Smurf Toys

Competing against two of the biggest toy-related franchises ever -- Cars and Transformers -- Smurfs has broken out in what is arguably the most competitive summer in movie history for blockbuster family movies that generate domestic and international licensing and retail merchandising revenue. This summer served up 17 films that amount to toy business bait, including Thor, Captain America: The First Avenger, X-Men: First Class, Pirates of the Caribbean: On Stranger Tides, Green Lantern and Winnie the Pooh -- up from the 10 or so in previous summers. Jakks Pacific, with revenue last year of $747 million, competes against industry giants Mattel and Hasbro (with $5.9 billion and $4 billion in 2010 sales, respectively). The largest merchandising program in history is being staged for Cars 2 by Disney, which expects the Pixar movie to surpass the Toy Story 3 licensing bonanza last year of $2.8 billion sales and to eclipse Star Wars: Episode III -- Revenge of the Sith record in 2005 of $3.5 billion in retail. Meanwhile, Hasbro is making a competitive marketing blitz for Transformers: Dark of the Moon with 350 licensees, well above the 250 for Transformers: Revenge of the Fallen in 2009.

No property in the modern era better exemplifies sustainability than Star Wars, which remains a top seller even though there hasn't been a new movie since 2008 (although there have been new TV shows). NPD ranks Star Wars as the fourth biggest seller this year and the top movie license entering summer. "Year in and year out Star Wars is popular," says Toys R Us's senior PR manager Bob Friedland. Summer is only the opening salvo in the toy wars. About a third of the year's business will be done before Labor Day. The other two thirds of movie merchandise sales will be in the rest of the year, mostly in December. This summer the biggest displays in Kmart, Target, Wal-Mart and Toys R Us have been for Cars 2 and Transformers.

The success of the Smurfs, however, is a signal for retailers as to how to prepare for the holidays. That is why by this Christmas Papa Smurf and Smurfette expect to be sharing more shelf space and front of store visibility with Lightning McQueen and Bummblebee the Autobot. The stakes are huge. The research firm NPD says licensed toys and games generated $6.3 billion in retail sales through the beginning of July, a one% increase over the same period a year ago.

The results this summer have already boosted Hasbro and Mattel, who both credit movie related sales for higher second quarter 2011 financial results. For the full year analyst Edward Woo of Wedbush Securities estimates Transformers will add $700 million in sales to Hasbro and Cars 2 will pad Mattel revenues by $500 million. Although Cars 2 has more display space in stores and more products, Hasbro benefits because it doesn't just license Transformers, it owns the rights to the property first invented in Japan. That means they control the TV version, video releases and don't share product licenses and merchandising revenues with anyone else.

Drew Crumb and David Pang in a June research report for Stifel Nicolaus explained the difference: "Hasbro does NOT share the Transformers toy IP (intellectual property) with other toy manufacturers so we still think the Transformers line should post one of the biggest sales figures for an individual toy manufacturer in '11." It used to be that toy sales were gravy for studios like Paramount, Sony and Disney. But these days licensing can be as lucrative as the movie box office and producers count on that to cover costs which often exceed $150 million.