April 2014 | Vol. XIII - No. 4
Mattel buys Mega – what is the likely impact?
In a flat to declining U.S. toy market place, Building toys have been a very noticeable exception. Between 2003 and 2013, the total market went from $22.9 billion down to $21.7 billion whereas the Building category more than tripled from $600 million to now $2 billion. Lego has been the main driver in this success story and an article of mine, written in August last year, explained why this was the case – see here.
With about 70% market share, Lego pretty much owns this toy category. Mega is a very distant #2 and K’Nex and Hasbro’s Kre-O an equally distant #3 and #4. Mattel had launched Trio several years ago but it never got traction and finally went away a few weeks ago. The national buyers at the major retailers have been asking ever since when the company would finally take the plunge and make a serious claim for its share of this pie due to it’s position as the largest toy company overall.
This is how the market shares of the major participants looked at the end of last year:
Now that Mattel has bought Mega, and has claimed the #2 spot in the Building category, where are they going to take the brand?
It is Mattel’s strategy to do whatever it takes to dominate the toy categories they consider strategically essential, and the Building category is likely to be no exception to this core philosophy.
This is how the company stacks up in the market share stakes in the U.S. :
They are clearly Numero Uno in their current core competency areas. To achieve the same dominance in the Building category they would have to halve Lego’s market share which is very unlikely to happen, at least in the short to medium term. Mattel is hence much more likely to focus on incremental steps targeting untapped growth opportunities, or gobbling up market shares from smaller competitors, or confronting Lego only in those demographic segments where they are particularly strong and Lego potentially at a disadvantage.
I talked to the national buyers both here in the U.S. as well as in Europe to get their take on what they think Mattel’s likely strategy is going to be.
They believe that a major opportunity for Mattel is in the Girls segment of the Building category. This segment was initially brought to life by Lego after they realized that they depended for 80% of their sales on boys. They created a Girls line, Lego Friends, which they introduced in the fourth quarter 2011 and which turned into a run-away success. By the end of 2013, the percentage of Lego sales made to girls had increased to 35%, up from the 20% they had before.
Mega also recognized this as an opportunity and launched a competitive line, based on the Barbie and Hello Kitty licenses, early last year. This again was successful and in fact nearly made up for all the sales losses the company incurred in the boy segment in 2013. The Barbie part of Mega’s offering now represents about a quarter of their total Building toy sales in the U.S.. There is also of late one other entrant into the Girl segment, GoldieBlox, who is not yet a factor in market share terms.
In other words, sales of Building toys for girls now account for about 28% of the total sales of the Building category. Since girls represent about half of the total consumer group, there would appear to be considerable upside for future growth.
Given Mattel’s strength in the Girls sector overall, and their ability to tap two so far unused licenses – Monsters and Disney Princess – the buyers believe that the first thrust will be in the Girls aisle by upgrading the current Barbie offering and to later this year introducing additonal licenses into the lineup. There is no reason why this should not allow Mattel to double their market share in the Girls segment from the approximately 10% today to 20% by end of this year which would increase Mega’s market share of the total Building Toy category from the 12% today to about 15%.
There is little doubt that this would not only put Lego under pressure but would also severely affect current or future entrants into this part of the Building toy category. Currently, there is only one – GoldieBlox. Theirs is an interesting story.
GoldieBlox, founded in 2012 and making Building toy kits for girls, was the first small business to air an ad during the Super Bowl (February 2,2014). Intuit footed the estimated $4 million bill for the ad, which was seen by a record 111.5 million viewers (Nielsen). The company has wide distribution in Specialty, three SKUs at Amazon, and now has also broken into Mass (two SKUs online at TRU, and three SKUs on the shelf at Target). The buyers tell me that the products started out of the gate with a bang but have since slowed down to a much more sedate pace. The problem appears to be consumer dissatisfaction particularly as far as extended playability is concerned. In other words, the buyers think that GoldieBlox could be a one-trick pony and that consumers are beginning to react to this. In a dragout battle for shelf space and market share between Lego and Mega, Godlieblox is likely to lose out unless they change their product model to something that clearly trumps Lego or Mega in terms of intellectual challenge and longterm playability.
There is, in the opinion of the buyers, another significant opportunity for Mattel – the 2 – 4 year old boy segment which currently is dominated by Lego Duplo. Fisher-Price would be an ideal vehicle for a Mattel entry into this segment, particularly if this entry is under the Thomas label or of other HIT properties such as Mike the Knight, Bob the Builder or Fireman Sam.
This is how the sales in unit terms stacked up between Lego, Mattel, and Mega, in this age group during the 4th quarter 2013:
In other words, Mattel (including Fisher Price and other brands but excluding Mega) is totally dominant in this age group at least at the mass retailers. Lego has less than half Mattel’s sales and Mega, in turn, has about 30% of Lego’s business. There should hence be considerable growth potential for a Mega entry buttressed by Mattel’s clout and licenses.
However, at time when the major retailers are considering reducing toy space overall, these initiatives will but exacerbate the already fierce struggle for shelf space. Today, the Building space is occupied as follows:
The picture for the “Others” looked as follows on March 22:
There seems little question that both Lego as well as all “Other” brands will experience extensive haircuts in shelf space availability as a consequence of a Mattel-muscled Mega campaign. K’Nex and Hasbro’s Kre-O will likely be able to defend their turf and SpinMaster, particularly with their Erector entry, will try their best to expand theirs. However, one buyer told me that the retailers could well consider enlarging the Category shelf space both in the Building and the Girls aisles if this increased competitive activity results in accelerated overall growth for the Category.
While this assessment has been totally focused on mass retailers, there is also the question of what is going to happen in the Specialty toy channel. It consists typically of thousands of single-door toy stores but also includes Learning Express whose individually-owned stores number about 130. In addition, there are also literally tens of thousands of Dollar stores, Craft retailers, smaller mass merchants, and Pharmacy chains, all of whom carry toys of some sort. Between them, they account for about a quarter of the toy market in Dollar sales terms and their market share has been steadily declining.
While this channel could be of importance for the Mega Stationery and Activity business which was also bought by Mattel, it is somewhat improbable that this will change Mattel’s well-established policy of benign neglect towards it. Hence, the smaller manufacturers in the Building Toy sphere, who are traditionally very strong in Specialty, are unlikely, in this instance, to be too much affected by the change in Mega ownership.
Another natural area for sales growth is international. Mattel has nearly half of its business outside North America and a very effective infrastructure in all major toy markets including Latin America and Asia. In contrast, Mega’s international business is pretty much restricted to Europe which accounts for about 30% of their total sales.
On balance, is the Mega acquisition a good move for Mattel? Yes, unquestionably so provided that full-fledged due diligence is done and does not turn up problems. It gets the company into a large and growing segment of the toy market, and one that is not affected by the current trend towards electronics; it allows Mattel to fully leverage their strength in the Girls and Preschool market places; and it fits seamlessly into their strong international operations.
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Writer's Bio: Lutz Muller is a Swiss who has lived on five continents. In the United States, he was the CEO for four manufacturing companies, including two in the toy industry. Since 2002, he has provided competitive intelligence on the toy and video game market to manufacturers and financial institutions coast-to-coast. He gets his information from his retailer panel, from big-box buyers and his many friends in the industry. If anything happens, he is usually the first to know. Read more on his website at www.klosterstrading.com. Read more articles by this author
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