The Toy Book - 2016 NY TOY FAIR EDITION

State of the
Industry
LOOKING AHEAD:
PREDICTIONS FOR 2016
by SEAN MCGOWAN, managing director, equity research department, Oppenheimer & Co.
I'VE BEEN COVERING THE TOY INDUSTRY
from an investment perspective for 30 years,
and one of the things I’ve always loved about
Toy Fair is how it forces us to look forward
rather than backward. Even before the holiday
season peaks, companies get so focused
on the following year that they start talking
about “this year’s line” even before the year
they are in has become “last year.” It’s a great
reminder that if you spend too much time
looking back, you will either trip or skip over
what’s right in front of you. Still, it helps to
look back a bit even as you’re looking ahead.
As we review the past year, several
important aspects of the toy industry have
changed significantly. We will discuss these
changes, and my predictions for 2016.
PREDICTIONS FROM 2015
1) Industry sales will grow slightly (Industry
sales were actually up approximately
7 percent);
2) Consumer spending on digital games
will grow strongly (correct for mobile games
and newer console video games, not as true
for older-generation software);
3) Commodity prices, especially oil, will
continue to be unusually low, helping manufacturing
costs (dead on);
4) A strong U.S. dollar will offset the
benefits of lower commodity costs (double
dead-on);
5) Amazon will reach the “tipping point”
(spot on—see more on this below);
6) Smart toys will grow in influence (true,
but nothing is ever easy);
7) Black Friday will decrease in importance
(correct, although I didn’t predict its
ascendance in the UK); and
8) Competition from outside the traditional
toy industry will grow (drones, anyone?).
PREDICTIONS FOR 2016
1) Retailer Shuffle
Some of the topics from my 2015 predictions
repeat this year, but first, let’s talk about
some areas that have seen some change
in the past year. As I wrote this column a
year ago, Mattel was the world’s largest toy
company—as measured by sales and by the
market value of its stock—but it is now being
challenged on both fronts. The value of the
U.S. dollar has soared against most major
currencies, ravaging the sales and profits of
companies making products in China and
selling them in the U.S., or selling them euros,
pesos, pounds, reals, rubles, or Canadian
or Australian dollars and then translating
the results back to dollars. However, I would
argue that one of the biggest things to
change in the last year has been the growth
in Amazon’s power in the industry. Across the
retail landscape (in both the U.S. and, even
more, in Western Europe), online retailing has
steadily gobbled share of total retail sales,
and 2015’s holiday season appears to have
gone well beyond the tipping point.
Amazon’s share of total toy sales may
not be as high as that of some of the largest
retailers of toys (Walmart, Target, Toys “R”
Us), but its share of the industry’s growth is
staggering. Sales data shows that the U.S.
toy industry’s total sales grew approximately
7 percent. If we assume that Amazon’s share
of the industry grew from about 10 to 12
“One of the biggest things to
change in the last year has been
the growth in Amazon’s power
in the industry. Across the retail
landscape... online retailing has
steadily gobbled share of total
retail sales, and 2015’s holiday
season appears to have gone
well beyond the tipping point.”
percent, that would imply that a significant
percentage of the industry’s growth accrued
to Amazon. That’s just math, and the share
and dollar figures may be off a bit, but I still
think the point is fairly unassailable; online
sales are crucial to the industry and Amazon
in particular is a customer that is likely to become
increasingly important. So, the first of
my predictions for 2016 is that Amazon could
very well break into the ranks of the industry’s
top three retailers.
2) Lego Takes Charge
Another area where the industry saw
considerable change over the course of the
year is industry leadership. At the end of
2014, the market value of Mattel’s stock was
about 50 percent higher than that of Hasbro.
One year later, Mattel’s market value was less
than 10 percent higher than that of Hasbro.
So, Mattel is still the leader, but its advantage
has eroded. Similarly, in 2014, Mattel posted
sales of more than $6 billion, whereas Lego
60 THE TOY BOOK | FEBRUARY 2016 | TOYBOOK.COM