Toy and Hobby Stores Consolidate to Compete - IBISWorld

WWW.IBISWORLD.COM November 2012 1
Toy and Hobby Stores Consolidate to Compete
Toy and Hobby Stores
Consolidate to Compete
By Justin Waterman
As companies fight for business and to hold onto market share,
industry concentration has been on the rise.
Thinning
margins and
competition
have forced
retailers out of
business
The increasingly saturated Hobby and
Toy Stores industry (IBISWorld report
45112) has been a game changer for many
industry operators. In this highly
competitive environment, companies
have scrambled to gain market share and
diversify their product selections.
Companies that have been unable to cope
with heightened competition, volatile
plastic prices and rising purchase costs,
on the other hand, have been forced to
exit. Tightening market conditions
during the recession only exacerbated
this trend. In 2009, per capita disposable
income declined 3.6%, causing consumer
spending to slip 1.9% that year. As
consumers began spending more
cautiously, they curtailed their purchases
of discretionary goods, including toys;
when they did shop for toys, they sought
out the cheapest prices. As companies
fight for business and to hold onto
market share, industry concentration has
been on the rise. Although some
companies have expanded to meet
changing consumer tastes, most have
been consolidating operations or exiting
the industry altogether as a result of
competition, volatile input prices and
rising costs.
These factors have caused revenue for
the Hobby and Toy Stores industry to
decline at a 0.3% average annual rate to
November 2012
$17.1 billion in the five years to 2012. In
an effort to compete with low online
prices, firms that were able to cut costs
lowered prices for consumers. Many
smaller firms with lower margins and
modest yearly revenue figures were not
able to compete during and in the wake
of the recession, so they were forced to
shut their doors. These closures caused
the number of industry firms to fall at an
annualized 2.6% to 19,133 over the five
years to 2012, down from 21,782 in 2007.
An exit of smaller firms from the industry
has left the remaining players with a
higher market share, resulting in the top
four players accounting for about 87.0%
of industry revenue in 2012, up from
81.9% in 2007.
What’s driving consolidation?
External competition
Hobby and toy stores must compete with
discount or large department stores that
offer comparable products. Stores like
Walmart and Target, for example, offer
heavily discounted prices by leveraging
their size. In other words, their
significant economies of scale allow them
to negotiate contracts in which they can
secure cheaper inventory and sell toys for
lower prices. This advantage, combined
with the convenience of being a one-stop
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WWW.IBISWORLD.COM November 2012 2
Toy and Hobby Stores Consolidate to Compete
% Growth in share of economy
20
15
10
5
0
–5
Maturity
Company
consolidation;
level of economic
importance stable
Hobby &
Toy Stores
shop for a variety of household items, has
restricted growth in the Hobby and Toy
Stores industry. By increasing their size,
however, hobby and toy stores can offer
lower prices by buying in bulk and can
provide a product range that is more
diverse than most of their external
Quality Growth
High growth in economic
importance; weaker companies
close down; developed
technology and markets
Used Goods Stores
Toy & Craft Supplies Wholesaling
Computer Stores
Fabric, Craft & Sewing
Supplies Stores
Toy, Doll & Game Manufacturing
–10
–10 –5 0 5
10 15
20
competitors. This strategy has gained the
attention of hobby and toy retailers over
recent years and is expected to turn
industry revenue around, pushing it up
0.5% to $17.1 billion in 2012.
Further competition stems from online
retailers of toys and hobby goods, which
Key Features of a Mature Industry
Revenue grows at same pace as economy
Company numbers stabilize; M&A stage
Established technology & processes
Total market acceptance of product & brand
Rationalization of low margin products & brands
Quantity Growth
Many new companies;
minor growth in economic
importance; substantial
technology change
Decline
Shrinking economic
importance
% Growth in number of establishments
SOURCE: WWW.IBISWORLD.COM

