Sharing is caring for toy giants Hasbro and Mattel. As sales of physical toys continue to decline, the brands are leaning into outbound licensing, the practice of granting intellectual property to a third party, to bolster revenue.
While both companies have benefited from licensing deals with entertainment companies, they are increasingly outsourcing the production of toys as well—though the payoff from these deals is just beginning, James Zahn, editor in chief of The Toy Book, told Retail Brew.
Looking at their Q1 earnings reports released this week, the results show two companies in very different financial positions but with the shared problem of falling toy sales.
- The trend was most striking at Hasbro, where sales of consumer products declined 21%. This drop offset sizable gains in its entertainment and digital gaming divisions and contributed to a 9% drop in revenue.
- At Mattel, sales overall were down just 1%, but gross billings for dolls were down 4% year over year and 10% year over year for infant, toddler, and preschool toys, while sales of action figures, games, building sets, and other toys were flat.
The benefit of outsourcing the production of some toy lines through licensing deals is that it generates revenue but with fewer costs, Zahn explained. He pointed to a deal that Hasbro struck with Florida-based toy company Basic Fun! back in 2022, which granted the smaller toy maker the right to manufacture and distribute toys from Hasbro’s Littlest Pet Shop franchise.
“This is a brand that Hasbro did very well with years ago and went dormant for a while, and rather than relaunching themselves, they flipped the master license to Basic Fun!” he said. “The smaller company takes on the heavy lifting and the upfront cost of product design, development, production, distribution, and at the end of the day, Hasbro will cash a check.”
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Hasbro CFO Gina Goetter told investors in February that part of the brand’s reset process in 2023 was paring down its portfolio of products and outsourcing licenses.
“We made the decision to move to an out-license model for brands where we determined the respective path to scale and profitability as an owned and operated entity did not meet our internal threshold,” she said. “While there are short-term impacts to revenue from this model shift, we ultimately can expect greater operating profit dollars from out-license IP, and it allows us to focus resources back to our core brands.”
In other words, Hasbro may make less revenue from these deals, but ultimately more profits.
Zahn said that Mattel is now “borrowing a little page from the Hasbro playbook” with its plan to outsource production of baby and toddler segments Fisher-Price baby gear and Power Wheels.
Mattel CFO Anthony DiSilvestro told investors last week that the 11% decline in infant, toddler, and pre-school category was mainly due to declines in the sales of its Baby Gear and Power Wheels categories, which the company is now “out-licensing or exiting.”
“It’s evolution,” Zahn said. “I would say that the toy industry probably hasn’t seen this type of evolution and disruption in many, many years.”