Sunday, February 15, 2009

What You Need to Know in the Phil Toy Industry Pt. 1

Original article from :

I just got back from our National Business Conference which was held at Hyatt Hotel and Casino Manila from February 9 to 13, 2009. I couldn't go on-line because internet rate is a whopping P25/minute.

Anyway, I was talking to a couple of people about the kind of collectors we have here in the Philippines. Some of these people commented that the toy collecting industry is getting bigger... but not necessarily better. Others stated their euphoria on the on-going markdowns and BOTO... and still others express their disgust on the activities by scalpers recently. While I always encourage everyone to speak up their opinion, I also promote education/re-education and information dissemination so that people will have a better outlook.

Then, i remembered a post I made last December 8 at Cybertron Philippines. It was a really long reply to one of the members inquiries on toy distributors. Of course, the assumptions he made was based on his perception on how things ought to run.

This little article was made so that all of us (collectors-- hard core and casual, and non-collectors) can have a better understanding on how things run locally. The information written below will prevent us to have a myopic view on the toy industry. This will definitely prevent us from giving ill conceived advise to others like "don't buy now and wait for BOTO... you know it will happen" .... Don't do that to "Transformers: Revenge of the Fallen" toys btw. You might end up disappointed if you wait for restocks. Playkit already adjusted their inventory after all these mark downs and BOTO... unless they put the welfare of collectors before theirs again and place re-orders. In any case, don't say I did not warn you.

Anyway, there is an on-going discussion about this at Cybertron Philippines' message board. You have to be a registered member to read the discussion Don't worry, you can register there for free. Please post your comments and suggestions either at CybPh or here at my multiply and I/we will try to get back to you the soonest time possible.

Without extending my bit even further, here is the reprint of the first part of "What You Need to Know in the Phil Toy Industry"

This is a good opportunity to explain the whole gamut of things so that collectors will have a better understanding on how things work.

First of all, let's break your questions, speculations and opinions.

why do distributors limit the stuff they bring in.
- i think this is a question... but it's also a speculation. To answer this question, we have to identify most, if not all, the forces that work in the market.

Since the example that you gave is G.I. Joe, let us focus on its distributor.

Have you guys notice the dramatic increase of G.I. Joe items in the past couple of months? Did you notice that there was a Mail-In Doc here locally? In effect, it is easier to get a Mail-In Doc in the Philippines that the US... all we have to do is fall in line and we get a Doc.

Playkit is working extremely hard to bring everyone their favorite collectible. But there are factors that we need to realize that make it difficult for them.

(1) What distributors can and cannot do?

Being a distributor (this goes true for all toy distributors like Playkit, Ban Kee, Richwell, Smarty, etc.), doesn't mean you have the liberty of getting only the good characters in a specific toy lines' assortment.... and it doesn't mean you can only choose the toy lines that your carry. Distributors have to deal with minimum orders, case assortments and non-moving toy lines.

Let me be more specific. It's really great that there is a growing toy collector demand for G.I. Joe these days. Transformers (since last year) and Marvel have been strong brands for collectors. Star Wars has a cult following although the numbers are dwindling. But none of these brands are strong in the Philippines if we consider the total market (aka mass market). Please remember that these brands also target young boys and girls (non-collectors). And truth be told, the mass market is much, much bigger compared to the collector market.

... and let's not forget that being distributors mean that they have to order weak (perhaps non moving) toy lines like My Little Pony, My Littlest Pet Shop, Nerf and Mr. Potato Head.

How are they going to market/sell these brands?

How about TV commercials? I don't think so! Remember that TV commercials are expensive. Who's going to shoulder the cost? If you are in business, you will pass these costs to consumers for you to maintain your profit margins. This means that our favorite toys will become more expensive.

Will TV commercials work? Unlike in the old days, TV commercials will not give you a 100% guarantee that your brand will be patronized by consumers. It will give you public awareness... but what about conversion and retention? You have to do a whole different marketing approach to do these. And these will entail costs.

Since there is only the collector market, how about we do niche marketing? Target the sure buyers (the collectors) and promote to the public.

