There is a large number of companies of various sizes which design and sell toys to retailers globally. Most toy companies outsource the manufacture of their toys and currently 86% of the world’s toys are manufactured in China. Most of the rest of the world’s toys are manufactured in other Asian countries, with only low volumes of products manufactured in Europe and the USA. The toy market is divided up into a variety of sectors, by children’s age range and the type of toy. There are different sectors with toys aimed for babies under one year old; children aged 1 to 3 years and pre-school children of 3 to 5 years. There is a further sector for children of school age of 5 years and upwards. Additionally the toy market is broken down into categories of toys. Research has shown that children aged 2 to 4 years old receive the most toys in quantity but that the most money is spent on toys for the 6 to 8 year age group. Toys sold in the market to those children aged between 9 and 11 tend to be more sophisticated. Some of these games need access to the Internet and most involve more complex programming.
The other feature of this age group is that the ‘buyer’ tends to switch to the child from the parent. That is not to say that the child pays the money, more that the child drives the buying decision, always subject to the budget and final say so of the parent. The current trend in toy sales is towards electronic toys and computer assisted learning. Many of these electronic toys are highly developed to be attractive to children. Sales of traditional toys and games have achieved relatively low growth in the European market over the last 10 years, whereas electronic toys and merchandise from popular films and TV programmes have seen reasonable growth. Merchandise from films and TV programmes are licensed to toy manufacturers or toy retailers that can achieve high short-term profits depending on the licensing arrangement and the volume of sales.
However, fashion trends are difficult to predict and toy retailers can be left with large volumes of unsold inventories if the toys are unpopular or less in demand than originally anticipated. The toy market is highly seasonal and is dominated by the pre-Christmas sales period. Typically, around 30% to 55% of toy sales occur in the fourth quarter of the calendar year (October to December). China has established itself as a high quality, low-cost manufacturing base for a wide range of consumer products for global markets. It does not, as yet, principally design and create new products, but instead is capable of manufacturing products that have been created by Western companies.
It is necessary for the companies which create the designs, whether the product is a toy, a range of clothing or a computer chip, to ensure that the design is protected by registering the design for intellectual property rights (IPR’s). However, in many instances small changes can be made so that ‘copies’ of the design do not breach the IPR. Legal protection of IPR’s is becoming increasingly important in today’s global markets, where resources are sourced in one area of the world, manufactured into finished products in another area (principally in China and other Asian countries) and then sold in other geographical markets. Most toy retailers procure a range of products from many different toy companies.
There is a wide range of companies, from small to very large multi-national companies, which operate as toy design and distributing companies. These companies design, patent or license the toys and then outsource the manufacture to specialist toy manufacturers. Most toy companies outsource the manufacture of toys. Contracts are usual in the industry and would normally include clauses concerning design quality, delivery schedules and penalties for breaches of contract. The toy companies then sell their products to toy retailers. There is also a large discount market for toys where toys of inferior quality are sold. The retail prices in this market are often 50% less than in the conventional markets.
There are several global toy fairs each year that attract buyers from toy retailers across the world. One of the largest toy fairs is held in Hong Kong in January each year, where new toys are launched for the following Christmas market. Other global toy fairs are held in Europe, Russia and the USA, also early in the calendar year. At these toy fairs, buyers will assess and choose which of the new toys may achieve high sales. The toy fairs attract a wide range of exhibitors that are launching new toys, both large listed companies and small companies. The level of sales achieved by many toy companies will often depend on orders generated from buyers attending these international toy fairs. Therefore, it is important that prototype toys and marketing literature is ready in order to meet the requirements of these global buyers at the start of each calendar year.
The Jot brand was established in 1998 by husband and wife team Jon and Tani Grun. The company initially designed a small range of toys that were manufactured in their home European country. These toys proved to be very popular in their home country and Jon Grun then expanded the range of products. By 2003, within five years of starting Jot, the founders were encouraged to see Jot’s products ordered by many large toy retailers across Europe. By this stage the company had grown considerably, and had annual sales of almost €2 million.
