The bil­lion-dol­lar toy

Baku­gan, Ja­panese for ‘ex­plod­ing balls,’ is a hit for Toronto’s Spin Mas­ter

National Post (Latest Edition) - - Financial Post - BY HOL­LIE SHAW pin Mas­ter Ltd.

Shas achieved its block­buster suc­cess not by hog­ging all the toys, as it were, but by invit­ing oth­ers into the sand box to play.

The Toronto-based toy com­pany, founded by a trio of child­hood friends in 1994 with the launch of the nov­elty plant-grow­ing Earth Buddy, qui­etly be­came North Amer­ica’s fourth-largest toy com­pany in 2008, be­hind Mat­tel, Has­bro and Lego, thanks to the phe­nom­e­nal suc­cess of its Baku­gan Bat­tle Brawlers.

For the unini­ti­ated, Baku­gan is not just a toy, al­though the toy it­self wears an im­pres­sive num­ber of guises given its un­der-$20 price: part game, part action fig­ure, mar­ble­like Baku­gan balls pop open to trans­form into tiny fight­ing char­ac­ters when they are waved over a trad­ing card.

“It’s a fran­chise,” rev­els An­ton Ra­bie, co-chief ex­ec­u­tive, con­tem­plat­ing the phe­nom­e­non that saw a Baku­gan sell­ing ev­ery 2.5 sec­onds at its pre­hol­i­day sales peak late last year. “Fran­chises with­stand time and they con­tinue to in­no­vate. You look at fran­chise and you think of Spi­der-Man. You can cre­ate a Bella Dancerella Dance Stu­dio and take it home, and [chil­dren] have a great ex­pe­ri­ence — but it’s not a fran­chise.”

There are Baku­gan back­packs, books, clothes and lunch boxes. There is a TV show on the Car­toon Net­work. There is a video game. A movie deal with Uni­ver­sal Pic­tures, sealed late last year by Los An­ge­les-based part­ner and co-chief ex­ec­u­tive Ron­nen Harary, is due out in 2011.

Ini­tially, the toy’s suc­cess in­volved a lot of strate­gic plan­ning to stand out among the 5,000 toys launched ev­ery sin­gle year. When Spin Mas­ter ex­ec­u­tives in­tro­duced Baku­gan to the U.S. mar­ket in 2008 af­ter sev­eral months of ro­bust sales in Canada, they had a mul­ti­level plan to lever­age the toys, lin­ing up en­ter­tain­ment and li­cens­ing deals, and a guer­rilla mar­ket­ing cam­paign that put toys into the hands of the kids who would covet them.

But as the depth of the re­ces­sion be­came ap­par­ent last year, a “per­fect storm” of fac­tors came into play, re­calls Jon Levy, co-founder and head toy buyer at spe­cialty chain Mas­ter­mind Toys. “I think you could not dis­pute that they had one of the big­gest hits in the toy in­dus­try, with one of the low­est price points at one of the tough­est times in the econ­omy,” Mr. Levy says. “It was a per­fect storm, but Spin Mas­ter de­served it.”

In­deed, while toy sales gen­er­ally don’t dip dur­ing a re­ces­sion — out of all re­tail cat­e­gories, peo­ple are the least likely to curb spending on chil­dren when times are tough — this one has been dif­fer­ent. Toy sales fell 3% in 2008, ac­cord­ing to mar­ket re­searcher NPD Group, fu­elled by a shock­ing 5% de­cline in the fourth quar­ter, the in­dus­try’s busiest.

In the same quar­ter, Spin Mas­ter’s sales rose 55%.

“It is the No. 1 prod­uct we have ever launched — by a lot,” ad­mits Mr. Ra­bie, an im­pres­sive feat for a com­pany with an al­ready im­pres­sive ros­ter of hit toys in its short his­tory. The Toronto com­pany has won more in­dus­try-ad­min­is­tered Toy of the Year (TOTY) awards than any other toy com­pany in the world since the awards’ in­cep­tion in 2001, for toys in­clud­ing Baku­gan, Moon Sand, Air Hogs, Bella Dancerella and Aquadoo­dle.

Within eight months of its U.S. launch, Baku­gan pro­vided the lion’s share of sales for the com­pany. “I re­mem­ber the first call I got from a re­tailer who said, ‘You are out­selling Star Wars and Trans­form­ers,’ ” Mr. Ra­bie says. “I asked if we were out­selling them on a unit ba­sis or in dol­lars. He said, ‘You are out­selling them on ev­ery­thing.’ That was the day where it re­ally hit me. We have this bil­lion-dol­lar fran­chise which is trans­form­ing the or­ga­ni­za­tion and I just re­al­ized that we needed to keep adding more re­sources.… We are spending more money this year on prod­uct de­vel­op­ment and R&D than at any other time in our com­pany’s his­tory.”

