Why Merchandising for EP2 WON'T Fail

[Jedieb]

First off, let me explain why I say that TPM's merchandising failed. To be honest, TPM generated an enormous amount of merchandising revenue. But as EP2 gets closer and closer you're probably going to see references to TPM's "failure" at retail. In a sense people who say and write that are both wrong and right. If you take your typical blockbuster and see how much revenue it generates through merchandising sources like toys, clothing, etc. you might come up with a number like $100M. (I'm just using $100M as a starting point for my argument. I have no idea what the actual number is.) Along comes the prequels and merchandisers start wetting their pants. Everyone and their mother begins desperately trying to get a piece of the action. Lucas, being one of the greatest if not greatest film maker/businessman Hollywood has ever seee, charges UNPRECEDENTED licesing fees for the prequels. All the merchandisers cave in one after another. They pay the piper and begin rolling out the merchandise in record numbers.

So what went wrong? Remember that $100M number I threw out earlier? I would guess that TPM probably doubled, maybe even tripled that number. So how can a film that generated so much money at retail be considered a flop!? Easy, GREEDY retailers never bothered to take into account what other retailers were doing. They never stopped to consider that moviegoers were only to be able to shell out only so much dough on TPM merchandise. A kid only has so much to spend. If he spends $20 bucks on action figures he's not going to spend another $20 on t-shirts, bed sheets, stickers, book bags, Applause statues, ceramic figures, Taco Bell/Kentucky Fried Chicken/Pizza Hut promos. There was simply TOO MUCH merchandise out there for TPM to support.

One area where I do have some level of expertise is SW toys. And that's a perfect example of where things went wrong. Out of a desperate fear of losing the SW license Hasbro gave GL whatever he wanted. Everything from stock to a few hundred million dollars. (The numbers were around $400-$600M.) So when TPM comes around they basically lost their minds. For the year of 1999 Hasbro produced around $700M worth of toys. They sold about $500M to retailers. That's not bad. Oh, who are we kidding, that's PHENOMENAL! There's only one problem with that scenario. Retailers only sold about $350 worth of SW toys. That means Toys R Us, Target, K-Mart, and locally owned comic book shops were stuck with over $150M of UNSOLD merchandise. Hell, most films would kill if they could even generate HALF that in toy sales. Giants like TRU have agreements in place where they can ship unsold merchandise back to Hasbro and get credit on future orders, but smaller retailers don't have that kind of clout. They got stuck with tons of merchandise that to this day they still haven't unloaded. I went by my local comic book shop today and they still have TPM toys from the spring and summer of 99 still gathering dust on their shelves.

By the time X-Mas of 99 rolled around fans and collectors were growing fed up with Hasbro and the lack of new SW toys. If Hasbro had produced $700M worth of new toys then why was it so hard to find a Holographic Sidious? Because retailers weren't ordering any new SW product. Why are you going to order anything new when you still had product on your shelves from back May and June? So people who had been collecting since 95 simply jumped ship. They went on ebay and sold off their collections or just simply stopped trying to buy anything. Some just decided to cut back and buy the occasional figure. I've stuck with it because it's one of my favorite aspects of SW but even stalwarths like me have seen ample evidence of collector apathy and frustration. If you look at toy aisle today you see a much more realistic amount of product on the shelves. And this leads me to why EP2 wont "fail".

Retailers and merchandisers now have some hard sales data to work with. They can look back at TPM sales and order and produce product accordingly. Figure lists for EP2 have already leaked out from Hasbro and you see a much more conservative effort from Hasbro. They'll make fewer figures and retailers will make more realistic orders. Everyone should do much better this time around. This generalization should extend to other areas of SW merchandise.

Before I finish I want to talk about the word "fail" again. Remember, when I say that TPM's merchandise failed I'm not saying TPM merchandise didn't sell well. I doubt any other film in 99 came even CLOSE to generating the kinds of numbers TPM did. What TPM didn't do was empty out wharehouses. (Anyone who's familiar with the Holo R2 fiasco knows what I'm talking about.) That's not TPM's fault. Retailers and merchandisers are to blame for making and ordering too much damn product.

