TOY INDUSTRY ASSN. UPBEAT ON 2002, EXPECTS 6% GROWTH

Despite facing various obstacles in 2001 -- most prominently troubled economy and terrorist attacks Sept. 11 -- traditional toy industry (excluding videogames) still managed 1.7% sales growth, Toy Industry Assn. (TIA) Chmn. Patrick Feely told N.Y.C. news conference Thurs. kicking off annual American International Toy Fair. Retail sales in 2001 reached $25 billion, up from $24.6 billion year ago. Results, he said, were particularly positive when compared with how other industries fared in 2001.

Meanwhile, NPD Group released data Thurs. indicating total toy industry growth in 2001 actually was 10% when videogames were factored in -- $34.4 billion compared with $31.1 billion year earlier. NPD said videogame sales soared 43% to $9.4 billion in 2001, driven in large part by rollouts of Nintendo’s Game Boy Advance (GBA) and GameCube and Microsoft’s Xbox game systems. NPD Group’s NPDFunworld div. said total videogame hardware unit sales increased 39%, with higher prices of next-generation game systems leading to triple-digit increase of more than 120% in dollars. NPD also said videogame accessory unit sales jumped 26% in 2001 and dollar growth 47%. PlayStation 2 (PS2) accessories led all platforms in accessory sales with 517% unit sales increase in 2001, while portable accessory unit sales rose 10% overall. However, NPDFunworld Toys and Videogames Dir. Ilene Haase cautioned: “Last year will be a tough year to top since higher priced hardware systems drove the majority of the dollar growth. As for 2002 and beyond, we look forward to seeing the industry move toward connectivity via the Internet and a new level of superior quality games that can harness the power of these technologically advanced machines.”

Total U.S. interactive entertainment software market -- including PC and videogame software -- approached $6 billion in 2001, up from $5.4 billion year ago, NPD said. Console and portable software unit sales increased 8.3% and PC software units 3.8%. Not surprisingly, top-selling console game in units was Grand Theft Auto 3 from Rockstar Games, which NPD said sold just under 2 million units since Oct. Half of top 10-selling videogames by unit in 2001 were for PS2, while one -- Super Mario Advance at #5 -- was for GBA, 2 for Game Boy Color, 2 for PlayStation. No GameCube or Xbox games made top 10. The Sims from Electronic Arts was again number one PC game. Title has sold more than 2.6 million units since its introduction more than 2 years ago. NPDTechworld Senior Software Analyst Steven Koenig said: “Sales in the PC game sector during 2001 were largely driven by a handful of proven franchises and correlating sequels or expansion sets. As a result, the market for PC games managed to achieve relatively good growth in 2001, despite the gaming industry’s strong focus on the console business during the last half of the year.”

TIA’s Feely, who also is CEO of Radica Games, said toy industry failed to achieve 6% growth rate in 2001 that he had predicted year ago. In kicking off last year’s Toy Fair, he said that “after experiencing the largest increase in a decade in 1999,” toy industry saw sales drop 1.4% in 2000 but he expected rebound in 2001. That didn’t quite happen to level toy industry had hoped for. Industry and its investors were confident that after terrorist attacks consumers would return to stores in 4th quarter to buy toys for their kids, Feely said. However, he said: “Given the dismal retail scene following the 9/11 attacks, retailers chose to take a more cautious approach in their holiday purchases. Therefore, it is likely that significant sales were lost due to tight retail inventory management during the 4th quarter of last year. By the end of November, store shelves were out of stock on many items… but it was too late to restock.”

On positive note, Feely said: “Retail inventories ended up very clean [at end of 2001] and the retailers will need to replenish their supplies, creating a positive outlook for the first part of 2002 as increased shipments are likely during the early months of this year. As the economy continues to improve during the year we should see this momentum build in the industry as the year progresses.” Therefore, Feely said he expected industry finally to see 6% growth this time around: “In 2002, we will see an even stronger cast of important new licenses on top of what should be a much improved market environment and less uncertainty at the retail level. In short, we're looking forward to a very good year.”