Kids be­gan to trade Baku­gan so vig­or­ously that it was deemed a dis­rup­tion and banned in a num­ber of schools — an­other sign the com­pany had a hit. Like Poke­mon and Ta­m­agotchi be­fore it, “only the hottest toys get banned,” says in­dus­try ex­pert Jim Sil­ver, a toy an­a­lyst with Time­toplaymag. com. “When you get banned it’s the ul­ti­mate com­pli­ment that you are the ‘it’ toy.”

Back when Mr. Ra­bie, Mr. Harary and Ben Varadi formed the com­pany and launched Earth Buddy — a ny­lon stock­ing with a face drawn on it that was filled with saw­dust and grass seed — it too was a hit that far ex­ceeded their ex­pec­ta­tions, with first-year sales top­ping US$1-mil­lion. In 2009, Spin Mas­ter rev­enue is ex­pected to hit US$700-mil­lion. The Baku­gan­fran­chise, mean­while, in­clud­ing all li­cens­ing deals, is worth about US$1-bil­lion.

One cru­cial fac­tor favour­ing Baku­gan, an­a­lysts say, is its price. “Baku­gan was the hands-down break­out hit for 2009 that took the North Amer­i­can toy in­dus­try by storm,” Ger­rick John­son, toy an­a­lyst at BMO Cap­i­tal Mar­kets, said in a re­port.

Re­tail­ers, most notably Wal­Mart, told sup­pli­ers last year that they were not go­ing to pro­mote toys priced at more than $20. At this year’s New York Toy Fair, down­ward pric­ing was a defin­ing trend among ven­dors.

Spin Mas­ter’s other as­set has been a will­ing­ness to share and di­ver­sify. To de­velop Baku­gan, the Cana­di­ans ap­proached Ja­panese toy-an­den­ter­tain­ment con­glom­er­ate Sega Corp. with a pro­to­type and a plan to pro­duce the toy as part­ners. Sega en­gi­neered the mech­a­nism that al­lows the balls to snap open. (The name comes from baku, Ja­panese for “to ex­plode,” and gan, mean­ing “sphere.”)

“We love part­ner­ing with other com­pa­nies,” Mr. Harary says. “It’s in our DNA. We thought Baku­gan would ben­e­fit from hav­ing some Ja­panese sen­si­bil­ity added to it and that would drive the prod­uct fur­ther, and that was more im­por­tant than try­ing to do ev­ery­thing our­selves. In Ja­pan, they love things that are small and they love action fig­ures, and we knew that they would be able to bring that to the ta­ble.” And Sega, he notes, has an an­i­ma­tion divi­sion.

“The Ja­panese like to cre­ate sto­ries around their toys and that cre­ates as­pi­ra­tional fan­tasy when [chil­dren] are play­ing with the toys. When we de­vel­oped Baku­gan we also ap­proached them with the idea to cre­ate a TV show.”

An­other part of Spin Mas­ter’s charm is the close re­la­tion­ship it has with ven­dors, which an­a­lyst Jim Sil­ver at­tributes to Mr. Varadi, an orig­i­nal part­ner and head of toy de­vel­op­ment. He is known for hav­ing an open-door pol­icy with in­ven­tors. “You don’t have to go through a cor­po­rate cul­ture [to pitch to them],” Mr. Sil­ver says. “Most com­pa­nies of that size are very cor­po­rate for an in­ven­tor, and it’s like nav­i­gat­ing a mine­field, and you don’t have that at Spin Mas­ter. They are very well-liked and they are will­ing to work with just about any­body.”

Next on the agenda for Spin Mas­ter is grow­ing the en­ter­tain­ment divi­sion it re­cently formed to de­velop TV and movie prop­er­ties. “Now, with ev­ery­thing we look at, we think of con­tent,” Mr. Ra­bie says. “We are be­com­ing more of an en­ter­tain­ment or­ga­ni­za­tion. It used to just be that you’d make a great toy and it was plas­tic, and that was that. Now, you de­velop con­tent and the toy right out of the gate. The en­ter­tain­ment drives the [sales] ve­loc­ity so much higher.”

BRETT GUNDLOCK / NA­TIONAL POST

The three child­hood friends be­hind Spin Mas­ter’s toy em­pire are Ron­nen Harary, left, Ben Varadi and An­ton Ra­bie.

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