Commencing in 2004, Jot started outsourcing all of its manufacturing to a range of manufacturing companies in China in order to reduce its cost base and to enable the company to price its products more competitively. By the end of 2010 sales revenue exceeded €8 million and the company had achieved substantial sales revenue growth each year. Jot has seen its sales revenue grow by 16% in the year ended 31 December 2010 and by almost 18% in the year to 31 December 2011. A summary of Jot’s key personnel is shown in Appendix 1 on page 11.
Jot’s product range and serviced age groups
Jot currently has a relatively small range of 34 products aimed at only 2 age groups. These are the pre-school age group of 3 to 5 year olds and the next age group of 5 to 8 year olds. It currently does not produce any toys aimed at babies aged less than one, toddlers aged under 3 years old or children aged over 8 years old. Jot’s products include a range of toys designed by the company, for which it holds the IPR’s, as well as some licensed toys, for which it pays a license fee to the companies that hold the IPR’s. Jot’s products mainly include electronic features and this is seen as one of the strengths of its products. Jot currently launches around 5 totally new products each year. It also enhances certain aspects of some of its other products to refresh their appearance and features.
It also has a range of toys that sell consistently well and have not changed materially for a few years. Jot’s products for the 3 to 5 year old age group include: • • • • • • • • Construction toys with sound effects and electronic actions. Learning products such as mini-computers which ask questions and the child responds by pressing different keys. Toy vehicles some of which have electronic features such as sounds and lights. Plastic toys which have “animatronics” to make the toys move, for example, toy dinosaurs. Toy cameras. Electronic learning products to aid learning the alphabet and basic maths skills. Licensed soft play toys based on film and TV programme characters. Licensed plastic figures, cars and machines based on film and TV programme characters, some of which include electronic features that generate movements and sounds, including theme tunes.
Jot’s products for the 5 to 8 year old age group include: • • • • Toy cameras and simple video cameras. Dolls and action figures some of which move and make sounds. Small hand-held games boxes for playing computer games and educational learning products to improve maths and readings skills. A range of games and educational learning products for the hand-held games boxes.
In summary, most of Jot’s toys have simple electronics that make a sound or enable movement. Some of the more advanced toys have simple programming to enable educational aspects of the toy to be more interactive. Jot’s products are sold to toy retailers for between €7 and €38. These are Jot’s selling prices to toy retailers. Most of the retailers will then sell these toys at a large mark-up, which can be as much as 50% to 100%, i.e. a toy procured from Jot at €10 could be retailed to the end customer at as much as €20.
Margins vary from product to product and whereas toys aimed at the 9 -11 age group carry more sophistication (and hence risk) they also carry higher margins. In the year ended 31 December 2011 Jot’s actual sales volumes were over 706,000 units across Jot’s entire range of products. The total sales revenue for the year ended 31 December 2011 was €9,866,000, which resulted in an average selling price of just under €14 per unit. Over 80% of Jot’s product sales are sold to retailers for €20 or less.
Financials and shares
Jot has achieved a high annual growth in sales, with sales revenue reaching €9,866,000 in the year ended 31 December 2011, a growth of 17.9% from 2010 (€8,371,000 sales revenue for year ended 31 December 2010). Additionally, it has achieved an operating profit margin of 5.58% in the year to 31 December 2011, a rise from the previous year’s profit margin of 5.41%. An extract from Jot’s accounts for the year ended 31 December 2011 is shown in Appendix 2 on page 12. Jot’s Statement of Cash Flows for the year ended 31 December 2011 is shown in Appendix 3 on page 13. Jot is a young, growing company that is dependent on loan finance. Jot has three bank loans totalling €1,600,000, each at an interest rate of 10% per year, which are due for repayment as follows: • • • Bank loan of €500,000 due in January 2014. (about 14 months from the ‘current date’ Bank loan of €500,000 due in January 2015. Bank loan of €600,000 due in January 2020.