You know there is one group that came out ahead of everybody else in regards to TPM's merchandise; GL and Llucasfilm. Why? They got paid ahead of time. Hell they got paid everytime a cash register rang up a SW item. They're getting paid everytime I buy a POTJ figure. And you know what? I say good for GL. He's not being greedy, he's being a smart businessman. No one put a gun to anyone's head and forced them to buy and produce so much SW stuff.

[JonathanLB]

Well, to correct a few things...

Overall merchandise sales for TPM were the greatest in history, topping Lion King at over $1 billion. That includes everything, though.

Furthermore, Hasbro sold about $650 million worth of toys to retailers through 1999 alone. You are right; not all of it sold.

Most of the hottest toys sold like hotcakes, but many of the lesser figures and whatnot didn't sell "as well," even though sales were still very strong (not in relationship to how many toys were produced, though, you could argue).

Your argument is sort of looking at a number of different industries, and that is the reason you say you could be "right and wrong," because it depends what you are dealing with.

If you are Hasbro, there is no question that TPM was a massive success for them. It boosted revenue, it delivered in every way. The retailers also benefitted (I have company reports showing sharp increases and, later, decreases in 2000 because of lower shipments), but some retailers definitely overordered, and they didn't sell all of their products. Retailers probably came out worst, with Lucasfilm being #1, licensing companies being #2, and finally retail outlets.

Hasbro really didn't overpay for their license, nor did most other companies. Hasbro paid about $700 million when you take into account that they now own Galoob, which paid a lot too. Nevertheless, both companies made over $700 million in the first 8 months alone, although of that, how much was actually profit? Probably more like $200 million. Still, you add on 2000, then you consider 2001, and you're closer to paying off the entire amount. So, it could end up that by a few months after Episode II, Hasbro and Galoob have paid off whatever it cost them to get the licenses, and it's all gravy from there except for the royalties. That's still a hell of a good deal (having Episode III toys basically paid for entirely by the time the movie arrives).

You are right in many respects, Jedieb, the toy companies and other companies made way too many products, and we're not talking just too many OF each one, but too many KINDS of products too. There were like 20 new Star Wars t-shirts, and you know what? I already have about 7 (I wear them to sleep, not during the day, only polo for me during the day). So, nobody wanted all 20 new shirts, and they also made too many of each of the designs. Of course that won't sell, lol.

I think The Phantom Menace was an experiment in many senses, except for the actual film. The merchandising companies now know how to meet the demand without producing way too much supply, so they should be able to fix that problem better this time around. Second, other companies tested some new technology on the film, such as sound systems and digital projection. Everyone tested something, and now it's time to fine-tune that for Episode II.

This time around, it should go much more smoothly, even if sales are actually less, profits should be greater if they do it right.

There is no mistaking the fact that The Phantom Menace was a merchandising monster and made tons of companies tons of money, but that doesn't mean everything sold. There was a good deal of merchandise left over that really shouldn't have been produced.

In no way did TPM merchandise fail, it was a massive success, but Hasbro failed to predict the demand, which is not uncommon (double negative, but I don't want to say it is common, or uncommon, it's just not uncommon! hehe).

For instance, can you say that DK's Star Wars books were a failure because they sold 3 million copies, but printed 13? No. That is not fair at all. It doesn't *matter* how many copies were printed, it matters how many were sold. The company made an internal mistake and way overprinted beyond "what any reasonable person would do," said a Lucasfilm spokesperson. Think about it, 13 MILLION copies of only a few different books! That's the stupidest thing I've ever heard. Most books never sell 40,000 copies! So sales of over 100,000 for books about a movie is actually pretty remarkable, but that's the thing, they didn't sell 100,000 copies, they sold many times that!

So, it really depends on who you are. If you're DK, you screwed up and you failed, not Star Wars, but then from your perspective, the SW books were a failure because of your mistake. From anyon else's perspective, they were a massive success because they sold extremely well.

I think it would be like saying, "You know, yes 30 million people saw this movie in two months, but if you think about it, there were 170 million empty seats in all of the total showings. That's terrible! There should have been more people." No...that's not how it works. You don't look at what is left over, you look at what actually sold. What is left over is the company's problem, and not the fans' concern or that of anyone else.

