Toy Distribution Industry in Usa

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 children's catalog.

CHALLENGES FOR PASSION FOR LEARNING (PFL)

PFL'S 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 Porter's 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 PORTER'S FRAMEWORK

Three repositioning options have been analyzed using Porter's generic strategy framework:

i) Differentiation Strategy

ii) Low-cost/High-volume Strategy

iii) 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 Porter's 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 PFL's products

* Better customer care & information dissemination