Although Germany had by 1900 become the world's manufacturing center, American toy makers were beginning to gain ground, taking on a more modern cast when rapidly improving mass-production and -distribution methods were combined with the introduction of new plastic materials. Later on, innovations in design, marketing, advertising and distribution further strengthened the American presence even as manufacturing was shifted mostly to Asia.

However, no matter where toys are made or marketed, it is clear that the types of toys that are popular change over time and reflect a society's cultural values and attitudes toward children. For example, as G. Cross notes in Kids' Stuff: Toys and the Changing World of American Childhood (1997, p. 9), in the early 1900s middle-class Americans bought toys that trained their children for adult occupations, whereas modem toys "invite children into a fantasy world free of adults."

Toys are the quintessential entertainment products. Indeed, it is their very potential for entertainment--the play aspect, if you will--that makes something a toy instead of a merely nondescript object composed of plastic or wood or fiber or metal. The key additional ingredient, of course, is the imagination of the player. A toy, virtually by definition, alters a person's psychological state, diverting one's attention in the same way that all entertainment products and services do. Thus the toy business is an integral part of the entertainment industry: It's not just for kids.

Financial flavors
In fact, the toy industry has evolved into a rather sizable business that in the United States annually generates over $16 billion of sales at wholesale and about $25 billion at retail as of the late 1990s. Moreover, the United States represents approximately 36 percent of total worldwide demand, with Western Europe, Asia and Japan accounting for 28 percent, 13 percent and 10 percent respectively (Figure 1). As such, thousands of companies are involved in the global manufacture and distribution of toy and game products of all types.

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Figure 1: Global toy and video game sales at retail, 1996-98.

Although the toy manufacturing industry remains highly fragmented, among the largest companies, significant consolidation has already occurred and extends to firms in mainland China and Hong Kong, where 60 percent of the toys are made: Companies competing on a global basis require large amounts of capital and the advantages that derive from economies of scale in manufacturing, marketing, distribution and advertising. In this regard, the toy industry is following the patterns established in other entertainment subsegments. The major entertainment companies, moreover, control retail distribution facilities and important Internet sites and take an active interest in toys through licensing and merchandising ventures.

By the early 1990s, the industry in the United States had come to be dominated by three major manufacturer/distributor organizations that accounted for an estimated half of total sales. Those companies include Hasbro (Milton Bradley, Tonka, Kenner, Parker Bros., Galoob, Tiger Electronics, OddzOn), Mattel (Fisher-Price, Tyco, American Girl), and Nintendo. On the retail level, the business has come to be dominated by Wal-Mart (1999 share ~18 percent) and the Toys 'R' Us chain, and to a somewhat lesser extent by large discounters. Even so, nondurable toys have accounted for a gradually declining share of total US personal consumption expenditures on recreation (Figure 2).

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Figure 2: Toys (nondurable) as a percentage of total PCE on recreation, 1959-99.

As can be seen in Table 1, toy manufacturers' revenues grew by 7.9 percent over the 1994-8 span. However, these averages disguise the high variances of financial and operating performance that are a common and constant feature for both manufacturers and retailers. Such variance is somewhat more visible in Table 2 and in Figure 3, where the differing sales growth rates and dollar shipment volume changes of major product categories can be seen. The industry's volatility of demand and great seasonality, with two-thirds of annual sales always coming in the last twelve weeks of the year, of course adds to the operational uncertainties and risks.

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Figure 3: Comparative sales growth rates for major toy categories, 1983-99. Source data: Toy Manufacturers Association.

Trademarked so-called staple products, such as the board game Monopoly, Lego blocks, Mr. Potato Head, or the Barbie doll, however, seem to have an almost timeless appeal. As might be expected, such products produce unusually high profit margins for the companies that make them. However, although staples are to the toy industry what film libraries are to the studios, they are not normally a sufficient fuel for growth. For that, toy companies require luck, pluck and lots of spending on product development and television marketing. In this respect, the development process for new toys is similar to that in film and music. And, as in film and music, it is often the singularly profitable hit that pays for the many new product introductions that flop.

But the analogies between toys and other entertainment industries should not be stretched too far. The highly compressed seasonal pattern of retail demand combined with the enormous amount of physical inventory handling that is required to service this demand intensifies short-term delivery pressures on manufacturers and retailers. More often than not, these pressures lead to inventory imbalances (of too many unsold products) that must be corrected before retailers are again "open-to-buy" (i.e., to order, in both a fiscal and physical sense) new toys for the next season.

Toy company valuation methods differ too, since brand names, which are of little consequence in filmed entertainment, count for a lot here. Beyond the standard techniques of analysis used to project cash flows and cash-flow multiples (as in the media industries), stock market and corporate borrowing-power valuations must, in addition, make allowance for intangible brand-name assets.

Moreover, although demographic arguments are frequently invoked to favorably portray the industry's growth potential, most such generalized arguments must be tempered. For instance, it is usually more important in forecasting changes in industry demand to know the number of first-births than it is to know the projected total number of children in the population. But in targeting a marketing campaign, it may be even more important to know the income-level distribution of couples expecting a first child.