China’s toy market blazes ahead while others scramble to keep up

It has become the norm to find ‘Made in China’ on the bottom of a favourite plastic car, figurine or games console. Until recently, the vast majority of these freshly made China-branded toys were promptly shipped to foreign shores and stacked on shelves for Western consumers to lap up with unquestioning enthusiasm.

China today has rid itself of its status as a standalone, low-cost toy manufacturing base and come to rank alongside the world’s economic superpowers. Home to over 6,000 toy enterprises and 75 percent of global toy production, the country is the second-largest market for toys and games worldwide, after the US.

Euromonitor put China’s 2007 toy sales at $3.89bn and a colossal $8.3bn in 2011, equating to an average annual growth rate of 21 percent. What’s more, the China Toy and Juvenile Product Association believe the market will double from 2010 to 2015, to $9.5bn. China sits at the head of a booming Asia Pacific toys and games market, and is on course to surpass both Western Europe and North America by 2016.

Economic momentum in the Asia Pacific region has brought with it vastly improved disposable income, organised retailing, new product launches and solid demographic fundamentals, all of which have played neatly into the hands of toys and games retail. Today the region looks in good shape to expand its size and stature by quite some margin, with the spend-per-child – particularly in China – projected to pick up pace spectacularly over the coming years.

Traditional toys
While the Asia Pacific market has dominated mobile gaming for some time now, having last year reeled in revenues of $5.9bn – far and above second place North America with $3bn – the region’s climb to the top of the traditional toys space has been rather less one-sided. In 2011, China was only third for traditional toy sales. Today, China dominates the traditional space far and above any other nation. Euromonitor estimates the market will account for 27 percent of traditional toy sales worldwide come 2017, and that China will rack up double-digit annual growth every year until then.

In an age where traditional toy sales in Western markets are slowing, and most consumers are migrating to consumer electronics, Asia Pacific buyers are only now beginning to latch on to the sub-sector. Due largely to impressive economic growth in South Korea, Thailand, Indonesia, China and India, the Asia Pacific region saw a six percent increase in value sales in the traditional toys and games space in 2012, and the rate is anticipated to expand in the years to come.

Although the region’s penchant for traditional toys is a relatively new phenomenon, this is not to say sales channels are by any means underdeveloped. Though the traditional sub-sector brings to mind simple over-the-counter sales and tucked away toyshops, improved shopping infrastructure and extensive online channels have propelled sales into the stratosphere. Above all, department stores have emerged as the preferred channel of distribution, as the region’s consumers look for discounts and a broader range of toys and games.

Whereas domestic toymakers dominate the medium-to-low end space, serving the wholesale and individually run outlets, established Western players have come to dominate the upper-bracket consumer space – the segment with the greatest scope for development. Though the spend-per-parent in China is far short of its Western equivalent, this should be seen not as a weakness but as a growth opportunity, given that the country’s middle class looks set to expand and its spending to skyrocket. Euromonitor estimates that China’s 215 million-strong newborn to 14-year-old population will contribute an additional $5.3bn to global traditional toy sales 2011-16.

Dolling it up
What’s more, the burgeoning market has welcomed an unprecedented number of major industry players, in particular Western toymakers whose opportunities have diminished in the stagnant European and North American markets. They have dived headlong into China, although attempts to strike a chord with domestic consumers have all too often failed.

World number one Mattel has faced its fair share of troubles. The California toy manufacturer was forced to shut up shop at its Shanghai House of Barbie mansion back in 2011, following a dismal introduction to China’s toy market. Though the all-American doll carries a great deal of commercial clout back home, the Chinese market was less enamoured with the improperly proportioned figurine, and parents promptly rejected the product.

The vast majority of mainland consumers care little for brands, putting design, quality and price ahead. A Hong Kong Trade Development Council survey in 2010 found that 31 percent of mainland respondents could not name a single toy brand, and 47 percent did not pay attention to brands when making a purchase.

Euromonitor put China’s 2007 toy sales at $3.89bn and a colossal $8.3bn in 2011

Nonetheless, the failure here was due primarily to China’s ‘Tiger Moms’ – so called due to their authoritarian style of parenting – and the failure of Mattel to understand their consumer needs. Unlike their Western equivalents, Chinese parents tend to focus on educational criteria and competitive pricing when selecting toys for their children, with brand identity counting for nothing.

The toymaker has since shown a much keener understanding of Chinese consumers, revamping its iconic blonde and launching a ‘violin soloist’ Barbie, among others, to appeal to educationally minded mothers. Aside from the scholastic slant, Mattel has been forced to concede Barbie’s premium price point. While the Barbie brand enjoys massive status in the US, the brand’s relative anonymity, combined with China’s cost-conscious consumers, means the product today costs as little as $13, a far cry from its American equivalent of $30.

As a result of the company’s adjustments, Mattel’s Chinese sales have increased threefold from 2010-13, and will continue to gain at a similar pace for as long as it shows the same degree of commitment.

Mattel’s circumstances illustrate a very broad point: that Western toymakers cannot simply take their existing business strategies and force them on Chinese consumers. In order to understand China’s hordes of retail-ready consumers, long-established companies must disregard what renown they may have at home, and seek to better understand the nuances of Chinese markets.

Building brick bridges
The problem is one that has been well understood by a select few toymakers, not least Lego, which has charged into China in a way no other toy company has managed to equal. The company has an advantage from the outset – it is an educational tool, something that resonates with Chinese children and parents alike.

However, Lego’s success was never guaranteed – far from it. It is testament to the company’s maturity that it has surpassed Hasbro as the world’s second-largest toy maker since entering the Chinese market. The Danish company has gone so far as to cite China as a future ‘core market’. The importance of its operations there were reaffirmed last year, as profits rose by nine percent.

Crucially, the company has built on its existing manufacturing presence in China. Whereas China was once seen as little more than a manufacturing stop on the supply chain, its extraordinary economic and social development has cemented its status as perhaps the most impressive toy market on earth.

The participation of world-leading toymakers combined with strong market fundamentals should see the Asia Pacific region play a much larger part in the toys and games market. And it’s not just the Asia Pacific, either. There are a number of emerging markets across the globe with similar characteristics. With China at the helm, the toys and games market looks set to experience a significant uptick in the foreseeable future.