Boffo at the Box Office, Scarce on the Shelves

Wary toymakers are cutting back on film tie-ins

On Nov. 17, just one day after the release of the movie Harry Potter and the Sorcerer's Stone, Sabrina Smith went to a Toys `R' Us store in Santa Monica, Calif. She was hoping to buy a Harry Potter toy for her seven-year-old niece. But instead Smith found a lot of empty shelves. "The Lego classroom is gone. The dolls are gone," she said. "Somebody has just cleaned them out."

Don't parents spend every November and December scrambling to find the toys that are spun out of the season's hit kiddie movies? Sure. But industry observers warn that scarcities of movie-related toys this year could hit far earlier and more severely than in past holiday seasons. Burned in recent years by huge unsold inventories of movie merchandise and fearful of the slowing economy, everyone from toymakers and retailers to moviemakers has cut back. "People are more concerned with not having stuff left over than [with] getting every last sales dollar," says Martin Brochstein, executive editor of The Licensing Letter, an industry trade publication.

WARY. In the licensing business, they call it Post Star Wars Stress Syndrome. Although the movie Star Wars: Episode I--The Phantom Menace generated more than $1 billion in merchandise sales the year after its 1999 release, toymakers and retailers had counted on doing even better. They stocked up on far more toys than could be sold in any one galaxy, and suffered mightily when the stuff didn't move. The movie's main toy licensee, Hasbro Inc., saw its earnings and stock collapse in 2000 as a result.

So while this year's holiday coincides with kiddie megamovies like Harry Potter, Lord of the Rings, and Monsters, Inc., many toymakers remain wary. For the rights to Harry Potter, Mattel Inc. is paying AOL Time Warner Inc. a 15% royalty rate and minimum guaranteed royalties of $20 million, plus options allowing Warner to buy $3 million of Mattel's shares below market price. Compare that with what Hasbro paid Lucas Licensing Ltd. to get Phantom Menace: a 20% royalty and a guaranteed $600 million in sales, plus stock options according to industry trade journal KidScreen.

That's not the only big change Mattel has made. To reduce its dependence on Hollywood movies, and the need to pay big fees for movie-related toys, the company ended a longtime deal marketing products for new Disney films last year--and went into the movie business. On Oct. 2, its first computer-animated feature, Barbie in the Nutcracker, was released. Andrienne Fontanella, chief of Mattel's Girls division, says she expects to sell 4 million copies of the $19.98 video and more than $100 million in related Barbie merchandise.

Toymakers aren't the only ones who turned cautious. Studios have also cut back the merchandise in recent deals to avoid oversaturation. Warner Brothers Studios, for example, signed less than half as many merchandise deals for Harry Potter as it has with past children's films.

And shoppers' initial responses to recently licensed merchandise spooked retailers further. Late last year, Warner launched a few products to coincide with the release of the most recent Harry Potter book. Some items, like apparel, didn't sell. "People were concerned about the retail environment and cautious [about] licensed product. They cut back on orders," says Jerry R. Welch, chief executive of retailer The Right Start Inc., which owns Zainy Brainy stores and agreed to acquire toy chain F.A.O. Schwarz on Nov. 19.

With everyone in the industry fretting at once, the result was almost inevitable: far less merchandise in the stores--and popular stuff already disappearing from the shelves. "Stores are all running out of stock," says Matt Bousquette, president of Mattel's Boys/Entertainment division. "We are trying to air ship some product, but what you see is what you're gonna get."

All this is likely to make for some pretty unhappy parents and kids come Christmas morning. But Wall Street is certainly feeling jolly. This year, shares of Mattel are up 40%, to 19, while shares of Hasbro, which is making toys for Monsters, Inc., have climbed 75%, to 18. "There is a new discipline that's healthier for the companies and the industry," says Merrill Lynch toy analyst Hayley Kissel. Great. But does she know where to find a Harry Potter Lego set?

By Christopher Palmeri in Los Angeles and Diane Brady and Nanette Byrnes in New York

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