CORPORATION: Trying Times for Transformers Toymaker
With the Steven Spielberg-produced Transformers a summer smash in
theaters worldwide, these should be happy days for Tomy, the Japanese
company that makes the shape-shifting toys on which the blockbuster
film is based.
Yet with news headlines dominated by made-in-China scandals
involving toymakers such as Mattel (MAT), there's no fun in Toyland.
Tomy, like so many other Japanese and Western toy companies, relies on
factories in China to manufacture most of its toys, and that Chinese
sourcing is now causing big problems.
On the heels of Mattel's Sept. 4 announcement of a recall of
Barbie accessories and other toys due to worries about dangerous levels
of lead paint, the share price of Tomy, which has product-licensing
agreements with Mattel, is languishing at a four-year low. Tomy shares
fell 2.6% on Sept. 5 in Tokyo trading, marking their lowest level since
August, 2003. The stock price is down more than 22% this year, compared
to a 6.2% drop for the Nikkei index.
Quality problems associated with Chinese production are the
biggest immediate concern for investors. On Aug. 17, Tomy said it would
recall Chinese-made toy cars that it markets and distributes for Mattel
in Japan after finding lead in the paint. That move wiped 10% off the
stock price, although the company bravely insists it has no regrets.
"We want to provide consumers as much proof as possible so as to
guarantee the quality of our products," says Seiichiro Wasahara, a
spokesman at the company.
Bringing Back Old Fans
While the China scandals dominate
the headlines now, Chinese factories aren't the only problem for Tomy.
Just as worrying, at least in the longer term, is that the company's
main market, Japan, is shrinking as the population ages. Statistics
show just how bleak the future is. By 2030, the National Institute of
Population & Social Security Research predicts Japan's population
of 127.7 million will fall by almost 10% and that youngsters will
number fewer than one in 10, from around 13.6% now.
To fill the void, the company is targeting adults for one of
its hottest toy rollouts in years. To coincide with the release of
Transformers in Japan, Tomy is rereleasing dozens of the morphing robot
toys that the company hopes will be a hit with generations X and Y.
"The Transformers have had an image in Japan of being only for
children," says Masahiko Yamazaki, who leads Tomy's marketing effort.
"We'd like to bring back old fans and create a new market for adults."
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The need to appeal to a broader audience is clear. In the past,
Japan's toymakers had plenty of toy and game tie-ins to TV programs and
movies for kids. But with Japan's youth population rapidly declining,
they're being forced "to expand the market by increasing the targeted
age range," says Fumiaki Ibuki, editor of Toy Journal.
Tough Competition from Astro Boy
The prized demographic
in Japan: baby boomers' kids, who are now in their 20s and 30s. These
consumers, known as junior boomers, have cash to burn and kids with
whom they are eager to share memories of their childhood.
When Takara [later bought by Tomy] first released Transformers
in the U.S. in 1984, the giant robots that could morph into cars,
planes, and other vehicles were a novelty. A year later, they were
introduced in Japan to rave reviews. But the toys' popularity ebbed a
few years later, and only the most die-hard fans have remained loyal.
What's more, Tomy's Transformers now have to hold their own against a
slew of other robot characters -- from Osamu Tezuka's Astro Boy to
giant flying robots such as Mazinger Z and Gundam -- that have proven
far more enduring.
That's likely to make it a hard slog for Tomy in Japan, where
the company has exclusive rights. [Hasbro (HAS) owns the Transformers'
marketing license in the U.S. and other key overseas markets.] Though
300 million Transformers toys have been sold in more than 130 countries
over the years, Japan has only accounted for 10% of sales.
No Earnings Transformation Expected
But that hasn't
deterred Tomy. Ahead of the film's release, the company sold 16
different robot characters from the movie, and this month another two
dozen will appear in stores worldwide. There is even a collaboration
with Nike (NKE), called Free 7.0, which looks like a sneaker but
contains a robot inside, and an Apple (AAPL) iPod version is expected
soon. Eventually, 80 different products are slated for release.
Tomy says it hopes to do more than $50 million in Transformers
sales this fiscal year, through March, 2008. That might be possible,
but sales in Japan so far have been disappointing, according to Mizuho
Investors Securities. Says Shoji Morita, an analyst at Okasan
Securities: "In the U.S., there are many success stories of a hit movie
leading to a hit toy. In Japan, however, hit products are always
connected to TV anime or TV programs such as Pokemon and Gundam."
In fact, few expect the Transformers to help Tomy's earnings
much. Tomy produces Transformers for U.S. toymaker Hasbro, but the
Japanese company's profit margins from the arrangement are miniscule,
and Transformers-related sales have amounted to less than 10% of the
company's total.
But even if the Transformers flop, some analysts think Tomy
will still get by. In the first quarter, Tomy's operating earnings
swung to a profit of $500,000 from a $2.6 million loss a year ago, and
sales rose nearly 15%, to $342 million. Etsuko Tamura of Mizuho
Investors Securities says Tomy's Tomica trains and Barbie-look-alike
Licca-chan dolls are big enough sellers to lift the company's profits
this year. For the financial year, she projects operating profits will
grow 57%, to $40 million. If only Tomy's stock price could show a
similar recovery. "It's disappointing as we've had healthy revenue
growth," says spokesman Wasahara.
From Yahoo business news.