Japan: Trouble in Toyland

The birth of an heir to the throne hasn't yet revived the sagging birth rate--or solved the problem of selling toys in an aging society

When Japan's Princess Kiko gave birth to a baby boy in September, stock prices of companies making baby-related products rose on hopes that the royal delivery might trigger a rise in the birthrate. One economist even reckoned the birth of an heir to the chrysanthemum throne could lead to a windfall of $1.4 billion for manufacturers of commemorative products, baby foods, and toys.

Japan's toymakers could certainly do with the help. Indeed, while they may have given the world Pokémon, Power Rangers, and Tamagotchi, for companies and shareholders there has been non-stop trouble in toyland.

Japan's rapidly aging population explains much of the turmoil. Toymakers' core consumers are fast becoming an endangered species. In 2005, Japan's birth rate slipped to just 1.26 births per woman compared to 1.29 a year earlier—itself a record low. Meanwhile, 21% of Japanese are over 65 vs. 12.3% in the U.S.

Toys vs. Games

All that is hurting toy sales. According to the Japan Toy Assn., domestic toy sales were $5.96 billion in 2005, a 1.7% decrease from the previous year. Over the last five years, the market has shrunk 4.7%. "Toymakers are facing severe circumstances," says Fumiaki Ibuki, editor of the Toy Journal, an industry trade magazine.

This year will almost certainly be worse. One big reason is that competition from video games is higher than ever. This winter, Sony's (SNE) PlayStation3 and Nintendo's (NTDOY) Wii, both newly launched, will rank high on many wish lists of gamers young and old.

Meanwhile, sales of handheld game machines, like Nintendo's DS (which has sold over 15 million units in Japan this year) also remain strong. According to Enterbrain, a Japanese publisher of video game magazines, industry sales through Dec. 10 were $4.5 billion—already 17% higher than the whole of last year with the busiest two weeks of the year still to run.

Scrambling for New Strategies

Add to that mobile phones with sophisticated games, music players, and other gizmos and the size of the task facing toymakers is larger than ever (see BusinessWeek.com, 12/12/06, "Coolest Mobile Phones in the World").

Small wonder, then, that Japan's big-name toymakers are scrambling for new strategies. High on the priority list is making toys with appeal that goes way beyond kids. Last month, for example, Bandai (BNWKF) launched Ant Life Studio, an interactive desktop toy which involves watching digital ants looking after their queen.

That might seem zany but Bandai reckons folks will enjoy unwinding after a hard day at work by watching digital ants working hard. (This is, after all, Japan.) "The product is being received well with men in their thirties and forties," says Tsuyoshi Iwamura, who has led the development and marketing of Ant Life Studio at Bandai. "We wanted a grown-up version of Tamagotchi."

"Cradle to the Grave"

Sega Toy's (SGAYF) Homestar is another successful example of a toy for adults that is a hit. Using a built-in projector, the Homestar turns a living room into a planetarium, complete with 10,000 stars. It has sold 100,000 units since August, 2005.

Tomy has also scored a hit selling a low-cost electric potter's wheel called Rokuro Club. At about $95, the wheel is a fraction of the cost of a real one and is proving popular among men in their forties and fifties. Market watchers say toys for grownups makes sense financially. While the toy market as a whole is stagnant at best, the segment aimed at the more mature is growing at 10% to 20% annually and already worth $430 million a year. "Toy companies are trying to expand the market by increasing their target age range from the cradle to the grave," says the Toy Journal's Ibuki.

Toymakers are also looking to branch out into new areas. Bandai, for instance, has opened a boutique in Tokyo's fashionable Harajuku district. The brightly decorated shop sells specially designed clothes and other goods. Its target customers are women in their twenties and thirties. "We wanted to develop an adult apparel business," says Mikako Fuse, who leads the new apparel business project and the store. One hot-selling product at the shop is a range of colorful briefs for women, designed by Fuse.

Betting on Mergers

Toymakers are also betting on mergers and acquisitions. In September, 2005, game developer Namco and toymaker Bandai merged to form Namco Bandai Holdings, hoping to find synergies spanning the two industries. In March, Tomy acquired rival Takara (TKLLF) and has since taken a 10% stake in Epoch (EPHC), another toymaker. And Sega Toys parent Sega Sammy Holdings is now the biggest shareholder in Sanrio, known around the world for Hello Kitty (see BusinessWeek.com, 6/23/06, "Kitty Glitter: Saving Hello Kitty").

"We will undertake mergers and acquisitions as needed," Namco Bandai chief Takeo Takasu told a Japanese newspaper in late November. His company won't be the only one. Yet, like so many Japanese companies taxed by Japan's unfavorable demographics, overseas growth looks the most likely savior for toymakers. Tomy, for instance, plans to double its China network to 500 stores by 2008 and increase sales (including those of Takara) from $4.3 million to over $50 million by 2008.

In India, Tomy is selling spinning tops this year. Rival Bandai has opened a new sales unit in Guangzhou, and plans to add a new toy character designed just for China. Bandai also began showing the Power Rangers TV show in India earlier this year.

Of course, overseas expansion isn't risk-free. For one thing, like video games, toys popular in Japan don't always travel well. What's more, piracy remains a problem in some markets. Yet unless more Japanese follow Princess Kiko's lead—the wife of Prince Akishino now has three children—Japan's toymakers will have little option but to expand their horizons.