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Toy and Hobby Stores Consolidate to Compete
do not generate revenue for this industry.
Online sales of toys and hobby goods
have risen in popularity because they
make shopping for the cheapest toys and
hobby goods more convenient. First, with
fewer or no brick-and-mortar
establishments, overhead costs are lower
and the e-tailer can pass on cost savings
to consumers. In addition, customers can
browse through a variety of sites for the
cheapest goods.
Already, the trend has forced some
smaller toy stores to exit the industry,
leaving behind larger firms to fulfill
consumer demand.
Volatile plastic prices trim margins
Plastic and resin materials are key inputs
in the Toy, Doll and Game Manufacturing
industry (IBISWorld report 33993),
which produces toys and hobby items. A
rise in the price of plastic and resin
ripples through the supply chain, making
toy production more expensive for
manufacturers. These manufacturers
then sell these toys for a higher price to
the Toy and Craft Supplies Wholesaling
industry (42392), which then charges
higher prices to toy and hobby shop
owners, thinning their margins.
This scenario has surfaced over the
past five years, with the price of plastic
materials and resin rising at an average
annual rate of 3.5%, according to the
Bureau of Labor Statistics. This ascent
includes a 9.8% spike in 2008 that
hampered industry profitability.
Thinning margins rendered some firms
out of commission and helped contribute
to a 5.0% decline in the number of toy
shops that year. Although industry firms
reduced the number of stores and
employees to slow margin declines,
rising input costs caused industry profit
to fall from 2.6% of industry revenue in
2007 to an estimated 2.0% in 2012.
Greener pastures lie ahead for the
industry, however; due to rising
disposable income and further industry
consolidation, profit margins are forecast
to expand to 2.5% in 2017.
High-tech products raise purchase costs
The Hobby and Toy Stores industry
provides a variety of products and
services for children and adults alike.
IBISWorld separates the industry’s
products into four groups: traditional
toys, youth electronics, other toys and
games, and hobby and craft supplies. The
youth electronics segment has gained
popularity over the past five years with
the onset of age compression, which is
the phenomenon of younger children
desiring toys traditionally reserved for
older individuals. More advanced toys
are typically electronic in nature, and
thus require semiconductors. Research
and development costs of manufacturing
these advanced toys are significant and
typically passed on to industry operators.
The rapid and sudden rise of age
compression significantly raised the
purchase costs of smaller operators who
could not leverage economies of scale.
Firms without large cash reserves or
access to credit could not purchase these
expensive toys and thus could not
properly satisfy consumer demand. Such
toy stores were forced to close shop,
further fueling industry consolidation.
Strategies to expand market share
Acquiring competitors
Some firms, including major player
Toys ‘R’ Us, have acquired other
industry firms in an effort to expand
their product lines, market penetration
and geographic reach. While firms may
have a sizeable number of products at
their stores, there is always another
firm that stocks different products. By
acquiring a variety of stores in the
industry, a firm can expand its product
offerings, driving more traffic to their
stores. Further, buying out stores in

