unique attention and ownership of the brand.”

Meanwhile, over at Disney Consumer Products, amidst an ever-evolving retail backdrop, the company’s consumer-focused approach remains constant across all of its channels. Paul Gainer, EVP of Disney Retail, says understanding how consumers engage with its characters, and offering the right assortment of products at retail, is crucial to success. “We know that a one-size approach does not fit all,” he says. “Right now, there is an increased expectation for a more personalized shopping experience, but our approach must go beyond ensuring that the customer gets what they want, when and how they want it—there has to be a holistic approach to the entire experience.”

DisneyStore.com delivers personalized product recommendations by focusing on an individual’s shopping behavior, which helps Disney meet the demands of a more tailored shopping experience, adds Gainer. “In order for us to look at the shopping experience holistically, it is crucial that we use a number of different touch points to get an overview of our guest across all channels, wherever they shop,” he says.

All things considered, Karen McTier, EVP of Warner Bros. Consumer Products, feels the changing state of retail is having a positive effect on kids entertainment licensing. (WBCP has more than 3,700 licensee partners worldwide.) “As retailers sharpen their focus to omni-channel programs, the endless-aisle approach gives WBCP and its licensees more avenues to reach consumers with incremental product offerings beyond what is traditionally found just in-store,” she says. “Their increased focus on digital channels has allowed us to extend our marketing message to support these products across new and emerging media.” With its Batman Unlimited and DC Super Friends properties, for example, the convergence of retail and digital has provided WBCP with multiplatform opportunities to work closely with retail partners to offer consumer products wherever they are (in-store/online) and whenever they want it.

Stone Newman, president of global consumer products for Genius Brands International, agrees. He also finds the changing retail landscape to be fortuitous for GBI, which manages brands like Baby Genius and Thomas Edison’s Secret Lab. “We are finding more opportunities than ever before to partner directly with retailers across all price-points to address gaps in their planograms and create programs that address customers’ needs,” he says.

Newman adds that increased collaboration between licensor, licensee and retailer lets GBI better react to changes in the marketplace while providing great retail programs for customers. For example, when GBI launched its From Frank consumer products program in 2014, based on the humorous and humanlike French bulldog named Frank the Tank, it looked to extend the initial greeting card program into wall calendars. While there was interest from retail and a licensee, GBI could not get a manufacturer to commit to a 2015 wall calendar, which would ship in summer 2014.

“As a result, we licensed online retailer Go! Calendars directly for the 2015 wall calendar, knowing that starting in 2015, they would take the 2016 product from our licensee Chronicle,” says Newman. The partnership was beneficial for everyone as it meant From Frank calendars debuted a year earlier as an exclusive at a major retail partner; the market was established, which led to an easier sell-in for a new licensee; and ultimately the products were available for consumers to enjoy.

The Mouse that roared
The shifting retail environment is just one issue affecting entertainment licensing opportunities. At mass-market retail, it’s impossible to ignore the power of Disney. The House of Mouse’s empire boasts seven of the top 10 licenses in the business, roughly 330 Disney Store locations worldwide and e-commerce businesses in nine countries. Plus DCP’s three key arteries—publishing, licensing, retail stores—generated US$3.985 billion in revenues in 2014, an increase of 12% from the previous year. With properties like Disney Princess, Marvel and Lucasfilm in its arsenal, there is no other entertainment licensor that comes close to DCP’s sales numbers or retail reach.

According to Gainer, DCP is organized by franchise, rather than by traditional categories (i.e. hardlines, softlines), which enables the company to have entire teams focused exclusively on driving the growth of key franchises on a day-to-day basis. “Our entire business segment, from top down, is organized to support this model, which allows us to best leverage our biggest differentiator—our unique IPs,” he says.

So, just how do you compete with the likes of DCP?

“We have to have great products. We have to have tight price-points. We have to have multi-faceted consumer touch points,” says Leigh Anne Brodsky, MD of Iconix Entertainment, which bought Strawberry Shortcake for US$105 million from AGP in February, and also owns Peanuts. “We have an emotional connection with the consumer through our multi-generational brands. There’s a lot of heritage, and it’s a competitive advantage we have versus all of our competitors.”

Connecting with consumers in an emotional way through great content and creative is one of AGP’s key pillars. Gorman says despite the power Disney wields through its distribution channels, retail connections, TV networks and more, creating high-quality entertainment remains at the core of its business. “It’s easy to be scared of Disney, with its huge market share and great brands,” he concedes. “However, if you look at things that are really well done and creative, they tend to make their way through. An easy example that’s not one of our brands is Universal’s Minions,” he says. “Rather than competing against Disney, just make your own great creative, make sure it gets out there and manage it.”

