Business beyond the latest craze

Business beyond the latest craze

Christmas is a magical time of the year – a time for the Christian world to celebrate all that is good in mankind. The magic I am referring to is also linked to incredible power bestowed on parents during the month of December. Children that were unruly for the previous eleven months are suddenly transformed into models of good behaviour as they endeavour to stay off Santa’s naughty list.

This reprieve is somewhat tempered by a healthy dose of pester power, as retailers bombard children with the must-have toys. Almost every year there seems to be a new trend, and parents find themselves searching the aisles in the dwindling hours of Christmas Eve to ensure this year’s hottest present takes pride of place beneath the tree.

Yet when the excitement of Christmas morning abates, and the wrapping paper is left discarded in a frenzied mess on the floor, which of the gifts will the children play with? How long does it take the must-have to become the must-had?

This demand for continual change creates a difficult operating environment for toy manufacturers. Considerable resources are spent on the development of toys which often have a very short shelf-life. The key to generating long-run profitability is developing a product that has a lasting connection with the customer base.

Think about the longevity of brands like Barbie, which has been around since 1959. Barbie is a toy that many girls form a deep bond with over several years.

Mattel owns the Barbie brand, and has developed a very sustainable model by combining a core product with sufficient innovation to stimulate demand. While Barbie may not be the must-have product this season, Mattel’s long-term focus means that it will still feature prominently beneath the tree this Christmas.

Funtastic (ASX:FUN) is an Australian toy producer that traditionally relied on short-term promotions to generate sales. The company had poor inventory management, which meant they were overstocked when the “must-have” hype subsided. This issue was compounded by the company’s reliance on debt, which left Funtastic close to bankruptcy after the GFC. The promotion-driven strategy left the company in such a poor financial position and it is yet to satisfy our investment criteria at Montgomery Investment Management.

Management has since realised the impediments of this promotion-driven strategy, and has endeavoured to build a portfolio of core brands across its media and toy divisions. Funtastic is now purchasing brands, rather than distribution rights, so it can drive innovation of its core products over the long-term. This strategy is starting to generate meaningful returns.

The foundation of this strategy has been the Pillow Pets brand, which has the hallmark of a sustainable asset. A Pillow Pet is a pillow in the shape of an animal that appeals to both boys and girls. Children carry these pillows wherever they go, and in the process develop very close bonds with the brand.

Like Mattel, Funtastic has stayed true to this core product, but has broadened the offering by incorporating Disney characters and a glow-in-the-dark range. Pillow Pets now accounts for half of the Toy Division’s revenues in the 2013 financial year. Funtastic is now hoping to emulate this success with a new “must-have” product this Christmas.

“Chill Factor” is a silicon gel cup that makes slushies in minutes. The product was launched in May 2013, and has since sold 2.4 million units worldwide. Funtastic acquired the brand for $10 million and it intends to drive innovation like it did with Pillow Pets. Its first will be the launch of an Ice Cream Maker in December.

If the company can establish a deep connection with the consumer, by making the Chill Factor synonymous with summer, it may become a profitable long-term venture.

If your child receives a Chill Factor from Santa this year, take note how popular it remains after Christmas Day. If it is well used in the subsequent months, then Funtastic may have a winning acquisition on its hands!

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.