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Toy Manufacturer profitability case.pdf
- 1. TOY BOX: Unlocking New Potential Team Star Struck IIM Bangalore
- 2. Toys & Games in UK is a ~€8Bn market with a ~3.5% expected growth; showing characteristics of a mature market Note: Conversion rate used is 1GBP = 1.14EUR Source: Case data; Statista reports; Team analysis Toys & Games market in the UK over time (Revenue) 6.9 7.1 7.3 8.0 8.2 7.8 8.1 8.4 8.7 0 2 4 6 8 10 2017 2018 2019 2020 2021 2022E 2023E 2024E 2025E Revenue (Bn EUR) Monetization Engagement Toy Portfolio >50% increase in likeliness to spend on sudden craze toys Stocking up high demand toys during peak periods – effective inventory mgmt 3D Consideration for Success 5.6% 3.9% 2.6% 9% 2.2% -4.1% 3.6% 3.5% 3.5% -5% 0% 5% 10% 2017 2019 2021 2023E 2025E Revenue change Broad trend towards maturing market Higher interaction for latest ‘hotshot’ games & bestsellers Segmentation of UK Toys & Games Market by category (2020) Number of manufacturers in UK Toys & Games over time 2.66 1.57 1.24 1.15 1.10 0.14 0.13 0.0 1.0 2.0 3.0 Revenue (Bn EUR) Video Game Consoles Toys for Toddlers & Kids Dolls & Stuffed Toys Plastic & Other Toys Construction Sets & Models Puzzles Card Games 500 483 504 516 564 594 675 674 636 684 0 200 400 600 800 # of Manufacturers 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
- 3. Underlying behavioral shift driving long term market changes; emerging trends present attractive growth opportunity Note: List of trends not exhaustive Source: Case data; Team analysis Market Growth Time duration Market Growth Time duration Evolutionary Change Taste & Preference Change Market Consolidation ❖ Maturing market with too many players pushing down scope of profitability ❖ American super brands & MNCs consolidating power via acquisition of small players E-retailing (Online channel) Technological precedence Substitute Industry threat Age Compression ❖ Other forms of entertainment eating up time & spending share of kids (music, football..) ❖ Attempt to portray toys as more ‘Childish’ turning successful for kids nearing the age of 10 ❖ Increasing penetration & affordability of gadgets boosting early age adoption ❖ AR / VR and other new age toys kicking out the traditional giants out of business ❖ Tendency of children to move away from Toys starting earlier ❖ Social conditioning leading them to lose interest / discard a given toy relatively quicker ❖ Following the retailing trend across all industries prioritizing convenience ❖ External factors like Covid-19 forced accelerated e-retailing adoption Brain activity preference ❖ Parents and middle-aged toy shoppers are increasingly shifting their focus towards educational toys ❖ Especially after COVID-19, parents want to fill learning gap through play time at home
- 4. Toys R Us is consolidating a flat growth market; Correlation between portfolio, scale & profitability gives useful insights Note: Smaller players have been clubbed under ‘Other’ Source: Case data; Team analysis 306 339 372 132 135 133 94 84 74 48 46 42 30 33 41 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 2017 2019 2021 611 638 662 +4% +2% +4% Toy Box Other Toys R Us Childrens Grotto Learning World Player CAGR (’17-’21) Operating Margin (’21) Toy Box -6% 2% Toys R Us 5% 3% Learning World 9% -8% Childrens Grotto -4% -19% Other 0.2% NA Market size by Revenue (Mn EUR) Evolution of the competitive landscape in UK Toys market -30% -25% -20% -15% -10% -5% 0% 5% 10% 0 5 10 15 20 Operating Margin % (2021) Number of categories in portfolio Operating a wider portfolio with low scale dampens profitability a lot Toy Box has to move north-west Smaller players stick to limited categories, still might not be profitable Toys R Us leveraging Scale Economies to dominate categories This chart excludes Toys R Us data as its high revenue skews the visualization Understanding the relation between portfolio, size & margins Diversification hedges risk against variability of demand in a particular category or segment Higher operating cost of large stores limits expansion capacity Bigger inventory management reduces stock out possibility and minimizes lost sales opportunity Larger scale limits customer interaction & understanding, hence increases response time to market Toy Box
