World’s biggest toymakers aren’t having much fun these days

There’s trouble in toyland, and it started long before Toys ‘R’ Us went bust.

Sales at the world’s three biggest toymakers—Lego A/S, Hasbro Inc. and Mattel Inc.—slumped during the crucial 2017 holiday season, and the outlook for 2018 isn’t much better. Kids are tiring of movie-linked playthings, such as Lego’s Batman and Hasbro’s Star Wars lineups, that used to be reliable moneymakers. Venerable brands such as Mattel’s Barbie and American Girl are showing their age.

Many shoppers are trading down to collectible figurines such as L.O.L. Surprise dolls and Hatchimals stuffed animals that can retail for less than $10. And the big toymakers don’t have much skin in the fast-growing mobile-games sector, which already commands 20 percent of the $187 billion global toys and games market, according to Euromonitor.

What went wrong and how can the Big Three bounce back? The companies focus mainly on saturated North American and European markets, when they should be stepping up efforts in Asia, Latin America, and the Middle East, where there’s more growth opportunity, according to industry watchers. And the giants need to do a better job of pitching their wares via YouTube, Instagram and other social media, which smaller rivals are using to gain market share.

These problems “are all self-inflicted,” says Lutz Muller, president of Klosters Trading Corp., an independent toys consultancy based in Vermont. “Kids are wedded to their smartphones, wedded to social media, and the savvy marketers are using this to promote their products.”

Lego on March 6 announced its first revenue decrease in 13 years, after dismissing some 8 percent of its work force in 2017. Hasbro, which ranks just behind closely held Lego in worldwide sales, suffered a 2 percent fourth-quarter drop, although full-year sales grew 3.8 percent. Mattel has plunged from global No. 1 to No. 3 after four straight years of revenue decline, including a 12 percent slump in the last quarter of 2017. Mattel’s chief brands officer stepped down in February, as the company said its top two executives would assume more control over its biggest properties.

All that—and then on March 15, Toys ‘R’ Us announced it would close all its U.S. and U.K. stores. The closings could dent Mattel’s 2018 sales by as much as 10 percent, and Hasbro’s up to 5 percent, Bloomberg Intelligence estimates.

Other big-box retailers could take up some of the slack; indeed, Walmart is already the No. 1 U.S. toy retailer. But because non-specialty retailers allocate less shelf space to toys, “they put out what’s less risky,” focusing on a limited selection of proven hot sellers, says Bloomberg Intelligence analyst Mariam Sherzad.

That could jeopardize secondary brands and product innovation. Hasbro, for example, has more than 60 brands, from Baby Alive dolls to Battleship war games. Mattel was planning to launch new products as part of its turnaround effort. “They may have to hold back on that now,” Sherzad says. While toymakers are building their own e-commerce sites, online sales account for less than 16 percent of the global toys and games market, according to Euromonitor.

The shift toward cheap toys is yet another worry. Sales growth in the $10-and-under category is outpacing the overall toy market, with social media-fueled crazes such as a line of miniature collectibles based on Hatchimals, tiny stuffed animals that “hatch” from plastic eggs. They’re made by Spin Master Corp., a Canadian company whose revenue growth has dwarfed that of Hasbro and Mattel in recent years.

Social media is central to Spin Master’s marketing strategy. The company built anticipation for Hatchimals before the product’s launch in late 2016 with YouTube videos, and other online posts that showed the plastic eggs without disclosing what was inside.

The big toymakers need to become more adept at spotting trends and leveraging social media, says Frederique Tutt, global toys industry analyst at NPD Group. “They need to think about new growth generators.”

Mobile gaming is often blamed for toymakers’ woes, but the evidence is scant. Kids aged 8 and under now spend an average of nearly 49 minutes a day in front of a smartphone or tablet, up from 5 minutes in 2011, according to a 2017 study by Common Sense Media, a not-for-profit advocacy group. But the study found that increased time spent on mobile devices was offset by an equal decline in TV viewing, so kids’ available time to play with traditional toys hasn’t changed.

Some toymakers still have reasons to celebrate. While Mattel and Lego have lost market share in the U.S., Hasbro’s share has grown to nearly 16 percent from 13 percent over the past four years, according to Klosters data. Though sales of its Star Wars toys have been tepid, Hasbro struck gold this year on the hit movie “Black Panther.” Citing “robust demand,” the company says it’s ramping up production of action figures, claws and other items linked to the movie’s superhero star.

Hasbro Chief Executive Officer Brian Goldner expects movie-linked toys will continue to drive sales growth. The company has a strong slate of products tied to new Star Wars and Avengers movies this year, he said in an interview. That lineup will help Hasbro “deal with the short-term challenges that the Toys ‘R’ Us liquidation presents,” he said. “In 2019 and beyond, we’ll return to the kind of growth we’ve seen in the past.”

Hasbro is also transforming iconic brands such as Monopoly and My Little Pony into mobile games. The company took a controlling stake in Colorado-based mobile-games maker Backflip Studios in 2013 and increased its holding to 100 percent last year. Gaming now accounts for 16 percent of Hasbro revenues.

Lego is stepping up investment to pair its traditional plastic-brick toys with digital technology. An example is the Lego Boost, a mobile app launched last year for kids age 7 and up that lets them use coding to build customized robots. “We see this as a way of keeping children interested for a longer time,” Lego CEO Niels B. Christiansen said in an interview with Bloomberg News.

Mattel has teamed up with NetEase Inc., China’s second-largest video-games publisher, to develop mobile games and create digital content linked to Barbie, Fisher-Price and other brands.

Investors, though, don’t seem convinced that the industry is on track for growth. Mattel shares are down nearly 50 percent over the past year; Hasbro’s are down about 15 percent. In a sign of the market’s skepticism about Mattel’s prospects, investors value Mattel at only $4.5 billion, about the same as Spin Master, even though the U.S. company’s sales are three times greater.

One way the companies might seek to cut costs and boost sales: a bid by Hasbro to acquire Mattel. The companies discussed a deal, the Wall Street Journal reported in November, and Reuters said Mattel ultimately rebuffed its suitor.

For all the interest in digital technology and collectibles, more-traditional toys will remain an important part of the market, says Matt Hudak, a toys and games analyst at Euromonitor.

“You have millennial parents, having a late-in-life child,” he said. “They may be more interested in educational toys—or just want to share Star Wars with their kids.”