Jot’s bank has been very responsive to the company’s needs for cash in order to fund its growth but has indicated that at the present time it would not be able to provide any additional long-term finance. Jot has an overdraft facility of €1,500,000, which the bank has stated is the maximum limit. The current cost of its overdraft is at an interest rate of 12% per year. At 31 December 2011, Jot’s overdraft was €960,000. Jot’s business is highly seasonal with a significant proportion of sales occurring in quarters 3 and 4. As Jot builds up its inventory in preparation for higher levels of sales in quarters 3 and 4, cash flow is negative during the second half of the year. This is because outsourced manufacturing for the majority of all products occurs mainly from the end of quarter 2, during all of quarter 3 and the beginning of quarter 4.
Jot is a private limited company and not listed on any stock exchange. It has 40,000 shares in issue, each of €1 par value. The company has an authorised share capital of 200,000 shares. To date, the Board of Jot has not declared any dividends. The shares are held as follows: Number of shares held at 31 December 2011 Jon Grun Tani Grun Alana Lotz Boris Hepp Michael Werner Total 12,000 12,000 8,000 4,000 4,000 40,000 Percentage shareholding % 30 30 20 10 10 100
Production of toys
Jot has its own in-house team of designers who are involved in designing toys that are unique, innovative and fun to play with. The production of new toys is split into two stages. Firstly, the design stage involves the design team developing a new toy and after it has been approved, the second stage is where the operations team is responsible for contracting an outsourced manufacturer for the mass production of each product. The head of Jot’s design team is Alana Lotz, Product Development Director. She is responsible for researching the market trends in toys globally and establishing the availability of new innovative technology that could be incorporated into new toy designs. This is what helps to make Jot’s product range innovative and at the ‘cutting edge’ of new technology, as the products incorporate new technology electronic chip components.
Research and development work on new product development usually occurs between May and December each year so that the new products have been fully tested ready for the annual launch of Jot’s new range of toys each January. Jot currently launches 5/6 totally new products each year and the development costs are generally between €0.1 and €0.25 million for each new product. The total design and development costs are around €1.2 million each year. This is included in administrative expenses in Jot’s statement of comprehensive income.
Jot has just finalised its range of new products for 2013, so as to allow time to produce marketing literature and prepare prototypes ready for the global toy fairs being held in January to March 2013 in various locations around the world. The design team which is based in the UK develops all new products through the following stages: • • • • • • Brainstorming for new ideas. Designing a new product using Jot’s CAD / CAM IT system. Production of first prototype. Market research and improvements through to production of second prototype. Sign off by design and management team. Application for intellectual property rights (IPR’s) for each product design.
The design team is kept fresh by the introduction of new designers each year. Good designers are kept on but those that are seen as burnt out are let go. Early in 2012 a new designer was employed named Indy Kaplia who had some radical new designs to offer. One of these toys (a flying spaceship) had been rushed into production in time for the 2012 Christmas season and had been greeted well by the retailers.
Jot uses a specialised company, based in Europe for the manufacture and testing of all prototype products and there are often two or three stages involved before the prototype product is produced to the satisfaction of the designers. Only when each product is signed off by the design and management team can Jot’s legal team apply for the IPR’s for the product design. Then the approved new product designs go into production by outsourced manufacturers.
The designs are then electronically transferred to Jot’s operations team headed up by Michael Werner, Operations Director, for the selection and appointment of outsourced manufacturers. The stages in the production process are as follows: • • • • • Designs are sent electronically to outsourced manufacturers for tender. Outsourced manufacturer(s) selected and appointed and volumes and delivery deadlines for production agreed. Packaging designs and artwork are prepared and approved. Production samples are reviewed by Jot’s in-house Quality Assurance team located both in Europe and in Asia. Production is commenced to meet agreed volume and delivery deadlines.
Michael Werner is responsible for the selection, appointment and monitoring of Jot’s outsourced manufacturers and all aspects of the management of the outsourced manufacturing process for Jot’s products. Jot’s products are all manufactured by a small number of specialised outsourced manufacturing companies which are all based in China. Jot is responsible for shipments of all products from its outsourced manufacturers to its warehouses or sometimes directly to customers.