The billion-dollar toy
Bakugan, Japanese for ‘exploding balls,’ is a hit for Toronto’s Spin Master
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.”
The three childhood friends behind Spin Master’s toy empire are Ronnen Harary, left, Ben Varadi and Anton Rabie.