In the well-established economies of North America, Western Europe, Australia and Asia-Pacific, toys are often pegged as the driving category of entertainment-based merch programs. But how does this conventional franchise leader stack up in countries where consumer and retail markets are still developing? Do toys play the same role, or are there financial and cultural factors that force rights owners to adopt different approaches that lean more heavily on other categories.

4Kids Entertainment president Al Kahn has no doubt that kids the world over share a fascination with toys – and often want the same properties. But that doesn’t mean there’s a viable toy business in every territory. ‘The likes of Mattel and Hasbro have made a determined effort to get into regions like Latin America, but the first obstacle they always face is price point.’ Where families have less disposable income, it’s inevitable that demand for expensive toys and accessories will be limited, says Kahn – even if the raw manufacturing cost per unit is low. ‘Some companies achieve economies of scale by sourcing all their toys from a cheap labor market like China. But manufacturing isn’t the only cost.’

Getting product into markets like Saudi Arabia, Israel, Poland, Hungary, Argentina and Brazil involves freight costs, duties, uncertain exchange rates, local promo budgets and cuts for intermediaries such as agents, says Kahn. By the time you subtract these expenditures from the bottom line, toys can be a marginal business unless you’re sure of shifting big volume at a robust price point.

This isn’t a reason not to try and make money, stresses Kahn. ‘You’d be foolish to spend a lot getting a kids show on television and then not try to create a licensing program. But the emphasis in many non-core markets is on gifts with purchase such as stickers given away free with yogurt or snacks, or apparel like T-shirts that can be made locally at a high quality level for a reasonable cost.’

Notwithstanding distribution and marketing costs, producing toys in low-cost locations like China or Indonesia generally makes financial sense, but it can also mean running up against protectionist issues. A case in point is Brazil, which has imposed stringent restrictions on imports to protect its powerful domestic toy manufacturing base. While Hasbro has managed to gain a foothold in the region by forming a local partnership, Mattel has yet to find the right strategy to compete locally. The temptation in such cases is always for companies to export fewer toys, rather than set up a local base that will produce higher-priced toys and be exposed to vulnerable economic conditions.

The difficulty in making territories like Brazil pay becomes clearer when you consider the relatively small sums of money most rights holders generate from such markets. In 2002, London, England’s HIT Entertainment saw a mere 8% (US$16 million) of its turnover come from outside the U.S. and Europe – and that figure includes home entertainment, consumer products and TV. With consumer products accounting for 40% of HIT’s business that year, it’s clear the only way to make a margin would be to source centrally – particularly when you factor in local competition.

The economic equation is not the only damper on toy exports, says Ian Downes, who recently relinquished his role as group managing director of Active Licensing Europe (the licensing arm for Fox Kids Europe) to set up his own as-yet-unnamed children’s marketing company. ‘Fox Kids’ best-selling property is Power Rangers, which is popular in most places. But the range of toys you can sell is limited by the sophistication of the retail network. In Eastern Europe, there isn’t the same infrastructure (fewer big chains with thinner national penetration) as in the U.S. or Western Europe.’ As a rule of thumb, Downes says if U.S. retail stocks 100% of Bandai’s Power Rangers line (action figures, play sets, vehicles, etc.), the U.K. might have 80% and Poland 50%. And in the latter territory, you might see core product plus lower-priced items like jigsaw puzzles and dress-up sets.

This is not necessarily the case in capital cities. HIT brand business director Katie Foster, who oversees activity on properties like Bob the Builder, Rubbadubbers and Pingu in Europe, recently returned from Budapest, Hungary. ‘I was very impressed by the selection of Bob product in big stores. People in the West tend to have preconceived ideas about Central Europe (Hungary, Poland and the Czech Republic) that aren’t always accurate,’ she says. ‘There’s been investment from multinational players like Carrefour and Tesco, which is helping transform the retail scene.’

Having said that, the fundamental difference between Eastern and Western Europe is the depth of distribution infrastructure that local retailers are able to support. While the U.K., France and Germany have major multiples operating hundreds of high street stores, Eastern Europe does not have this degree of national penetration.

Another significant element at play in Eastern Europe is the relative strength of publishing compared to TV, says 4Kids’ Kahn. ‘TV penetration is not so strong, but publishing is still a powerful medium. That influences the way you enter the market.’ Downes confirms this, adding that the strength of publishing comes hand in hand with a local penchant for classic characters. ‘Publishers such as Egmont do big business in Eastern Europe. One beneficiary of this is Disney, which does well with characters like Mickey Mouse and Donald Duck.’

Given the range of complex issues that rights holders face in new markets, Foster says agents become a vital cog in positioning product, and they’re often rewarded with a high degree of autonomy. ‘Once you’ve set up a relationship and reporting lines with [an agent], you let them get on with day-to-day management because they know their markets.’ The key is to be flexible without compromising the overall brand positioning of a property.

