Toy Distribution Industry in Usa
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TOY DISTRIBUTION INDUSTRY IN USA
The toy distribution industry in USA is dominated by top five retailers (50% market share). Sales are seasonal towards the last quarter of the calendar year. The industry is attractive and the per capita contribution to toys is increasing. There has been a growing interest in the educational toys segment where educational value is the primary purchase driver.
DIRECT MAIL INDUSTRY
In 1993, over 40% of the Americans used mailed catalogs for purchases. Catalog consumers were well educated and had high incomes. Catalog sales were driven by mailing size, response rate & average order amount. Volume discounts, coupons & free gifts served as incentives. New products were extremely important in childrens catalog.
CHALLENGES FOR PASSION FOR LEARNING (PFL)
PFLS market positioning is of a direct-mail company offering 100% educational products for 6-12 year old children. Its first catalog mail in 1994 resulted in a disappointing response rate of 0.77% which resulted in a loss of $145000 on revenues of $54000. There was also increasing competition from specialty chains focused on educational toys and big discount retailers. The firm also faces immediate challenge of designing its 1995 holiday catalog. Repositioning of the firm with the objective of breakeven in the short term and sustained profits in the long term is another major challenge.
INDUSTRY ANALYSIS
We briefly state the condition of five forces mentioned in Porters Framework for industry analysis here.
The toy industry has seen high competition due to presence of many medium and small players. Major players competing on price contributes to the intensity of competitive rivalry.
Bargaining power of suppliers is moderate as there is mutual interdependence between manufacturers and mass merchandisers.
Customer bargaining power is low as toys are low-cost and standardized or mass products.
Threat of new entrants is high as often small players tend to come up with fad toys. Even PFL has also experienced several new entrants even in its differentiated product segment.
Threat of substitutes is low as there are no promising alternatives to toys.
REPOSITIONING OPTIONS ON PORTERS FRAMEWORK
Three repositioning options have been analyzed using Porters generic strategy framework:
Differentiation Strategy
Low-cost/High-volume Strategy
Focus Strategy
ANALYSIS OF REPOSITIONING OPTIONS
Advantages and disadvantages of each repositioning option are discussed below:
REPOSITIONING OPTION 1: DIFFERENTIATE ON SERVICE
Based on the Porters framework, this option can be regarded as an industry-wide differentiation strategy.
Advantages
Disadvantages
More local knowledge to better customize product offerings according to local taste
Leveraging local relations helpful in opening specialty stores and retail centres
Good alignment with existing business and marketing strategy of being a niche player
Replacement of least popular products with new products categories (Educational videos)
Expansion of customer base through word of mouth endorsements
Positive effect on brand-name by selling PFL products to raise money for schools
Additional expenditure would be required for design and production of catalogs
Additional expenses to procure the extended mailing list
Long term expenses could be as high as $80,000 per learning centre/ retail outlet
REPOSITIONING OPTION 2: HIGH VOLUME – LOW COST
Diversify into “non educational toys and games” segment
Advantages
Disadvantages
Lower costs can be helpful in the current scenario when the firm is making losses due to lower than expected response
Proven business model of industry leaders like Toys R Us
By reducing no. of suppliers and higher volume, PFL may secure better negotiation terms
Higher economies of scale with cost of products sold reducing from 46% to 32%
5% freight discount for increased volume purchases
Larger consumer base leading to increased sales from increased responses
Change of business model
Customers may not accept the new brand positioning resulting in decreasing brand loyalty
Competition with established and large players like Toys “R” Us
Risk of relatively low order amounts
No differentiation in its product offering
Investments for order-fulfilment centre and equipments (Approx $ 500,000) – A challenge for a cash strapped company like PFL
Increase in the mailing expenses
High supplier bargaining power
REPOSITIONING OPTION 3: SCIENCE, CRAFTS AND ACTION FOCUS
This is a focused differentiation strategy. This category is basically a subset of the larger educational toy category.
Advantages
Disadvantages
Higher profit margins, focussed advantage
Proven best selling items for PFL are from Science, Crafts and Action segment
Opportunities of development of PFL brand through magazine advertisements, which reach the appropriate target segment, i.e., high income parents willing to spend in PFLs products
Better customer care & information dissemination