Peter Yoder, VP of consumer products for Cartoon Network Enterprises, whose notable properties include Adventure Time and Regular Show, says one way Cartoon Network looks to differentiate itself is by offering unique brand experiences to different retailers, which starts with an open dialog to discover the best way to reach their customers.

“For Hot Topic, we do a lot of in-store programs where we pull together multi-category programs and bring them to the front of the store, so it’s almost like a boutique around one of our brands,” he says. “With mass retailers, it’s figuring out what’s the best way we can do a first-to-market program. We launched both our Adventure Time and Regular Show publishing programs at Walmart.”

Toy giant Hasbro is in the interesting position of being both a Disney partner and competitor at the same time. It holds the master toy licenses for Disney-owned Marvel and Star Wars until 2020, and will be taking over the Disney Princess and Frozen doll licenses from Mattel in 2016. But it also has proprietary brands like Transformers and My Little Pony, whose consumer products sales helped to drive a 74% spike in revenues for the toyco’s entertainment/licensing sector in Q1. To keep them rolling at retail, Hasbro continues to seek out and lock down licensees with design, development, marketing and retail expertise that can respond quickly to shifts in the marketplace. “This helps us to think differently and allows us to try new ideas or break into new categories while staying at the forefront of fashion and trends,” says Simon Waters, GM and SVP of entertainment and licensing for Hasbro.

The year ahead
Frankly, there’s still nothing more appealing than a good blockbuster movie property to retailers, which brings with it brand recognition, high consumer demand and a wealth of saleable products. The most recent blockbuster Frozen held momentum throughout 2014 to generate US$531 million in revenue across 39 different categories last year. Potential heavy-hitters on deck this year include Avengers: Age of Ultron (already in theaters), Jurassic World, Minions and Star Wars: The Force Awakens.

“Big tent-poles are dominating the market,” says Jay Foreman, president and CEO of The Bridge Direct. “Going into late 2015 and 2016, Star Wars is going to put pressure on all other boys brands, with the possible exception of Batman. Big events and all the related promotions around them are going to continue to drive demand and sales.”

Perhaps related to the looming blockbuster deluge, Piper Jaffray’s Wissink believes entertainment licensing will continue to expand its market share of overall retail toys sales in the US, as the number of products geared towards the convergence of content and play continues to increase. “Families today are looking for convenient solutions, and they’re on the go, so they want their kids to be able to play with their favorite characters in a mobile setting,” she says. “And because of that, you’re going to see entertainment continue to rise, and there will be more investment in actual storyline, story development, longevity and sustainability over time.”

LIMA’s Brochstein says the licensed entertainment business is always shifting because it’s a function of popular culture. He cites the emergence of YouTube stars—who largely didn’t exist five to 10 years ago, but now have their own licensed lines—as a prime example. While he does see room for growth, it depends on how the overall economy is doing. “A lot of entertainment licensed merchandise is ‘want to have’ not ‘need to have,’ so if the economy tightens, people are more concerned about their ability to live their day-to-day lives, and then entertainment takes a secondary place,” he says. “But by the same token, when the economy is fine and people feel a little easier about their disposable income, then it’s a great growth opportunity.”

Despite the blockbusters, Foreman also sees entertainment licensing’s success tied to larger trends in society. He doesn’t think the population is growing fast enough for automatic growth, or to make up for age compression and the competition for mind space from mobile devices. But there is hope. “It’s going to be up to content creators to keep making properties like Frozen and Minecraft to create demand, and companies like Cepia and Moose Toys to create toys like Zhu Zhu Pets and Shopkins to keep driving consumers to retail, whether it’s big-box, small-box or online,” he contends.

“Content is king, and the consumer is always open to exciting content and hopping on hot trends,” Foreman adds. “It’s harder than ever before to have a hit because of the plethora of content hitting the market terrestrially and digitally, but when you get one, it’s bigger than ever because of social media—everyone finds out about a trend almost at once.”

From a retail perspective, newmarketbuilders’ Spieckerman says the biggest opportunities will be in content creation and distribution, and then marrying it with great products and experiences. She believes kids entertainment companies should see retailers not just as places that sell licensed products, but as media platforms that can generate exponential reach and awareness for their properties.

As for where the retail market for licensed entertainment is headed, she predicts growth because retailers are more open than ever before to partnering with licensors that create great content, tell great stories and can translate them into innovative products and retail experiences. “Many retailers now have highly developed private brand programs and teams backing them up. From a content, product and experience ecosystem perspective, kids entertainment companies are operating in a window of opportunity,” she notes.

This article originally appeared in the June 2015 issue of Kidscreen

 

About The Author
Patrick Callan is a senior writer at Kidscreen. He reports on the licensing and consumer products side of the global children's entertainment industry via daily news coverage and in-depth features. Contact Patrick at pcallan@brunico.com.

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