Can U.S. Toys Industry Rebound in 2019 After a Rough Ride?

Zacks Equity Research

The Zacks Toys – Games – Hobbies industry has declined 22.9% in a year’s time.

Year 2018 was a forgettable one for Toys industry. The Toys "R" Us bankruptcy in September 2017 had left toymakers like Hasbro, Inc. HAS, Mattel, Inc. MAT and JAKKS Pacific JAKK in a mess. Adding to the woes, Toys "R" US liquidated its U.S. operations last year that resulted in a tectonic shift in the retail landscape for toys. All these companies earned the majority of their revenues from sales to Toys "R" Us. Dissolution of such a big retailer hurt sales of every industry player. Per The NPD Group, U.S. retail sales of toys totaled $21.6 billion in 2018, down 2% from 2017.

Further, the industry also bore the brunt of soft consumer demand and consequent sales crunch. The availability of a broad array of alternative modes of entertainment, including video games, MP3 players, tablets, smartphones and other electronic devices also hurt traditional toy makers.

 

Educational Toys Market Offers Growth Opportunity

Amid the decline in sales of traditional toys, robust demand for educational toys comes as a ray of hope for the industry. Per Market Study Report, the educational toys market is likely to witness CAGR of approximately 5.2% over the next five years. The global educational toys industry is likely to garner $34,200 million in revenues by 2024, a sharp increase from $21,991.48 million in 2015. Rise in demand for architectural, visual programming and eco-friendly toys is driving growth of the educational toys market.

Demand for physical toys has been declining due to children’s preference for digital games and other electronic learning tools. In order to cash in on this trend, industry players are introducing a number of mobile gaming apps and digital games, along with physical toys. They are banking on new distribution methods and ventures with other industries.

China & Brazil – Bright Spots for Toys Industry

We believe the industry has enormous growth potential in China and Brazil as both the countries have a huge population of kids aged 0 to 14 years. Per American toy industry association, out of Brazil’s population of 200 million, 45.7 million are children under 14 years. Meanwhile, China has 236 million kids below 14 years. Emerging markets offer greater opportunities for revenue growth than developed markets.

Bottom Line

Toys "R" Us liquidation will continue to cast a shadow on the performance of industry players in the coming quarters. However, expansion in emerging market and growth in demand for education toys bode well for the industry. Though traditional toy makers are struggling at the moment, video game developers like Electronic Arts Inc. EA and Glu Mobile Inc. GLUU are gaining from the shift in preference to digital games.

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