This is exactly why we have events like the Hasbro Grand Toy Fair. Cybertron Philippines is doing their share in helping out distributors by making business in the Philippines feasible so that they can bring in more collectibles in the future. This is done by doing events that will strengthen brands. If you check the way Cybertron Philippines run events, everything is geared towards educating the masses to promote and/or strengthen the brands (e.g. games for children, labels and description in the display cabinets, cosplaying for the public, etc.)

... Now that we have a better understanding on how things are in the market, what do we do next? There are lots of strategies out there (both good and bad), but the best thing to do right now is by doing your part (as a collector) by helping others. That's the reason why message boards like this exist. Cybertron Philippines works on the premise that toys are for everyone (young and old)... strategy revolves around helping others. Everyone can do the their part by helping address inquiries, report sightings, etc.

We have to face the reality that the Philippine market is very, very small. Especially when you compare it to the US/Canada market. I always think that the more we help out others, the more people will get into collecting... the more it becomes feasible for distributors to do business and bring in more toys.

But i also have to reiterate that this is easier said than done... I know my post above will get more inquiries. Just post here and I will gladly answer them.

Anyway, I also want collectors to always remember this before they complain or make comments about "oppotunity losses" next time -- > the collector market is (and will always be) small compared to the mass market. Collector demand cannot take the slack off the non-moving products in the mass market.

Let's complicate things a bit -- Let's take a look at G. I. Joe. Sure, i totally agree that collector demand is increasing. But distributors order by the case. Meaning there will always be "butaws" (undesireable figs) in a case... Wraiths, Zartans and Matt Trakkers will easily fly off the shelves. But what about Snow Jobs, Torpedoes and Tiger Force Dukes? Who's going to buy them? What are they going to do with unsold pieces? BOTO? ah, this becomes more interesting. If people here think that BOTO is the answer, you have another think coming... I will talk more about BOTO and how it affects everyone later.

(2) Orders are being done months ahead of time!

Yes, orders are being submitted way ahead of shelf release date.... and there really is no scientific way to project demand. There is just no simple way to predict the future. Here's a good example. Let's say you are tasked to place orders for G.I. Joe the Movie toys. How many cases should you order per line? per assortment/wave? Who will be the target market? How much budget do you need in order to promote the lines that your are going to order?

You will be rated based on the ff:

(A) fill rate -- meaning how well you can fill up the orders of toy store/malls when they place their order 4-5 months from now. Reorders can be a good indicator of performance. But there is no guarantee that Hasbro will fill up re-orders. And even if they agree to fill up your orders, how long will it take for stocks to arrive in the Philippines? Will there still be demand after this?

(B) productivity -- meaning you will have to reach the quota that you will set for this line.

(C) profitability -- the reason for every business existence. You will be rated based on the profit you make on the lines you will order. BOTO (and other price offs) will be subtracted from your performance.

Deadline of ordering is 5:00 PM today.

Yes, placing an order is that hard. Just like in every business (unless you are a government outlet or in a monopoly) there are lots of risks involved. We have to objectively take numerous things into consideration. As of now, we do not know the fate of G.I. Joe Movie. Everyone is speculating that it will be a huge success (just like Transformers the Movie). This means there will be a lot of demand for G.I. Joe movie toys. But what if it flops, what are you going to do with all the toys? BOTO?

Here's another thing. A blockbuster movie does not guarantee demand for toys. A good example here is Spiderman 3. It is the all time highest grossing Marvel based movie. But demand for the toys did not follow.

(3) Pricing 101

You have seen collectors post comments like "how come this particular toy is only $10 in the US and Php700 here in the Philippines?" This is oftentimes followed by "Conversion rate today is Php49 to $1. They should price it only at Php490" .... and it is common to see collectors add insults like "Bad trip, we are being cheated of our hard earned money! *add favorite profanity here*"

If you have seen these kinds of posts, the best thing to do is put a link going back to this site. I will try to explain this as best as I can. Again, since the inquiry is about G.I. Joe, we will use Hasbro.

