Trouble in Toyland: Sales are slowing
- Trend toward electronic games is accelerating
- Traditional games are more profitable
- Sales in emerging markets are growing
As retailers gear up for the busy holiday shopping season, there's trouble brewing in Toyland, according to research from Goldman Sachs.
Toy sales have been on the decline for some time, but Goldman suspects the trend may be accelerating, and this week the firm cut the industry's rating to "cautious" from "neutral." It also downgraded Hasbro shares to "sell" from "neutral," while keeping Mattel shares at "neutral."
"The nominal amount spent on traditional toys/games in the U.S. per capita is down 30% from $85 per person to $60 per person since 1998, and the pace of the decline has accelerated to 5% to 10% year to date," said Michael Kelter, an analyst at Goldman Sachs, in a research note announcing the ratings changes.
Digital games played on tablets such as Apple's iPad or on smartphones are putting pressure on more traditional forms of play, such as board games and puzzles. This trend may get worse, according to Kelter, as new videogame consoles come to market and reinvigorate the category and draw further from traditional games and toys.
While the trends hurting toy sales are broad in scope, some toy companies are being dealt a heavier blow depending on the brands in their portfolio and the countries where they operate.
Both Mattel and Hasbro derive 50% to 60% of their sales from the U.S. and another 20% to 30% of their sales from Europe, which is showing similar, but not as pronounced declines. Mattel has a larger presence in emerging markets, and it is being help by the growth it is seeing in those regions.
Hasbro, with brands such as Milton Bradley and Parker Brothers, has a bigger share of its business in categories that are suffering the worst, such as games and puzzles. That segment accounts for 25% to 30% of Hasbro's sales.
"It is a shrinking slice of the shrinking pie," Kelter said.
He also expects sales of Hasbro's boy toys — which include Transformers, Beyblades, and Nerf and account for about 40% of Hasbro's sales — will decline in this year and next.
Although those brands have been big sellers for Hasbro in recent years, Kelter expects that streak may be coming to an end. Searches, for example on the word "Beyblades" have fallen about 30% year-over-year, suggesting the product may have run its course, Kelter said.
Mattel on the other hand has been helped by strong girls' brands, such as Barbie and Monster High. Sales of dolls have been basically flat, he said.
Mattel's Achilles heel is Fisher-Price, Kelter said. Toys for preschoolers is Mattel's biggest segment, with about 35% of its sales, he said. But collectively, the preschool segment is now about $1 billion smaller than 10 years ago, he said.
Mattel has invested on a new brand campaign for Fisher-Price, but there aren't any signs the investment is paying off, according to Kelter.
Both Mattel and Hasbro have worked to give their brands some presence in the digital world. Hasbro, for example, sells a version of Monopoly that interacts with an iPad, but the profits are not nearly as rich in the digital world as they are in the physical one.
Kelter estimates that when Hasbro sells a Monopoly board game for $15, it generates $5 in profits given the estimated 33% contribution margin for their games business. But an app for the iPad or iPhone only generates $1 to $2 in profits, he said. So while the percentage made from an app may be greater, the revenue is so much lower it will be tough for app sales to compensate for the decline in sales of traditional games.
Already, Kelter estimates sales of digital games account for about 10% of a super-category he has created that encompasses video games, digital games and traditional toys and games. Less than 10 years ago, it had less than 1% share. What's more, the digital game category is growing at more than 20% a year.
© 2012 CNBC.com