Consumer Products Outlook
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On February 19th Andy Mooney, President - Disney Consumer Products at the 4th Annual Salomon Smith Barney Leisure Conference. In fiscal year (FY), 1997 the operating income of $893 million and in the FY 2000 the operating income dropped to $386 million. Obviously it was time for a turn around. Andy was brought in to revitalize the sector of the Walt Disney Company that had been the key to Disneys growth in the nineties. The two businesses of consumer products are Licensing and The Disney Store. According to Andy, Disney spent too much time focusing on The Disney Store when it is more lucrative to focus on licensing. Because of this refocus the number of Disney Stores has decreased. In 2000, there were 741 Disney Stores with 515 of those being in North America. Now there are 503 Disney Stores worldwide with 375 of those being in North America. The target is to decrease the amount of stores even further with a total of 405 stores. 300 of those would be located in North America. The stores in Japan were sold to The Oriental Land Company who run the Tokyo Disney Resort. Additionally, the stores in Australia will be closed.
Capital Expenditures at Disney Consumer Products have also been decreased dramatically. in FY 2000 Consumer Products spent $73 million on capital expenditures, in FY 2002 those expenditures were dropped dramatically to $58 million. Capital expenditures include the amount spent to remodel all of the remaining stores is under $300 million and will take 4 or 5 years to complete. If you do the math, and presume it will take 5 years, that means on average the capital expenditures per year on the store remodel would be $60 million. Considering Consumer Products only spent $58 million on total capital expenditures this fiscal year, it could be presumed that the capital expenditures will grow in the coming years if the plan remains in tact. 35 stores will be remolded this year. The average cost for each store remodel should be less than $750,000. Disney Stores are still an important part of The Walt Disney Company. They support Walt Disney Picture releases, programming on The Disney Channel, and are the largest travel agent for Walt Disney Parks and Resorts.
Peter Whitford, President, Disney Stores Worldwide then gave a virtual tour of the new Disney Store look. The store has been redesigned to focus on the stores key audience; girls from 3 to 8 and boys from 3 to 6. Plush will continue to be prominent. It will be 25 percent of total sales. One iconic centerpiece is a rocket ship themed to Toy Story which can be used as a product demonstration table. The middle of the store will be focused on boys franchises that the company will be investing in during the next few years. Finally, there is the Princess Palace. Guests will enter through a castle archway. This will establish the Disney Store as a princess destination. Princess merchandise accounts for 60 percent of sales. A giant storybook will be the location for the box office (cash registers) and will be used by synergy to promote the newest offerings from The Walt Disney Company. By entering partnerships with other divisions of The Walt Disney Company, Consumer Products is able to increase the income of the Disney Store business unit.
Now to licensing. Licensing was split into three groups: interactive, publishing, and everything else. Interactive amounted to 3%, publishing amounted to 15%, and everything else contributed 82% to the 2003 operating income of Consumer Products. The everything else group is unhealthy and in decline. Andy attributes this to a lack of category expertise that publishing and interactive have. When Andy says category expertise, he means focused knowledge of the product the group is working on. In order to gain category expertise, the everything else group was broken down to hardlines, softlines, and toys. Hardlines contribute 43%, softlines contribute 19%, and toys contribute 20% to the 2003 operating income of Disney Consumer Products. Disney brought in experienced executives with the desired category expertise to manage the new divisions. Toys is headed by Tim Kilpin, softlines (apparel) by Roger Wyett, and hardlines by Harry Dolman.
At the same time the amount of cast members at Consumer Products were decreased from 2,894 in 2000 to 2,279 in 2003. This is a reduction of 615 people. The remaining Cast Members were instructed to be more proactive in the development of new products with their partners in order to bring category expertise, in addition to Disney expertise, to Consumer Products licensing partners. Examples of new toy product include a Winnie the Pooh baby rattle executed by Fisher-Price and the Radio Disney Pop Dreamers dolls executed by a Canadian toy manufacturer. Examples of new hardlines include consumer electronics in the princess color palette, a new line of non-carbonated beverages, and a new line of breakfast food. Softines focused on creating partnerships with key retailers directly. Deals have been made with 18 of the top 20 retailers and negotiations are underway with the other two. The remaining two are Target and Wal-mart. Because of this new arrangement, consumer products has seen improvement in product quality and volume. To capitalize on the retro fashion trend, classic Mickey tees were reintroduced and placed the product on celebrities by utilizing Disneys connections in the entertainment industry. Disney now has a whole line of retro product.
The next focus area for Consumer Products was property development. Currently 40% of merchandise is based on the Winnie the Pooh family, another 40% is based on Mickey and friends, and the remaining 20% on film properties like Ariel, Bambi, and Dumbo. A decrease in the importance of film properties is attributed to increased competition. In 1994, The Lion King was the only animated release that year, in 2002 there were 16 animated releases being considered for Oscar nominations. Additionally, live action films have gained market share in the licensing field. In order to grow, the Disney Princess line was added to the core lines of Mickey and Friends and Winnie the Pooh. In 2001 princess retail sales amounted to $136 million. In 2003 princess retail sales are expected to amount to $1.3 billion. To support the princess initiative Parks and Resort have increased their princess offerings. Princess interstitial programming has been added to the media networks, and animated films for the home video are in development to be released in time with key product releases.
In the near future, The Disney Channel will be relied on for future property development. Two Disney Channel properties with success with older girls are Kim Possible, and Lizzie McGuire. In the spring of this year, Lizzie McGuire merchandise will be available at Kohls and in the fall Wal-mart will have an assortment of Kim Possible merchandise.
Publishing has developed some friends for Tinker Bell to anchor the new Disney Fairy line. Disney Publishing also created a new brand called Witch in Europe. This property was originally developed in Italy and is now available in 25 countries around the world. Witch is currently being turned in to a TV show to be broadcast on Disney Channels worldwide.
For the infant market the acquisition of Baby Einstein has provided a key brand in that sector. Currently in development is a television based preschool learning program called Little Einstein. For boys, Power Rangers is a billion dollar franchise that has provided successful results for over a decade. Disney Channel has taken over the management of the Power Rangers franchise in an effort to upgrade the storytelling, acting, and special effects. Stitch will also be a key property for boys with Stitch: The Movie coming to video and Stitch: The TV Show coming to The Disney Channel and ABC Kids. Stitchs continued presence will make Stitch one of Consumer Products key brands.
Interactive gaming is developing properties for older boys. Kingdom Hearts was the best ever selling Play Station 2 game in Japan and it sold 3.5 million units worldwide. A sequel to Kingdom Hearts is already in development. Tron 2.0 based on the 1982 movie will be released this year and a game based on Tim Burtons Nightmare Before Christmas will be released in 2004. Consumer Products will use these properties to increase its presence in the older boy market.
To wrap up Andy included some stats about Consumer Products. Right now, Disney Consumer Products has $13 billion in annual retail sales, is partnered with category leaders like Coke and Hallmark, is the worlds largest childrens publisher, and is the 5th largest toy company.
-- Posted February 26, 2003
-- Story by Benji Breitbart