Let's start with Distribution 101. I think those who belong to manufacturing industries already know about this... or at leaset they can attest to this.

This is the distribution model in the US / Canada

Hasbro USA --> Toy stores (Target, Walmart, TRU, etc.)

This is the distribution model in the Philippines

Hasbro USA --> Hasbro Asia --> Playkit --> Toy stores (Toy Kingdom, TRU, Rustan's, Landmark, etc.)

Right off the bat, you can see the differences. Hasbro USA is the one distributing the USA and Canada. Before I explain how the dynamics work in the Philippines, please allow me to introduce everyone to the concept of "profit centers"

"It is defined as a business unit or department which is treated as a distinct entity enabling revenues and expenses to be determined so that profitability of each business unit can be measured."

In short, when Hasbro USA passes the items to Hasbro Asia, they already include mark up.

Of course, Hasbro Asia makes profit when they pass the items to Playkit. And in order for their business to survive, they have to make a little something when they pass the items to toy stores. Lastly, TKs, TRUs and other toy stores will have to profit from consumers when they sell the items. That's a total of four (4) profit centers in the Philippines compared to two (2) in the US.

But there's more! It doesn't end there. Let's see what Playkit needs to pay just to bring us our collectibles. Remember, some of these do not exist in the US distribution model. One thing for sure, some of these do not exist in specialty shops

(A) Shipping cost from the factory going to Manila
(B) Philippine Customs / Importing Tax, etc.
(C) Trucking/Forwarding from airport to warehouse. Then, warehouse to your favorite toystores.
(D) Warehousing <-- you can ask Winn (V2) on how expensive this can get.
(E) Merchandisers - yes, it is playkit who pays the salaries of their merchandisers.
(F) Advertising cost - they pay for all those gondola displays, posters and leaflets distributed in toystores, mega billboards that you see at the sides of buildings and flyover, newspaper ads (in the case of promoting an event), etc.

... and a whole lot of other costs.

... simply put... it is not right to compare US pricing with Philippine pricing. Think about what I posted above next time someone makes comments that have no solid basis.

Why not ask Hasbro to distribute directly in the Philippines? I have to constantly reiterate that the Philippine market is very, very small... considering the expenses and hassle of distributing in the Philippines, I would think Hasbro would opt to ignore our market... that's the reason why they get distributors. You get someone with core competence in a certain field / area. They are the experts in our market. So Hasbro and other toy companies, naturally, would do business with them.

Next question is --> "How come we have less toys in the provinces - Luzon, Visayas and Mindanao?"

The answer is simple! Demand for branded toys is much lesser in the provinces compared to Manila. But even if you take this into consideration, Playkit is already starting to improve distribution in these areas. That's the reason why a huge event (or is it a series of events) was held in Cebu. Just go through the reports at the "What's Out Locally" thread and you will see more sightings in Bulacan, Batangas, Cebu, etc. I'm sure the other areas will follow very soon.

... as far as making consumers happy, i think this is a huge step. By discussing distribution in the provinces, we are albe to uncover another cost for distributors -- Distribution costs in the provinces. Remember that trucking/forwarding items in the provinces is much more expensive. You have to ship either by plane or sea... and we already know how expensive these are.

Here is a bonus answer for another most asked questions -- "How come Marvel Legends was cheaper when Toybiz was distributing it?" and it is common to proceed with "Back in the days when Toybiz was distributing Marvel Legends, you get a comic book. Sometimes there's even 4 comic books. How come Hasbro increased the price to Php700 even if they removed the comic books?"

Short history --> Toybiz bought Marvel when they were in financial trouble during the 90s. Since "Marvel" is a more dynamic and recognizable name than "ToyBiz" which says nothing except they are a toy business... they renamed the company to Marvel Entertainment Group. Then formed a company that will take care of Marvel's toy business which they called Toybiz.