This kind of carefully controlled relationship makes sense for HIT – particularly with the European Union on the verge of admitting Eastern European countries as members. In theory, this expansion of Europe’s free-trade zone could work against rights holders that have granted local manufacturing licenses to Eastern European companies, says Foster. ‘In a few years, you could run the risk of lower-cost items being imported to the U.K. and competing with an existing range of higher-priced products.’

Conversely, Western imports to Eastern Europe are perceived as expensive, and there’s an issue with black-market plush toys, says Eva Brannstrom, a VP at Sweden-based Plus Licens. ‘These factors, combined with under-developed distribution, has led to toys being under-exploited and licensed plush being under-represented.’ The biggest portion of toys sold are price-sensitive puzzles and games from strong local manufacturers, she says, rejecting the notion that pressure on prices leads to a compromise on product quality.

For the future, Brannstrom sees signs of a shift in the market. ‘There is a rapid development of retail chains in Eastern Europe selling Western-originated toys,’ she says. ‘With healthy GDP growth, I think toys will soon be a key revenue source there.’

Patrick Elmendorff, president of TV distribution at EM.TV & Merchandising, is also upbeat about the region – claiming to have witnessed ‘growing demand for our properties not only on the part of Eastern European broadcasters, but also from retailers and licensees. One of our characters that is very popular in Eastern European countries is Digimon. We have sold various licenses in Poland, Hungary and the Czech Republic covering categories like food (fruit juices, cookies) and publishing (sticker albums, painting books).’

Brannstrom places more of an emphasis on the importance of TV than some of her counterparts. ‘Licensing activity in food, confectionery and promotions has become a big revenue driver,’ she says. ‘These categories are extremely TV-driven, and licensees want trendy properties such as Pokémon.’ TV is also the engine behind Bob the Builder, which Brannstrom says is ‘one of the hottest properties in Poland right now,’ though she stresses that Bob’s success also reflects the fact that East European parents want toys with educational value. Underlining this, she points out ‘a real interest in construction toys. Lego, with Harry Potter and Star Wars products, is selling well throughout the entire region.’

Many of the above considerations are even more acute in Latin America, which has been characterized by volatile economic conditions for as long as anyone can remember. That said, big players like Nickelodeon have carved out a respectable business based on properties like Dora the Explorer, Rugrats and SpongeBob SquarePants.

MTV Networks executive VP of international program enterprises Kathleen Hricik says the foundation for Nick’s growth in Latin America has been TV – with a local Nick channel and big distribution deals with the likes of Televisa (Mexico) driving awareness and demand. ‘We don’t start out expecting a huge upside from licensing and merchandising. We wait until we’ve built awareness and then devise our program accordingly.’

In terms of consumer product, Hricik confirms that pricing is the key issue for Latin consumers. ‘There’s a mass-market feel to our business in Latin America. Apparel, back-to-school items and food promotions are areas where we work with local manufacturers to create affordable ranges.’ Because of the product development and manufacturing costs involved in toys, they are usually produced centrally. ‘That’s especially true for items like feature plush toys with sound chips that are difficult to manufacture on a country-by-country basis,’ says Hricik. ‘But we do try to supplement our range with lower-priced items that can be manufactured locally.’

Mexico and Brazil are the biggest markets for Nick product, but Hricik says there are also solid opportunities in Venezuela, Chile and Peru, adding that ‘Argentina used to be an important market, but severe economic problems there have made it much tougher.’

Hricik admits that the black market is a serious problem for toy exporters dealing in Latin America. ‘Because of the region’s proximity to the U.S., pirates can get knock-offs in the market even before we can launch our own product,’ she says. ‘We’re trying to be more aggressive in policing this issue, but it’s tough to deter the black market.’

The turnaround in production and cost per unit are not the only factors that diminish the overall importance of toys. Hricik also argues that Latin American kids tend to wear licensed apparel well into their teens – which makes for a bigger market. ‘More generally, greater expertise in the licensed apparel sector is driving up the value of the business worldwide. I’d say apparel is now more important for us than toys globally.’

Nick recently unveiled plans for the expansion of its L&M activities in Eastern Europe, with Hricik echoing the view that traditional characters do well compared to newer properties. Interestingly, the net chose to use Russia as its launch pad – a reflection of Nick’s high-profile TV exposure there. ‘We have a block on TNT that reaches 90 million homes,’ says Hricik. ‘That will provide the base for an L&M program for Rugrats and SpongeBob.’

Sesame Workshop also has a strong television presence in Latin America and a sophisticated licensing and merchandising operation to support it. Business in the region is overseen by regional director Dana Kuperman and director of licensing Francisco Arenas, who joined the Workshop after a stint at Lego in Mexico City. One of Arenas’ first moves has been to appoint Mexican agency Tycoon as the Workshop’s licensing representative across most of the region. Separate agents have been signed to handle Argentina and Portuguese-speaking Brazil.

