Spielwarenmesse: An inside view on toy markets: USA

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06. June 2017 / Market

An inside view on toy markets: USA

from Steve Reece /  Show comments

The USA typically gets the most attention from toy companies looking to expand outside their home markets. There is no doubt that a few wins ‘over the pond’ can hugely ramp up sales. There are however some big risks and challenges associated with entering the American toy market.

The US toy market has two distinct distribution channels: Mass & Specialty. The Mass channel features two prominent generalist retailers who drive huge volumes of sales: Walmart & Target. These two retail giants have nearly 7,000 stores between them. As is typical for generalist retailers, the space allocated to toys varies somewhat throughout the year, with a much bigger range for October-December peak season.

A further example of the sheer scale of the US toy market is Toys R Us, this international stalwart of the global toy industry has more stores in the USA than it does in the rest of the world combined. Toys R Us has in the region of 800-900 stores in the USA, if we compare this with the approximate 60 stores in Germany for instance we can see the sheer scale difference. Think of it this way – if every store takes one master carton of a product i.e. 6 units of a product, that would add up to c. 360 units in Germany, whereas in the USA it would add up to somewhere around 5,000 units.

Selling toys in the US mass market requires large numbers

All of which sounds like a great opportunity…except that it takes a large amount of cash to cashflow a business supplying businesses operating on such a scale. Let’s look at it this way – if you do a deal to get 3 products listed by the largest retailer in the Netherlands for instance, you would do well to sell 30,000 units over the three products. If you get 3 products listed at Walmart or Target across the US, you would be looking at more like 300,000 - 500,000 units across 3 items on average performing products. So, presuming your manufacturing cost is around $3 per unit, you’re looking at $million cashflow just to manufacture stock. Clearly this starts to look like both a massive opportunity & a massive potential headache at the same time! Imagine if the product doesn’t sell through well & the retailer wants to cancel orders…there could be a large stock issue to manage.

We might then want to sell on an FOB only basis i.e. the retailer takes the stock at the port in China, India, Vietnam, etc., and then it’s their responsibility…but retailers buy FOB when it suits them, not when it suits you! So, there is no guarantee those terms can be used to reduce your risk.

The bottom line is that mass toy market in the USA can be a roller coaster ride for smaller toy companies with fewer hot or must list toys, because a good year of 5 or 6 listings might be followed by a bad year with only 2 listings or even de-listing. This is challenging to manage in terms of overhead commitments etc.

Considering the specialty market is a reasonable approach

For most new market entrants, the US Specialty market is a safer bet, with a more diversified and de-risked opportunity, which offers a more solid foundation for building a toy business with somewhat less of the roller coaster ride of mass market distribution.

One of the least logical approaches I have observed many times is companies who won’t consider a US Specialty account which can sell 5 - 10,000 units of a product as being too small. The same companies will often fly half way round the world to pitch to the leading retailer in a small market with the same potential! The opportunity to sell to ‘small’ US accounts who can order thousands of units is vast. There are regional retail chains in America with stores across only a few states which have hundreds of stores, or even as many as a thousand stores. To put this in context – Argos, the UK’s highest volume per item toy retailer has c. 750 stores. There are so many retail opportunities in the US Specialty toy market that a prudent approach to building a business should surely focus on Specialty first & foremost.

Start with a rep

One further important point about the US toy market – it is very usual to sell to retail via reps. There are established sales rep groups turning over $millions. Even medium sized established toy companies will sometimes sell to Walmart or Toys R Us via reps. This rep tradition is partly a feature of the geography of the US – it’s a vast country. A good rep can open the door into retail accounts, but most importantly they can also maintain or grow listings once the account is up & running.

Don’t forget logistics

Looking at the sprawling geography of the US, one further major challenge is distribution & logistics. While the opportunity is huge, so is the complexity of delivering products across the US. Walmart for instance has over 40 regional distribution centres just to cover the USA. Many a business has died a death due to failure to manage supply effectively/profitably. So – the USA undoubtedly offers vast opportunity, but beware of the challenges that come with that scale of opportunity.


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Author of this article:

Steve Reece, CEO Kids Brand Insight

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