The fact that toy giants Mattel, Hasbro and Lego are involved in the worldwide product roll-out for the new Star Wars movie will probably come as no surprise. But so too is Spin Master, a Canada-based children’s toy and entertainment company that may not yet have the revenues of its larger rivals, but has proven a disruptive force in the children’s toy category. Analysts predict 2015 revenues for the company at more than US$900 million. That is up from US$812 million the previous year, translating into double-digit growth fueled in no small part by its Star Wars-branded flight toy and a 16- inch animatronic Yoda.
Those revenue figures put the newly public company (which listed on the Toronto Stock Exchange this past summer) within the top five toy companies globally, if not yet the top three.
That Spin Master continues to grow in a consumer category notorious for generally flat year-on-year growth is impressive. Kids can, after all, be fickle and as a result, product life-cycles incredibly short.
Launching a US$10,000 start-up two decades ago, Anton Rabie and his childhood friend Ronnen Harary, who also attended Western University Ontario together, hit the jackpot with a novelty product called Earth Buddy. It was a nylon-stocking-covered head of sawdust topped with grass seed that grows to emulate hair. As the product approached the end of its life cycle, the good friends, bucking the trend of Canadian companies operating solely as distributors of American-made toys, sought out ideas from inventors around the globe. Their goal: to create, design, manufacture and market innovative toys.
And Spin Master has done just that, with such brands as Air Hogs, high- performance remote-controlled vehicles with lifetime product sales of US$1 billion; its Zoomer line of robotic animals that won several Toy of the Year awards; and Paw Patrol, an entertainment brand which launched as North America’s #1 preschool TV show and toy line simultaneously. The latter represents a particularly attractive launch strategy for the company. Since forming its entertainment division in 2008, Spin Master has produced five TV shows commercialized through toy products and licensing in non-toy categories.
Spin Master now has four business units (Remote Control and Interactive Characters; Boys Action and High-Tech Construction; Activities, Games, and Puzzles and Fun Furniture; and Preschool and Girls), from which it launches two to three new brands each year. It has design and development teams in Toronto, Los Angeles and Asia, and a global staff of 900. At its headquarters in Toronto, ConsumerCurrents caught up with co-CEO Anton Rabie. With the unbridled enthusiasm of an entrepreneur on the cusp of a billion-dollar children’s entertainment empire, Rabie explains Spin Master’s high batting average in bringing retailers the next hot toy brand.
We’re sitting down just before the holiday shopping rush. What kind of year do you expect for the toy category?
The toy industry is a mature one; it has been around forever and is very stable. The first big change was a couple of decades ago with video games, but even then the traditional side of the toy industry remained flat. The same held true after the arrival of technology like the iPad. Yet this year, toy industry revenues are up. I attribute the lift to a number of factors: excitement around Star Wars; the improvement in toy innovation; and also the trend for parents encouraging kids away from screens. The last few weeks of the holidays will be important, but the industry is up so far about 4% to 6%, more than it has been in a decade.
You mentioned Star Wars: [Episode VII – The Force Awakens]. How did Spin Master end up partnering with Disney on the film, with toys like a remote- controlled Millennium Falcon?
Disney, they are the king. Our competitors work with them too; Hasbro has been doing a nice job on the main action figures. But we played to our strengths in animatronics with an interactive Yoda. We’re also the number one toy company in flight, with Air Hogs; that is how we ended up with the remote-control Millennium Falcon. We figured out which segments we could win the license for.
Geographically, where have you been seeing most growth?
A lot of it is international. A decade ago, the split between North America and global would have been about 80/20. Now, approximately 30% of our business is outside North America. Our goal is to grow international sales to 40% of total sales over the next few years. I think part of the reason for that is content. Thirty years ago it was very difficult for a TV show to go global but now that content can travel the world very quickly because of digital distribution models. That has helped a company like ours. We partnered with Keith Chapman, who had so much success creating the preschool series Bob the Builder, on a TV show called Paw Patrol. Within months, it was being broadcast in more than 70 countries. Now we see Paw Patrol-themed birthday parties around the globe, because… think about a kid in Australia – the emotional connection he has with the brand is the exact same as a kid in Europe or as a kid in America.
So Spin Master owns the intellectual property on these shows, allowing it to concurrently develop toys and license out non-toy opportunities?
Right. In some ways, the way children play hasn’t changed, but in an important way it has, which is why the model works so well. Kids still enjoy role play but what has changed is how obsessed they’ve become with aspirational characters. When our shape-shifting action figure brand Bakugan was big, kids knew everything about every one of the characters’ powers and features. Children really immersed themselves in that world through the TV series, web and even ancillary products like pajamas and bedding. That is why over the last decade we’ve really become a children’s entertainment company.