[Jedieb]

The numbers that I've always seen placed Hasbro's 99 sales at around $500-$600M. But these are all estimates because Hasbro's never released the actual numbers and I doubt we'll ever see them. I'd guess the actual number is between $500-$700M. But I'm pretty sure the $150 million of unsold product is on target. I've heard that thrown around several times. Hasbro has done incredibly well with SW but if they had met the high end of their sales figures they may have even had a shot to challenge Mattel for the #1 spot. Still, it was a deal they COULDN'T afford to miss out on. Losing the SW license would have been a disaster for them and they had to ante up. Too many retailers just got caught up in the hype. Even investors did as well. Did you see what happen to Hasbro's stock before and after TPM? It was amazing to see it jump from around $17 a share all the way to close to around $40. A 400% increase! If you look at a 5 year chart you can see clearly see TPM's release date and Hasbro's highest stock price line up perfectly. It's rather amazing. But do you where it's at today? $12.50 a share, things have leveled off and reality has settled in. People just got caught up in the hype.


I know I used the word "failure" but I did it to make a point about how we're going to see these kinds of comments in the inevitable EP2 hype. The DK numbers you posted are a great example. 3 million is a great number to reach, but if your aim was 13 million then you've got a serious problem. DK should easily avoid this problem with EP2 as should other retailers because they now have some hard sales data to work with. But too many writers are going to ignore the positive next spring whenever they talk about SW merchandise. They'll have a point that some retailers took a hit with SW merchandise, but they'll ignore the positive.

The B.O. figures are a good analogy. Remember how some people expected a $150M opening weekend and a final gross of anywhere from $600- $1 Billion? TPM "failed" to reach either of those benchmarks. But you can't say the movie was a box office failure because of it, that would be nuts! Where retailers got hurt is that they used numbers like $150M and $1 Billion to help them determine how much product to make and order and they got burned in the process.

[JonathanLB]

You are right about people being caught up in the hype, but one point I raise in my book is that fans could afford to be caught up in it, but corporations often made VERY COSTLY mistakes by basing their actions on hype, not on facts. I mean, that usually does not happen, but Star Wars really is so huge that everyone kept making new, bigger predictions as to what it would make on this or that.

$1 billion in the U.S. alone? That is insane! Maybe so, but something like 32% of people polled on a Yahoo questionaire thought TPM would make over $1 billion. Shows what they know about the box office.

And, you are right, since some people set such stupid expectations for TPM at the box office, its "puny" $431 million gross seems less impressive. In reality, if you just look at the facts and not the expectations, you realize how utterly weird, and incredible it is for a fourth film in a series to make over $100 million, let alone more than 4 times that amount. There was a popular first film, then a sequel, then another sequel, then a prequel, and that prequel still managed to become the overall second highest grossing film ever (worldwide). That almost defies logic, that interest could remain so high for so long.

So, it depends on what "lens" you are viewing the movie through, one of facts or one of expectations and hype. Certainly, TPM was an utter failure compared to some of the expectations, but thankfully success is not based on expectations, but on actual hard data, lol!

I do understand your point, Jedieb, and you made a good post. Writers in the media, many of them, couldn't care less whether or not TPM did well, they will try to say, "To avoid the disaster that happened in 1999 when Hasbro overproduced," blah blah blah. All these stupid statements that have no basis in reality, but that's the media for you.

I think you are probably right, if Hasbro shipped $650 million (source: Wall Street Journal), then retailers probably sold about $500 million worth of that in 1999, the rest remaining on shelves to be discounted or whatever, hehe.

I think you would enjoy my merchandising chapter, Jedieb, I'm almost tempted to send you a copy, hehe.

I have three chapters in my book on toy sales, I believe. There's "Prequel Toy 'Wars'" then "Toy Rush" (guess when? Hehe), and "Merchandise Sales."

The company stock price soared to its high in May, just before the opening of the film, then it began a continued decline, falling about three times from its high, slightly more actually.

Hasbro was very disappointed that their stock price did not reflect their record year. The Wall Street Journal wrote, "Did Impossibly High ‘Star Wars’ Hopes Unfairly Zap Hasbro Stock to Dark Side?" The article explained that "the stock price is more a result of peoples' expectations than actual 'Phantom' sales." The article was very positive, while it certainly didn't have to be, and said that Hasbro had enjoyed success with their Star Wars line, and that most retailers had been selling the toys very quickly (this was July 1999), so most analysts couldn't understand the drop in the stock price.

