Collectibles Drive The Toy Market And Funko Is At The Wheel

Collectible toys are emerging as the fastest growth segment of the overall toy market and Funko (FNKO) is leading the charge.

Collectibles in the toy space are basically toys for adults. The purchase motivation is fundamentally different from what drives the traditional toy market – it is financial gain as opposed to play and entertainment. Whilst most collectible products will not turn out to be profitable investments, some most certainly are. For instance, the original G.I. Joe figures from 1963 now go for $200,000. The 1969 Hot Wheels Rear Loader Beach Bomb goes for $100,000. The 1980 Teddy Ruxbin now is worth $1400 and an original 1998 Furby recently sold for $700.

The collectibles market is large and growing at a rapid pace. While collectibles have invaded a wide number of different product categories – toys, games, apparel etc. – by far the largest is traditional toy and games. It was estimated for 2017 at retail to amount to about $2.6 billion worldwide:

Category

Retail Sales U.S.

Retail Sales International

Retail Sales Worldwide

Collectible Toys

US $1.5 billion

US$ 0.9 billion

US$ 2.4 billion

Collectible Games

US$ 0.9 billion

US$0.3 billion

US$ 1.2 billion

Total

US$ 2.4 billion

US$ 1.2 billion

US$ 3.6 billion

Source: Klosters Retailer Panel

Growth from 2016 to 2017 has been estimated at 25% and a similar rate is expected for 2018.

The Collectible Toys segment is to a very large extent driven by movie IPs such as Star Wars, Avengers, etc. As a result, it is also one that is much less seasonal than the traditional toy market

The single biggest retailer in the U.S. for collectibles overall is GameStop (NYSE:GME), which is now devoting half of its store space of its approximately 4000 U.S. stores to the category. Their collectible sales overall are estimated at $650 million of which about one-third is in Collectible Toys and the remainder in accessories and apparel. This would give GameStop a market share of about 28% of the U.S. Collectible Toys market. Amazon (NASDAQ:AMZN) is only slightly behind with an estimated 24% and Target (NYSE:TGT) and Walmart (NYSE:WMT) are estimated to have each about 6% to 10% market share.

The leading toy companies in the collectibles field is Funko for licensed action figures. Other participants are Mattel (MAT) for Barbie, Hasbro (HAS) for movie action figures, Spin Master for Hatchimals, MGA for LOL, and Wowee for Fingerlings but they are up to now factors by default in that they are not actively promoting their products as collectibles. However, this is now changing.

This is how Funko’s business developed:




Source: Funko SEC filings; *Klosters Retailer Panel

At the end of December 2017, Funko’s business was mainly in the U.S. [72%] and mainly in Collectible Toys, specifically Action Figures [80%]. This gives them for 2017 a market share in Collectible Toys in the U.S. of 30.5% and internationally 19.6%.

Given the size of the market and its growth rate, it is little wonder that the heretofore passive competition is now becoming active. Both Mattel and Hasbro have begun to focus on the collectibles opportunity. In the case of Mattel, it is Barbie collectible dolls – 17 Barbie dolls for the International Women’s Day, 3 Barbie dolls featuring the main actresses in Wrinkle In Time, and one Barbie doll depicting Laura Croft in Tomb Raider. None of these are directly competitive with Funko whose main focus in Collectible Toys is in Action Figures.

Hasbro is a different story. The company has seen the collectors’ base for their traditional 6” action figures erode due to two factors. One is that there were too many films in too short intervals for a given IP. The second is inroads by Funko’s 3.75” figures. Star Wars is a recent example. According to estimates by the national buyers at the major retailers, about one-third of the sales of the traditional Force Awakens action figures were made to collectors during the last quarter of 2015.

This went down to about half for Rogue during the fourth quarter 2016, and in the case of the Last Jedi, this dwindled to less than 10%. As a result, Hasbro has decided to aggressively enter the Collectible Toys market by going head-on against Funko with Mighty Muggs – the same size figures at the same price and with the same licenses. Black Panther, Funko’s top selling POP brand in February, is a case in point.

This is Funko’s Black Panther, 3.75” size at $9.99 at ToysRUs’ website:



And this is Hasbro’s 3.75” size at $9.99 on Hasbro’s website:



Hasbro’s product is more versatile than Funko’s in that the figure has three different facial expressions and you press down on the head to change the face.

A good friend of mine – a major toy distributor – had the following to say about this:

“I feel Mighty Muggs is a superior offering since it has actionable engagement with the face changing at the press of the ‘head’. Very nicely done by Hasbro.

Funko on the other hand is static. Price points are better too. We have had a good response to the initial launch, so far.”

What is not clear to me is the legality of this very odd situation. Both Funko and Hasbro are Disney (NYSE:DIS) licensees for action figure brands such as Black Panther. License agreements are by their very nature designed to provide some sort of exclusivity to the licensee in return for pretty hefty royalties. I cannot imagine that Funko would have entered into an agreement permitting another toy manufacturer to basically imitate its products. Unless in fact Funko confirms that this is an amicable arrangement, I would consider Hasbro’s initiative and Disney’s agreement to be inappropriate and in fact unacceptable.

There is little doubt that Mighty Muggs will have an effect on Funko’s market share particularly in the U.S. where the company has already reached a level from which it would anyway be difficult to expand further. This is not the case internationally where Funko is making rapid progress. The POP brand has significantly expanded its footprint and is now in the top five action figure positions in Canada, Mexico, U.K. France, Spain, Italy, China and South Africa. It is expected that this expansion will continue and broaden geographically in 2018.

Given all this, it is probable that Funko’s Collectible Toy business will lose market share in the U.S. going from 30.5% in 2017 to 29% in 2018 and will grow internationally from 19.8% to 21%.

The Klosters Retailer Panel metrics suggest that Funko sell-through numbers grew by 25% in January and February. As for the totality of 2018, twenty-eight major retailers in seventeen countries were kind enough to tell me what they thought in terms of likely Funko sales. This is the result, broken down by Geography and Categories:




Source: Klosters Retailer Panel

The same buyers recognize the danger that the Toy Collectibles market could eventually slow down or even decline. They are not worried in the short term – say for the next two or so years. Further out, they think that the more toy companies focus on the category and flood the market, the more likely it will be that such a development could occur. However, they also believe that the very nature of collecting will favor the existing brands at the expense of new and opportunistic entrants. This would suggest that Funko will be in reasonably good shape for the foreseeable future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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