WWW.IBISWORLD.COM November 2012 4
Toy and Hobby Stores Consolidate to Compete
areas where the acquirer is not already
present boosts market share by
capturing customers in that region.
Organically gaining market share
Another way firms gain market share is
through organic growth. During and in
the wake of the recession, per capita
disposable income and consumer
sentiment fell. In 2008 in particular,
consumer sentiment plummeted 25.5%,
and in 2009, average disposable income
fell 3.2%. Because toy purchases are
highly discretionary, consumers curtailed
their spending on these items,
particularly on more expensive (and
usually higher-margin) toys and hobbies.
These new habits cut heavily into
margins and caused underperforming
firms to exit the industry. With smaller
firms out of the picture, the remaining
firms absorbed the market share once
held by out-of-business firms, increasing
the average firm’s market share.
Recent M&A activity
Toys ‘R’ Us changes its structure
In 2009, Toys ‘R’ Us, the industry’s
largest player, acquired troubled
competitor KB Toys. Although KB’s 460
stores were shut down that year, Toys ‘R’
Us became the owner of KB’s logo and
web address. During the same year, Toys
‘R’ Us operated 849 domestic stores, with
each store generating an average of $9.9
million. Since then, the company has
slashed its store count by about half. This
move is in line with the company’s goal of
shifting to a lower ratio of seasonal stores
to year-round stores, with the seasonal
stores open only during heavy shopping
seasons. As of January 2012, the
company operated 351 domestic stores,
with the average establishment
generating $24.0 million, or more than
double what each store generated two
years prior. This phenomenon occurred
because although the store count halved,
Hobby and Toy Stores Risk Rating
Risk component Weight Score
Structural risk 25% 4.77
Growth risk 25% 5.34
Sensitivity risk 50% 4.74
Overall risk 4.90
demand remained relatively stable for
toys and hobby goods from brick-andmortar
stores, and the remaining 351
stores satisfied this demand.
While the company is expected to be
more efficient over 2012, with domestic
profit rising about $6.0 million, the cut in
the number of stores will slightly reduce
the company’s market share to 47.7%
(down from 47.8% in 2007). Only sales of
toys and hobby supplies from physical
store locations, as opposed to online sites,
contribute to this market share. Revenue
from the company’s consolidated
operations, however, including online
sales of toys and hobby supplies, are
expected to rise 1.0% over 2012 to $14.1
billion. Larger operators across the
industry are expected to follow suit and
reduce their number of establishments,
contributing to an expected average
annual 3.0% decline in the number of toy
and hobby stores in the United States in
the five years to 2012.
Risk factors
SOURCE: WWW.IBISWORLD.COM
Overall risk in the Hobby and Toy Stores
industry is forecast to be moderate over
2013, with a score of 4.9 out of 9. Growth
risk, in particular, is expected to be high in
2013, scoring 5.3 points and accounting
for one-fourth of the score. IBISWorld
estimates that revenue will grow 0.5% to
$17.1 billion over 2012, slower growth
than 2010 and 2011. The primary reasons
for this slowdown are the rising and
volatile prices of plastic and steel, and

WWW.IBISWORLD.COM November 2012 5
Toy and Hobby Stores Consolidate to Compete
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Risk rating
Hobby and Toy Stores Risk Rating
6.5
6.0
5.5
5.0
4.5
4.0
Year 04 05 06 07 08 09 10
mounting external competition from the
online retailing sector. Such pressures
have caused industry participants to
consolidate by shutting down stores to cut
overhead costs. Others have downsized,
reducing the square footage of each store,
thereby lowering rent and utilities costs.
With fewer square feet to manage, some
workers in the industry have been laid off.
Over the past five years, employment fell
at an estimated average annual rate of
1.3% to 142,298 employees, down from
151, 606 in 2007.
Consolidation to come
In the coming years, revenue is expected
to grow strongly on the back of strategic
store placement in heavy-traffic shopping
Benchmarking performance metrics
centers and rises in consumer spending.
During the five years to 2017, industry
revenue is forecast to rise at an annualized
0.6% to $17.6 billion. At the same time,
the number of toy and hobby store firms is
expected to fall at an average annual rate
of 1.1% to 18,145. As toys become more
expensive to produce (stemming from
rising plastic and steel costs), smaller
firms will choose or be forced to shut their
doors, exacerbating the industry’s present
consolidation activity. As the largest
players in the industry use their reserves
to open an increasing number of seasonal
stores (the prime selling season), they will
gain market share. Consequently, the top
four companies in the industry are
forecast to account for 89.3% of industry
revenue in 2017, up from 87.0% in 2012.
Jo-Ann Stores Inc.: 3.8% Michaels Stores Inc.: 5.0%
Michaels Stores Inc.: 3.2% Jo-Ann Stores Inc.: 0.9% Jo-Ann Stores Inc.: 4.5%
Annual Growth: -0.3%* Revenue volatility: 2.2%* Net Income: 3.4%*
Toys ‘R’ Us Inc.: -0.7% Michaels Stores Inc.: 2.6% Toys ‘R’ Us Inc.: 1.2%
*Industry average
Toys ‘R’ Us Inc.: 2.6%
11 12 13
Industry risk Division Risk: Retail Trade Economy Risk: Entire US Economy
SOURCE: IBISWORLD
SOURCE: IBISWORLD

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