Meaning, back in the days when Toybiz distributed Marvel Legends... they do not need to pay for licenses, honoraria, transfer pricing or whatever they call those fees. They can reprint all the comic book they want. They can add on any marvel merchandise like posters, etc without paying any kind of licensing fee. It's different when Hasbro took over. They have to pay Marvel royalties if they want to include a comic book (or any other collaterals) in the package. Hasbro, also, has to pay Marvel licensing fees everytime they launch an ML wave. Of course, Hasbro will transfer these costs to the consumers.

The same can be said with Star Wars and Indiana Jones. Hasbro does not own these franchises. That is why they need to pay royalties.

What about Transformers and G.I. Joe... Hasbro owns them. No need to pay royalties. That's the reason why G.I. Joe can go down to as low at Php380. Please do not expect the same pricing scheme when the 3.75" Marvel Universe line hits the market.

(4) Buy One, Take One (BOTO) and other Price Offs

You've seen them around. Collectors perpetually clamoring for BOTO and price offs. Some collectors make it known to the free world that they are for BOTO... and they will wait as best as they can to wait for it to happen! They advertise to everyone that they should not buy from malls so that there will be no product movement... and this will eventually lead to BOTO. Then, BOTO arrives! Should one really be happy when this happens?

Yes and No!

Yes, if you are fixated in short term gratification. You will immediately get the collectibles you want at half the cost.

No, if you can understand the implications this has on your collectibles. Why is it detrimental to toy collecting? Simple! If a toy line reaches BOTO, it will have an implied meaning that there is less (or worse, No) demand for it. Inadvertently, you have sent a strong message to the distributor -- DO NOT IMPORT THOSE ITEMS BECAUSE THERE IS NO DEMAND. Whether this is perceived or real, the distributor will have a tendency of ordering less stocks in the next waves... If there is ample demand next time, we will have less stocks... this will lead to out of stock situations... and eventually, collectors will have to search these items in the secondary market (probably from scalpers)... and all of these will lead to collectors making harsh judgements, comments, violent reactions, inquiries, etc (just like the one above)... and it is sad that collectors cannot blame themselves for their undoing. Distributors are the favorite target every time this happens.

The sad part is... when distributors do something right (e.g. bring in exclusives, etc) only a handful of people thank them. If something wrong happens (even if its the market's fault), people are easy to judge and throw profanities at them.

So, you still think BOTO is good for our industry? While you temporarily enjoy paying half for earlier waves, you will have to eventually pay for it in succeeding waves.

(5) Scalpers and Bootlegs

Here is another topic that everyone likes to talk about. Why do we hate scalpers? Is it because they rob us of our right to buy toys at SRP? Is it because they oftentimes employ dirty tactics? Is it because they beat us to the limited edition figures that we have long awaited for? Probably all of the above.

But there is a bigger reason why I hate these vultures. How about they make people quit collecting! They make our fun hobby intolerable! They stand at the opposite side of what I believe in -- value of sharing and giving... Toys are meant for everyone to enjoy!Scalpers rob our children (who i believe deserve these toys much more than us collectors. Oh come on! Do not give me that crap that they don't even know what character they are holding. Some of these children can beat adults in a transforming contest... or a trivia contest) of their right to enjoy toys that they want!

Remember when people quit, demand for a certain item decreases. and when this happens, it sends a signal to the distributor not to import these toys... and the rest you can read at (4)

Bootlegs have a worse effect. It targets a different audience. Should children opt to buy bootlegs, collectors will also get affected... and the rest you can read above.

Besides bootleging is another form of piracy. It directly robs companies like Hasbro. What if Hasbro decides to drop certain toy line because of the effects of piracy? Who will suffer?

Here's another way of looking at things. What if Hasbro (and other toy companies) finds a technology that will prevent factories from bootlegging their products? I'm sure this will be costly. Who will pay for them? I'm sure these will be passed on to consumers. Then what? We complain because we have to pay for technology against bootlegging? It's really a vicious cycle.

Anyway, I hope you learn a thing or two about my post. I would also like to reiterate that these comments came from me based on how I understand the market. Playkit, Hasbro, and other companies mentioned above have absolutely nothing to do with the comments I made.