- 5. Implications for Toy Box: Critical juncture in business lifecycle; New approach with sharper focus & responsiveness required Source: Case data; Team analysis Concerns facing Toy Box? ❑ Sales decline - Continuous decline in sales volume & pricing power (2017-21: ~21% sales decline) ❑ Increasing competition - Toys R Us continues to expand footprint impacting Toy Box customer base ❑ Deep pocketed competitors – Toys R Us is consolidating (5x Toy Box revenue) and is supported with deep pockets ❑ Blurring of the “Toy” categorization - New entertainment substitutes taking up the mind space and time share of children: Video games, Music, Sports, Media merchandise What should Toy Box do? ❑ Specialize – Identify attractive subsegments in toys & capitalize on opportunities in niche segments o Higher margin emerging segments with high expected demand due to underlying market changes ❑ Efficient Operations – Focus on margin & cash flow maximization; Minimize expenses ❑ Enhance customer engagement & stickiness - Exploit brand equity of “Toy Box” & top it up with superior customer experience & engagement ❑ Align org. structure & incentives with new corporate strategy ❑ Expand presence to newer markets (geographies) Product portfolio Engagement Target Markets Success factors in UK Toy industry Sweet spot Responsive- ness Customer focus Agility Freedom & Culture
- 6. Need to realize placement in market; Video / Computer games and Educational Toys top contenders for concentrated efforts Note: The categories of Activity, Educational Toys and Arts & Crafts have hereafter been clubbed under one umbrella category named ‘Educational Toys’ Source: Case data; Team analysis 10 60 110 100 0 40 120 20 30 80 90 50 70 130 90 Educational toys 27 Puzzles Models Video & Computer games Infant Activity Dolls Soft toys Board Games 41 Toy vehicles Male action Other Ride-ons Outdoor toys Arts & Crafts 123 31 93 64 47 38 33 11 28 4 45 39 Others Toys R Us Toy Box Childrens Grotto Hamleys Learning World Large MNC players Legacy local retailers Consolidation in market forces them towards narrowing focus Deep Pockets allow MNCs to fuel inorganic growth via acquisitions Need to minimize damage by specializing in 1-2 categories Can afford to be present across segments with leading share Proposed Focus Segments Player Shares by Market Segments (Mn EUR) Toy Box Childrens Grotto Learning World Focus on being leader of some rather than being a laggard of all Victims of increasing competition & price wars with larger players Flat industry growth making them pursue aggressive routes
- 7. 123 200 319 2017 2021 2026E Educational game Sales (€ mn) 128 261 400 2017 2021 2026E Video game Sales (€ mn) Positioning Toy Box for leadership in the UK toys market Source: Case data; Team analysis, Public domain Where To Play? Target group (% of population) Segment stability Remarks Educational Toys 35+ age (40%) High High margin; Strong traction in elders Video games 15-44 age (34%) High High margin & high growth Sporting merch. All age groups High High margin but Toy Box lacks capabilities in the segment Media merch. Young Kids Low High risk – High reward; Uncertainty of scoring a “HIT Toy” is high How To Win? ✓ Identify & target attractive customer segments & markets ✓ Position Toy Box value proposition prominently and effectively – Enhance marketing & communication ✓ Lean operations – Focus on core business activities (Buying & Selling, Customer service, Marketing) ✓ Sharpen focus of business – Narrow the portfolio o Employ a divisional structure (product line based) higher accountability, faster response to changes in market o Helps align & track performance effectively o Hire appropriate talent per business requirement ✓ Stay abreast of and responsive to market developments 50-60% 45-50% Margins Requires setting-up highly responsive sourcing & inventory practices
