Spin Master looks to surprise its investors
Co-founder Ronnen Harary says bricks-and-mortar retailers will fill demand unmet by Amazon. Toy powerhouse enjoying success in global growth and new acquisitions
When two British inventors approached fledgling toy company Spin Master Corp. with an air-powered plane, co-founder Ronnen Harary didn’t know it had already been rejected by his much larger competitors. All he knew was that it was a blast to fly.
“It was probably a good 45 minutes until the inventors told us to stop because they were afraid it was going to break,” said Harary, remembering the day in 1996, when he and CEO Ben Gadbois first got their hands on the prototype for what would become Air Hogs, one of the company’s top-selling toys.
More than two decades later, Air Hogs is still winning accolades, including a 2017 Toy of the Year award for a new Star Wars-branded version. Spin Master, meanwhile, has grown into a $5.4-billion toy powerhouse, returning about 175 per cent since its initial public offering in July 2015, versus18 per cent for Canada’s main stock index, and making Harary, 47, and co-founder Anton Rabie, 46, billionaires on paper.
Spin Master has managed to stay one step ahead of turmoil that’s plaguing the toy industry. But the demise of Toys “R” Us Inc.’s U.S. operations has some analysts saying the sector is unlikely to ever completely recover, and Spin Master’s shares have slid this year alongside those of Hasbro Inc. and Mattel Inc.
Meanwhile, the company’s rapid growth puts pressure on it to take bigger risks and hit more “home runs,” said BMO toy analyst Gerrick Johnson.
Hits such as Air Hogs, along with strategic acquisitions like its purchase of the 120-year-old U.S. stuffed toy company Gund, its stable of outside inventors, its entertainment division and rapid international growth have all contributed to its success. But Harary attributes it to something simpler: Everyone loves a surprise.
“I know it sounds very simplistic, but for a child, or even for an adult, it’s those unexpected surprises,” Harary said.
Spin Master’s revenues have been on a steady upward trajectory, growing to an estimated $1.7 billion this year, from $418 million in 2012. A big chunk of that growth can be attributed to the success of Hatchimals. The toys sold out in several locations in Christmas 2016, and they were the biggest single contributor to the 6-per-cent increase in global plush sales in 2017, according to NPD Group Inc., a U.S. market research firm.
This success has prompted some serious envy in the industry. BMO’s Johnson polled more than two dozen executives at the New York Toy Fair in February, asking them which toy company they most admired, other than their own. Spin Master dominated, with a 53-per-cent vote.
“They have an incredible ability to find and discover and execute on new ideas for new products,” Johnson said.
Spin Master’s first product, the Earth Buddy, turned a simple stocking full of sawdust and grass seeds that would grow to look like hair into a winner.
Many years and toys later, the pressure is on to keep rewarding investors, said BMO’s Johnson.
Unearthing toys that will endure is not easy, though the company’s Paw Patrol, a cartoon about search-and-rescue dogs, will likely be one. It was the top-ranked TV show by Nielsen Holdings Plc in 2017, for kids aged 2 to 5 years old.
“Paw Patrol is a brand that’ll live forever, but I think the challenge for Spin Master is replicating that success,” Johnson said.
Spin Master may also find it difficult to bring innovative products to the market now that Toys “R” Us is shutting down in the U.S., said Johnson. Canadian stores were sold to Fairfax Financial Holdings Ltd. for $300 million.
About 15 per cent of Spin Master’s gross product sales came from Toys “R” Us over the last three years.
“Over the long term, the industry growth rate’s going to slow, relative to what it has been recently, because there’s going to be less innovation,” Johnson said.
Harary isn’t particularly worried about losing Toys “R” Us. He believes such other bricksand-mortar retailers as Walmart Inc., Target Corp., Kohl’s Corp. and Party City Holdco Inc. will step in to fill the demand that hasn’t already been gobbled up by Amazon.com Inc. “Kids still want toys,” he said. Harary said the company is “very focused on” a goal of producing a new TV show every year. These can then be turned into new toys, or leveraged for licensing deals.
The company is also pursuing growth through acquisitions. Its $79.1-million purchase of Gund closed April 1, and Harary plans to expand the brand into international markets — another plank of Spin Master’s strategy. Its sales outside North America grew to 35 per cent of total gross product sales in 2017, and it has a medium-term goal of increasing that to 40 per cent.
Gadbois and his team are “constantly on the road meeting with inventors” and probably evaluate “a couple thousand ideas a year” before narrowing it down to 10 or 15, Harary said.