While the Sesame brand is well-known across the region, the strongest market is the U.S.’s next-door neighbor Mexico, which has been airing a co-produced version of Sesame Street called Plaza Sésamo for 30 years. Indeed, Kuperman stresses that Mexico is the Workshop’s number-two L&M market outside the U.S. – generating greater returns than key European countries like Germany. Plaza Sésamo’s on-screen appeal is crucial to the organization’s L&M strategy, but Kuperman stresses that the ability to get product to consumers is helped considerably by the sophistication of Mexico’s retail market, which ‘covers everything from upscale department stores through to mass-market outlets like Wal-Mart, which is a very big player in Mexico.’

Arenas also underlines the growing sophistication of the licensing business in Latin America. Aside from the expanding Tycoon network, the region is home to companies like Exim, which launched in Argentina in 1984 and now has offices across Latin America to serve clients such as Universal, Hasbro, HIT, Marvel, Nelvana, ABC Australia, BBC Worldwide and 4Kids. Underlining the diversity of its L&M business, Exim has secured regional deals in categories from confections and toys, to publishing and paper goods.

Mexico’s proximity to and transparent trade relationship with the U.S. are obvious factors in its favor, says Arenas. ‘Another big difference between Mexico and other Latin American countries has been the consistent performance of its economy. It has not always grown as fast as other countries, but it has provided a predictable market opportunity.’

Echoing Hricik, Arenas says there is more of a mass-market feel to licensed product purchases in Mexico than in the U.S. Americans spend on toys all year, whereas Mexican spending on big-ticket items is restricted to Christmas (although food licensing is strong year-round). This is the inevitable result of lower disposable income south of the border, though Arenas observes that there is a significant low-income population in the U.S. for Sesame Workshop to reach out to as well.

Outside Mexico, the Workshop sees Brazil, Chile, Peru, Colombia, Venezuela and Central America as the most promising potential markets, subject to the usual provisos about recession (Brazil), political unrest (Peru), security threats (Colombia), national strikes (Venezuela) and currency fluctuation (all of the above). ‘It’s about being flexible,’ says Kuperman. ‘There are pockets of opportunity in the fact that Chile has a big middle class or that Colombia has a well-educated population. And there are powerful channels to consumers via door-to-door distributors such as Avon. With the appeal of educational products in Latin America, this has been a good way for us to get books and videos to people. For example, Planeta Internacional (a division of Europe’s Planeta D’Agostini) has the rights to a 30-part encyclopedia series for kids that has done well for us in the region.’

Of course, Sesame Workshop’s approach to the L&M market is colored by the fact that it’s a not-for-profit organization, something which has resulted in many unique co-pros – most notably the Israeli/Palestinian/Jordanian version of Sesame Street. ‘We start with the needs of local children, and then make sense of licensing potential afterwards,’ says Ann Kearns, the Workshop’s VP of licensing, global consumer products.

In practice, this emphasis on tailoring adds an extra layer of complexity to toy sales in that Sesame Street has a raft of characters that are specific to one country or region. In Mexico, for example, Plaza Sésamo features a big green parrot instead of Big Bird because it’s indigenous to the region.

Although the Workshop gains in terms of authenticity from this approach, it forfeits the economies of scale that commercial outfits can realize on globally familiar characters. ‘We do customize some product around local characters in a show, but it’s not always cost-effective to do so,’ says Kearns. ‘Bert, Ernie and Elmo travel well internationally, but there are other characters that we can’t support in the same way.’

Viewed from a different perspective, of course, the emphasis on tailoring product and retaining a not-for-profit agenda can be welcome calling cards. As Entertainment Rights sales director Chloe van den Berg observes, one problem with trying to export global characters to territories is that they may not be welcome: ‘There are obvious sensitivities – such as the use of pigs in Muslim countries or cows in India. But there are more general considerations, such as Russian President Vladimir Putin’s public disapproval of Western preschool programs.’

Products with U.S. connections can struggle in the Middle East, says 4Kids’ Kahn: ‘Pokémon was the source of outrage there. Even though it’s a Japanese concept, it appears to have been received as an unwanted U.S. import.’

While cultural sensitivities have made the Middle East a tough market for most companies to crack, poverty is more of an issue. Despite pretty good TV penetration and young, affluent population segments in the United Arab Emirates and Saudi Arabia, recent World Bank estimates have 22% of the Middle East and North Africa’s 62-million population living on less than US$2 a day. It’s not surprising then that execs like Foster and Downes say Israel is their strongest Middle Eastern market – though in geopolitical terms, Israel is often aligned with Europe.

Foster says Israel’s value as a commercial market is tempered by the terrible political conditions many of its citizens live in. ‘We rely heavily on local licensing expertise for guidance because of the unique conditions in the Israeli retail sector brought about as a result of suicide bombings.’ As an example, fast-food restaurants do a big trade in delivery because of the Israeli public’s fears about personal safety. This has an obvious impact on how a licensing program is put together, and it’s also a sobering reminder that the availability of licensed toys remains a pretty low priority for parents in many parts of the world.