- 8. Achieving operational excellence at Toy Box Source: Case data; Team analysis Key Business Activities Sourcing Distribution Store Ops. & Service Marketing Org. Structure Customers Market mediation Internal function • Focus on Customer delight • Focus on efficiency ✓ Focus on keeping customers happy & engaged ➢ Ensure product assortment matches customers’ needs ➢ Improve customer service – training of sales personnel ➢ Enhance store experience & feel ➢ Prevent customer disappointment – Clear communication of offerings; minimize stockouts Market mediation – Revenue driver A ✓ Focus on efficiency in costs & achieving corporate objectives ➢ Outsource non-critical activities like distribution ➢ Align corporate structure with business model – Product based org. structure aligning KPIs and incentives ➢ Hire talent commensurate with corp. strategy (Niche play, marketing etc.) ➢ Dedicated teams to track market movements & customer preferences Internal function – Cost driver B
- 9. Geographical analysis: Utilizing Toy Box’s geographic presence to optimize response towards threat from Toys R Us stores Note: The analysis is based on the sample data set of 31 stores and doesn’t take into account the full population of 100 stores; ‘Competition impact’ refers to presence to Toys R Us store in the same location Source: Case data; Tableau, Team analysis Stores where absolute revenue declined from 2017 to 2021, with competition impact Stores where absolute revenue increased from 2017 to 2021, with competition impact Stores which did not see any competition impact Scenario TRU present in 2017 TRU present in 2021 Total Stores Green % Red % “Short Run” 13 8% 92% “Long Run” 7 71% 29% Hypothesis: Toy Box is more or less able to deal with the competitive threat of Toys R Us over a longer period of time. Though it remains to be severely impacted in the initial years (potentially due to customer acquisition tactics by TRU) Expand to Out Of Town Stores Establish Product Niche ❖ Current focus on High Street locations only caters to half of the total market opportunity ❖ 57% of Out-of-Town shoppers are of age 35+, which are more likely to buy Educational Toys ❖ Threat of competition from TRU is much lesser for such locations as there is limited revenue potential ❖ To counter competition coming in on existing turf, more responsiveness to customer demand is required ❖ Specializing on some categories & spotting early trends can go long in building first mover advantage ❖ In selected categories, a wider assortment of products can be introduced to sub-urban public ‘Red’ stores typically tend to be smaller in scale than their counterparts Created on Tableau
- 10. Summary recommendations & Action plan: Prioritization framework, timelines & expected challenges Note: The assessment of the recommendations have been done qualitatively by the team Source: Case data; Team analysis Direct Impact Time Commitment & Efforts 1 2 3 4 5 Recommendation Operational Ease Financial Commitment Time for execution Narrow down Product portfolio to focus on 2 main segments: Video & Computer Games; Educational Toys Short – Medium Term Expand store presence to Out Of Town areas This presents 50% of untapped market opportunity with lower threat from competition Medium - Long Term Outsource distribution to third party vendors Optimize cost using pooling economies by specialized logistics players Short Term Re-position itself as a specialized & focused brand Communication to the market to install interest in the new marketing message Short – Medium Term Rejig the Organizational Structure to divisional