But kids can be a pretty tough audience. How do you source ideas for a brand they’ll respond to?
The thing that is unique about our company is that we’re known for rewarding ideas from the outside. We do a lot of R&D internally as we’re fortunate to have world-class inventors, designers and engineers, but a lot of it also happens on the outside, because we’re driving both. The world has become so flat that we feel we can access tech and IP from so many places. And so we really embrace the relationship we have with all kinds of inventors around the world, from an engineer in China to an illustrator in Los Angeles. You’ll find a unique story behind every single innovation in our product library that involves different inventors, engineers and other partners.
Tell us one story of that innovation.
Bakugan is a great example. An American illustrator had created this very, very rough sketch of a ball exploding into something like an action figure. The design and engineering would require very small parts, and so we went to Japan, where we accessed the expertise of inventors and engineers. We also partnered with Sega Toys in Japan and Corus in Canada on an animated TV show. That is how Bakugan became a billion-dollar franchise – but it started as a spark from this one inventor.
And when you look back at the original seed – the sketch – you can see how much it must have changed to get to its final iteration. So, we think about our approach in terms of mental tinkering, where all these different people put their fingers in. What if we did this? What if we tried that? We can do that because there is no ego about whose idea it is since our ideas come from anywhere.
How much revenue does Spin Master allocate for product development annually?
We spend 2% of sales on product development. The interesting thing about Spin Master is if you look at comparable companies we actually spend less, even though we’re known for our innovation. As I mentioned, we do a huge amount of R&D internally, but part of the cost for us is actually variable because we’re paying inventors royalties based on sales. We in essence outsource some of the product development to our inventor network. So we have a fixed cost component and also a variable cost. The outside channel also helps us to constantly innovate and diversify. We don’t have to worry as much about a toy’s life cycle because we have so much in the pipeline.
Beyond efficiencies in product development, what other advantages come from forging relationships with so many outside partners?
We’ve found that when we show an innovation in a kids’ toy category that we haven’t been in before to a Wal-Mart, Target or Toys ‘R’ Us, they are willing to embrace it in a way they might not if we were a different company. Some of our competitors are known for one category of toy, so it is harder for them to go to a buyer and say, ‘We’re doing this now.’ We’re known for working with different inventors and breaking through into different categories, so it is an easier sell.
Still, developing a winning idea must be very difficult to do. How much of it is an art versus a science?
It’s really a combination of both, but normally art kicks off the process and the reason I say that is because no brand has ever been conceived exactly the same way. The science comes later once an idea has been given the green light, and you have those checks built in along the development. Then it is a balance between the two, flipping back and forth between art and science, science and art.
Spin Master has also made a number of acquisitions – most recently of Cardinal Industries, a game and puzzle company in the United States with revenues in excess of US$50 million. How important is acquisition to the company’s growth?
This is an area of our business on which I spend more and more of my time. In the last 10 years, we’ve made about 11 acquisitions, but in the last couple of years, we’ve made more than ever. We’ve also become more acquisitive. When some companies start looking for acquisitions, they hire an investment bank, but we take a different approach. First, we have a team internally that is probably bigger than those of our larger competitors. They are four people with deep industry knowledge and 10 years’ experience with Spin Master.
Second, while we look for great brands to acquire, we’re also not afraid of looking at small deals – and a lot of them, too. We’re now set up to do about three to five small to medium-sized acquisitions per year pretty comfortably. We’re also not afraid to do acquisitions with what I call ’hair’ on them. That can become an advantage for us because there are usually fewer bidders. You can also end up paying less.
Can you give us an example of such an acquisition with ‘hair’ on it, i.e. one that on the surface wasn’t so attractive?
Toy construction set manufacturer Meccano (known as Erector Set in North America) had hair all over the place. The company had a factory in France that no one wanted to deal with because it is unionized. But we’re not afraid to do the work first before we dismiss something just because it looks like a hassle. We really try to uncover the value equation by asking the right questions. What if we put our robotics division on it? How else can we put our infrastructure on it? What intellectual property would it provide? How could it diversify us? When you do the extra analysis you sometimes discover an opportunity you wouldn’t have otherwise noticed.
I also don’t delegate the finesse of the deal – I make sure I personally oversee it. Inventors have these emotional triggers related to ego, family and legacy. I take the time to understand what those are and construct a deal that makes them happy. It is a competitive advantage to keep inventors with their company. By taking care of the back-end, they can spend more time on the rainmaking, on product and licensing. We approach acquisitions with the same mindset with which we run the business – that ideas can come from anywhere.