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February 27, 2012

Brazil’s Emerging Middle-Class Offers Opportunities for Toymakers

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Analyst Insight by Giedrius Daujotas

The growing middle-class in Brazil and subsequent rise in spend per child are creating opportunities for toymakers looking to expand in emerging markets. In 2011, Brazil's middle-class, if defined as households with an annual disposable income of over US$15,000, numbered 32.4 million households, a figure which puts Brazil's in fifth place globally in terms of number of middle-class households, ahead of France and the UK. Alternatively, if we define middle-class as households with an annual income of over US$25,000, the total would be 19.8 million households, still more than in Spain or Canada.

With Brazil's economy continuing to show signs of strength in 2011, it is increasingly becoming a lucrative target market for international toy companies. Mattel's recently announced results for 2011 indicate that Latin America accounted for revenue of nearly US$1 billion, with Brazil and Mexico now the company's second and third largest foreign markets, indicating the importance of the country as a toy market.

Strong economy sparks growth in disposable income

It is no coincidence that growth in its toy market has been boosted by the strength of Brazil's economy. The country's unemployment rate reached 4.7% in December 2011, marking a historical low, and way below the typical rate of above 10%. Increasing competition for employees has pushed up wages and disposable income. Over 2006-2011, Brazilian per capita disposable income grew at a CAGR of 11%, reaching US$8,058 by 2011. That figure does not include the effect of exchange rates, which would make growth even stronger.

Real GDP growth has slowed from the 7.6% recorded in 2010, but remained a healthy 3.2% for the first nine months of 2011 when compared to the same period the previous year. At the same time, Brazil's currency, the real, appreciated by 12% in 2010 and 5% in 2011 against the US dollar, boosted by the country's positive trade balance. While in the long run a strong exchange rate may pose a risk to Brazil's domestic economy, it does create a positive environment for international toymakers as it makes their toys more affordable in Brazil.

Disposable Income in Latin America, 2006-2011
ScreenHunter_01 Feb. 27 14.44

Source: Euromonitor International (Countries and Consumers) from national statistics

Toy market boosted by growing in middle class consumers

This growth in middle-class consumers has caused a rise in spending on toys. Traditional toys and games posted an impressive value CAGR of 17% over 2005-2010 in local currency terms. If exchange rates are taken into account, the increase is a mesmerizing 25% CAGR over the same period. In total, the Brazilian market for traditional toys grew from US$630 million in 2005 to US$1.9 billion in 2010, becoming the ninth largest toy market in the world. And the best part is that with an average spend of US$38 per 0-14-year-old, Brazil still lags behind some its peers in Latin America and so has plenty of potential for further growth.

Largest Markets for Traditional Toys in Latin America

Market size in 2010 and spend per child (0-14-year-old)

ScreenHunter_02 Feb. 27 14.44

Source: Euromonitor International 

So, what kinds of toys do Brazilians like? Mattel leads the Brazilian market by a large margin, commanding a robust 30% share, followed by Hasbro and local toymakers Grow Jogos and Estrela, the latter of which used to distribute and manufacture Hasbro toys in the country. Mattel's investment in localised toys such as Dora la Exploradora has paid off and these toys account for a significant share, but its main sellers in the country are Barbie and Hot Wheels, similar to US properties. Local licenses such as Turma da Mônica, or Xuxa, created after former children TV presenter, are also popular and compete against international characters Disney Princess, Toy Story and Shrek.

In the absence of large chained international retailers, such as Toys “R” Us, toy retailing is more fragmented in Brazil compared to the US or Europe. The largest toy stores include Ri Happy and PBKIDS, both of which expanded aggressively over 2005-2010. However, sales through traditional toy stores accounted for only 32% of all toys sold in Brazil in 2010. A significant 13% share of toy retailing is represented by department stores and a further 11% by variety stores, such as Americanas or Leader. Internet retailing is also on the rise, having reached a 9% share in 2011, and online sites from toy specialists Ri Happy, PB Kids as well as pure play internet toy retailer toymania.com.br have tempted many people to order online. The fragmented retailing landscape has benefited early entrants, such as Mattel, which have had time to establish strong relationships with retailers.

Economy-priced toys to drive future growth

The usual favourites such as model vehicles, dolls and action figures will continue to account for the bulk of sales as they are desired by children who watch television. In addition, sales of pre-school toys, construction toys and arts and crafts are also expected to enjoy strong growth over the forecast period due to more working women and parents choosing toys rather than their children.

Despite the improvement in purchasing power, price is still an important issue and economy- priced toys are better positioned to expand in the Brazilian market, benefiting companies like Mattel. Latin America is already a US$1 billion business for Mattel, and the toymaker is well positioned to reap the rewards as the Latin American toy market grows. Other toymakers such as Hasbro, BANDAI NAMCO and Takara TOMY are also looking to benefit from the increasing spend on toys in Latin America.

 

 


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