Clearly identify the 2 divisions & establish boundary spanning teams to maintain agility Medium Term 1 2 3 4 5 Action plan for moving towards a sustainable profit model Impact evaluation & Prioritization framework Headwinds expected to be encountered Resistance to change within the organization: Need to tackle this with explanation & help to all employees highlighting tangible & intangible changes Confusing brand positioning among customers: Need to roll out a proper communication campaign to establish credibility with respect to the changed organizational mission & stance in the industry
- 11. Financial implications & Expected impact on Toy Box Note: Preliminary projections: Revenue growth assumed at 3% p.a. – Conservative estimate vs 9-10% CAGR for video games & educational toys since Capex capability & store expansion data is not available for Toy Box Source: Case data; Team analysis Financial implications & projections of proposed recommendations Impact on Toy Box business (€ in 000s) 2021 2022E 2023E 2024E 2025E 2026E Revenue/Sqft 247 350 361 371 382 394 Total sqft 300 300 300 300 300 300 # Shops 102 102 102 102 102 102 Revenue 74,320 1,05,140 1,08,294 1,11,543 1,14,889 1,18,336 Bought in costs 32,772 39,953 41,152 42,386 43,658 44,968 Gross profit 41,548 65,187 67,142 69,157 71,231 73,368 Gross margin 56% 62% 62% 62% 62% 62% Store Costs 13,249 15,118 15,151 15,184 15,218 15,251 Distribution Costs 6,524 7,360 7,581 7,808 8,042 8,284 Overheads 3,942 4,001 4,061 4,122 4,184 4,246 Marketing Costs 6,237 6,299 6,362 6,426 6,490 6,555 Store Labour Costs 10,212 16,631 16,880 17,134 17,391 17,651 Total operating costs 40,164 49,409 50,035 50,674 51,324 51,987 Total costs 72,936 89,362 91,187 93,060 94,982 96,955 Total operating profit 1,384 15,778 17,107 18,483 19,907 21,381 Operating margin% 2% 15% 16% 17% 17% 18% Note: Excludes store network expansion into out-of-town locations Profit margins Target customer base Inventory variability Efficiency Marketing focus Portfolio diversification Differentiating factor TB current average performance TB expected performance post recommendations Low High
- 12. Appendix – UK Toys market segmentation by Category (2017) Source: Case data; Team analysis 128 88 87 84 82 80 66 63 42 39 37 33 26 9 151 0 20 40 60 80 100 120 140 160 Video & Computer Games Activity Dolls Infant Male Action Ride-Ons Board Games Toy Vehicles Models Puzzles Outdoor Toys Soft Toys Educational Toys Arts and Crafts Other Revenue (Mn EUR)
- 13. Appendix – Financial implications of Status-quo Source: Case data; Team analysis (€ in 000s) 2017 2018 2019 2020 2021 2022E 2023E 2024E 2025E 2026E Revenue/Sq.ft 247 238 230 221 213 205 <<Reduced volume & pricing due to competition Sq.Ft 300 300 300 300 300 300 #Shops 102 102 102 102 102 102 Revenue 93,932 88,278 83,832 78,713 74,320 71,595 68,971 66,442 64,006 61,660 Bought in costs 34,017 33,798 34,007 33,295 32,772 31,571 30,413 29,298 28,224 27,189 Gross profit 59,914 54,480 49,825 45,418 41,548 40,025 38,557 37,144 35,782 34,470 Gross margin 64% 62% 59% 58% 56% 56% 56% 56% 56% 56% Store Costs 11,824 12,206 12,552 12,904 13,249 13,282 13,315 13,348 13,382 13,415 <<Tightening real estate market Distribution Costs 7,010 6,943 6,800 6,668 6,524 6,426 6,330 6,235 6,141 6,049 <<Inhouse distribution + IT development Overheads 3,520 3,620 3,782 3,895 3,942 4,001 4,061 4,122 4,184 4,246 <<Inflation Marketing Costs 6,492 6,419 6,322 6,339 6,237 6,299 6,362 6,426 6,490 6,555 <<Increasing competition Store Labour Costs 9,834 9,968 10,035 10,138 10,212 10,365 10,521 10,679 10,839 11,001 <<Change in labour law Total operating costs 38,680 39,155 39,491 39,945 40,164 40,374 40,589 40,810 41,036 41,267 Total costs 72,697 72,954 73,498 73,240 72,936 71,945 71,002 70,108 69,260 68,456 Total operating profit 21,235 15,324 10,334 5,473 1,384 -349 -2,032 -3,666 -5,253 -6,796 Operating margin% 23% 17% 12% 7% 2% 0% -3% -6% -8% -11%