While category showing best sales increase in 2001 was action figures, licensed properties category -- after decline in 2000 -- performed strong as well, Feely said. Top licensed properties in 2001 included Harry Potter, Monsters Inc., Jurassic Park. Infant and preschool category also saw strong sales with 13.8% increase on products by Fisher-Price and LeapFrog’s LeapPad and LeapPad Books. Products in “All Other Toys” category featuring electronics and technology, including Takara and Hasbro’s E-kara TV karaoke product line and Tiger Electronics’ Hit Clips, also were strong sellers, he said.

Toy retail climate continued to change in 2001, Feely said, as changes “affected some of the major players. The retail scene is one of the most volatile areas in our industry today, dramatically impacted by our economy and changing consumer retail trends. Wal-Mart and Toys ‘R’ Us continued to dominate toy retailing in 2001 and are likely to have even more importance in the future, given bankruptcies at several key retailers during the last 2 years.” Most-recent bankruptcy of major retail chain was Kmart last month (CED Jan 23 p1). Kmart had 3rd largest market share of toy sales in 2000 at 7.4%, behind only Wal-Mart (19%) and Toys “R” Us (16.5%).

Also commenting on changes in retail toy environment was Toys “R” Us Chmn. John Eyler, who said: “Every year there seem to be fewer players and the fewer players that have large market shares continue to grow.” He predicted that “in the next 5 years, at least of 15% of market share that currently exists out there will belong to players who won’t be here 5 years from today.” Biggest challenge, he said, was not to try to take market share from Wal-Mart, which has 20% at this point, but “who gets the biggest slice of the rest. There’s more than 80% market share up for grabs and our belief is that over any period of time, we can grow market share simultaneous to Wal-Mart and simultaneous to [number-3 toy seller] Target because there will be at least 15% up for grabs over the next few years.” Eyler also said data continued to indicate that his company’s remodeling initiative in which it’s converting all of its stores to Mission Possible format was helping to grow sales, traffic and positive customer opinions of Toys “R” Us. He said: “By October of this year, we will have renewed the entire portfolio of Toys ‘R’ Us stores.”

On online sales front, Feely said “although e-commerce has not lived up to its initial promise, it is proving to be an important source for toys and games particularly at industry leaders Toysrus.com and KBToys.com.” Although he said “final figures are still being compiled, total online sales increased by over 40% in 2001 and toys are one of the leading categories driving that growth.”

Sour note was hit at news conference in Q&A segment when organization and its assembled panelists were asked to comment on report handed out by N.Y.C. anti-sweatshop watchdog group National Labor Committee (NLC) for Workers and Human Rights. Report -- Toys of Misery: Made in China -- claimed human rights abuses were rampant at factories in China that suppled largest U.S. toy manufacturers and retailers with many of their products. As example, NLC said Shuihe Electronics in Guangdong, which it said produced toys for Mattel and Wal-Mart, “requires 100-plus hour work weeks, pays half the legal minimum and overtime wages, exposes workers to toxic paints, glues and solvents with no protective equipment, forces workers to live 14 to a room in dirty, crowded dormitories and fires workers who protest.” TIA Pres. Thomas Conley said “we think there are many inaccuracies” in report. But he said TIA had “talked to our colleagues in Asia, we talked to the authors of that report,” and had “been working with 19 other toy associations all around the world and we have been working very hard to get our code of conduct in place… We take great pride in our leadership role in making sure that not only are our toys made safely, but they're made in factories that are safe for their workers and that their workers are compliant with all of the laws of the countries in which the toys are being made… We hope to continue our dialog with the authors [of report] and we hope to continue to work to improve on the conditions for the global production of toys.” He said that, according to import figures of Commerce Dept., “about two-thirds of the toys” made by his group’s members “are currently made in China.”