The stock market is not an accurate indicator of what a company is worth, or how they are doing, unfortunately. My dad owns the majority of a public company (his company, Regent: Assisted Living, or RGNT, which he founded), and he doesn't think the investors have a clue. It's a bad industry lately with plenty of bankruptcies (assisted living and elderly care), so the investors are not enthusiastic about any stock in a company within the field, regardless of whether or not it is doing well.

With Hasbro, that was not the case, but certainly it had a lot to do with people reading some of the articles about sales not going so well (see what I call tabloid journalism like Entertainment Weekly and E! Online), then they sold off.

Well anyway, to Jedieb you listen, he knows much about the toy industry, hehe

[Darth23]

I new there was too much Star Wars stuff made the first time I went in to Wal mart. There was just tons of EVERYTHING. Backpacks, inflatable chairs, puzles, posters, thise stupid looking lcd games, models, model rockets, games, vheicles in all different sizes, and action figures, action figures and more action figures .

And many different kinds of everything. 8 posters instead of 1 or 2. 10 lcd games instead of 1. Like Jedieb said, people who are going to buy this stuff can only buy so much.

Personally, I think the idea of having the merchandise on the shelves before the movie comes out is a mistake. I understand that that's part of the cross- promotional thing to 'build interest' in the movie - but only serious fans and collectors will want to buy stuff from a movie that no one has even seen yet. (imo) I didn't start down that slippery slop of buying Star Wars stuff until the Saturday after I saw the movie.

Personally I'm glad that there was a bunch of overstocked stuff - I probably bought way more that I should have because I found so much stuff discounted, though.

-------
Anyway- I'm sure stores arent' going to be nearly as saturated with stuff the next tiem around.

[Jedieb]

If it's not a big hassle I wouldn't mind seeing your merchandising chapter or anything else in the book related to toys. (It would save me some money when the book comes out.) I'd love to read about the May 3rd midnight run again, it was a night to remember. I think I remember yoy saying you spent over $1,000 that night. I spent over $400 and staggered around work half asleep the next day.

There were several reasons Hasbro stock took a tumble. Hasbro has made a series of major acquisitions in the last couple of years. (Galoob, Wizards of the Coast, etc.) The burden of acquiring these companies and getting them under control has affected Hasbro's earnings and stock price. So it's not just about SW, but SW is arguably Hasbro's highest profile line so it gets a disproportionate amount of coverage. Personally, I wouldn't think twice about owning Hasbro stock. I wish I'd bought a few shares a couple of months ago when the stock dropped down close to $10. Long term, the company is an excellent investment. It won't make you a millionaire, but it will give you a solid long term investment. At least that's what I'll tell my wife when I buy Hasbro stock in my daughter's name.

[JonathanLB]

Oh yeah, the stock is a steal right now. I think it's a real solid company that is doing well, and in the next five years will do much better.

I think you could easily double your investment in 5 years, maybe triple. It could only make you a millionaire if you put about $333,334 in

Well, I probably shouldn't pass out any chapters of the book now, but I will think about it. I still am not done editing, though, so for now I have to get back to work, hehe.

[Darth23]

Hey Jon!

Can you lend me about 300,000 bucks?

:-P

[JonathanLB]

I don't have much money right now, actually! My bank account has about $109 in it, no joke.

The rest just disappeared into ebay and a few other places, and then right now I'm actually over 45 days behind on payment for my websites, but I will send that out this Monday...

My advertisers are more than three months behind in some cases, so that hurts a lot. They're just not paying in a speedy fashion at all. Internet business pretty much sucks, unless you are selling something.

[Darth23]

That's cause the internet works better as a free exchange of information than as a big giant shopping mall.

[JonathanLB]

Actually, it still works great for selling stuff, but the advertising market is just not good.

The banner ads are no longer very effective because everyone ignores them, so they don't pay much.

Direct sales will still succeed, and Amazon.com is making good money on their music, DVD, and book divisions, but their rapid expansion was probably not smart. I think they should have been more cautious, but they were trying to take risks and succeed, so hey, sometimes you don't know what will work and what might be too risky...