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Is China’s breakout toy sensation a bubble about to pop?

Written by Low De Wei Published on     5 mins read

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Pop Mart was becoming a victim of its own success.

The sharp rise of one of China’s breakout toy makers is at risk of running out of steam.

Pop Mart International Group has thrived in recent years due to the rising popularity of so-called “pop toys,” tiny collectible plastic figurines that can be modeled on any character. The Beijing-based chain has become a market leader after appealing to Generation Z consumers by wrapping and marketing these toys through blind boxes, which contain a mystery pop toy that customers can buy for RMB 59 (USD 9).

But despite a blockbuster flotation on the Hong Kong Stock Exchange last December, doubts are creeping in about whether the company can continue to thrive in China’s notoriously competitive toy market.

 

Growth slowing

A cursory glance at Pop Mart’s earnings in 2020 would seem to suggest that there is little reason to worry.

The toy chain raked in RMB 2.5 billion in revenue last year, a year-on-year increase of nearly 50%. Profits after tax grew by 16% over the same period.

But the pace of growth has slowed sharply in contrast to previous years. In 2018 and 2019, Pop Mart saw annual revenue growth of over 200%.

One reason for a slowdown in growth is due to the failure of one of Pop Mart’s most hyped-up initiatives, an online pop toy community mobile application called Paqu Huyu.

Pop Mart previously boasted that the “flagship platform,” first acquired in 2017, would be used by fans and the pop toy community to discuss trends, exchange collectibles, and purchase limited-edition items.

But the app was not profitable until 2020 due to no items being sold on it. An IPO prospectus by Pop Mart disclosed that just RMB 422,000 was generated from the app in the first half of 2020, while the annual report for Pop Mart did not mention the initiative at all. Discussion activity on the app remains muted, despite initiatives like designating users on the platform as “artists” to inspire the creation of new pop toy designs.

For a company that has to constantly source new toys to appeal to young adults’ changing tastes, being able to secure new designs, known as intellectual property (IP), which comes at big cost, has become pivotal to Pop Mart’s future.

The number of intangible assets held by Pop Mart exploded from RMB 18.6 million in 2019 to over RMB 90 million last year, driven mainly by obtaining newly licensed IP. The company has also committed to spending HKD 1 billion (USD 129 million) on investments in recruiting new designers and acquiring new toy designs by 2024.

Still, none have managed to replicate the popularity of Pop Mart’s best-selling “Molly” series, based on a blonde, blue-eyed, female character designed by Hong Kong designer Kenny Wong in 2006. But cracks are appearing as well, with sales revenue for the product line down by over RMB 100 million compared to 2019.

For now, other toy series created by an in-house design team are making up for the shortfall, with nearly 40% of revenue last year being generated from sales of products trademarked by Pop Mart, a slight increase compared to 2019.

But an increasing dependence on exclusive tie-ups with established titles like Harry Potter, Universal Studios, and Japanese anime series Naruto to create themed toys has also left Pop Mart vulnerable to competitors that can swoop in and offer better-paying collaborations.

Sales of such merchandise nearly doubled last year, making up nearly a fifth of all revenue.

 

‘What brand I buy is not important’

The risk of competitors poaching Pop Mart’s toy brands is far from an idle threat. Another pop toy franchise, Kule Chaowan, has obtained rights to produce toys based on popular Sesame Street and Hello Kitty characters, while M&G shop, a popular stationery store chain, has made the foray into selling pop toy blind boxes as well.

Both chains operate more than 200 brick-and-mortar stores nationwide, while Pop Mart continues to lag behind with just 187 despite opening 76 new retail outlets last year after fast and costly expansion.

But the entry of Miniso Group, China’s largest variety store chain, into the toy market is fast emerging as a major threat. The budget retailer of household and lifestyle products with clean aesthetics launched a new “Toptoy” chain last year focused on new pop toy products and has introduced a series of blind box collections based on Disney characters like Mickey Mouse and the Winnie the Pooh franchise.

Miniso’s founder and CEO Yeo Guofu has professed his desire to create home-grown toy brands for children, and its lower-priced blind boxes at RMB 40 are a direct challenge to Pop Mart. Toptoy is also growing rapidly, with over 100 outlets set to open their doors in China this year, on top of the 4,200 Miniso stores currently open worldwide.

Pop Mart faces an uphill battle in retaining the shifting loyalties of a customer base largely aged below 35 and overwhelmingly female, like Xiao Peng, a university student studying in Shanghai. Peng told Tech Planet she used to spend a few hundred RMB a month on blind boxes but quickly shifted her attention to other collectibles like Gatcha game cards and doll-making. “I just want to buy something, the brand I buy is not important,” she said.

Its market dominance remains precarious. Data compiled by market research firm Frost and Sullivan for the company’s stock listing found that Pop Mart has an 8.5% share of the pop toy market, with its nearest competitor close behind at 7.7%.

Still, other toy sellers have managed to maintain their dominance in the face of major competition by branching out. In neighboring Japan, mysterious capsule toys dispensed from vending machines known as gashapon are widely popular, not unlike the blind boxes concept. Still, Bandai, a toymaker first founded in 1950, has retained more than 50% of market share after carving out a niche in the production of plastic model toys and video games.

It remains unclear if establishing a permanent niche in marketing designer toys is achievable for Pop Mart. Large streaming services like Youku and Bilibili have launched blind box series to promote shows on their platforms, while large tech behemoths like Baidu and Tencent have also indicated interest in creating such toys and possess much deeper pockets for attracting and paying artistic talent.

Pop Mart maintains that its influence is growing in the pop and designer toy industry. It organizes annual toy shows in Beijing and Shanghai, although the COVID-19 pandemic caused the firm to pare down exhibition plans last year. It is also doubling down on a strategy of opening new outlets and vending machines known as “roboshops” in China’s youth-rich second- and third-tier cities.

However, an investor in the pop toy sector told Tech Planet on condition of anonymity that Pop Mart was becoming a victim of its own success. “(For competitors), the strategy now is to open a competing outlet wherever Pop Mart opens a new store, or even pay more to nail down a better location in the area relative to Pop Mart’s,” said the investor.

It is unsurprising to see why. Pop Mart’s stock value doubled after its IPO, which raised nearly USD 674 million for the company’s expansion plans.

Since then, its price has fallen by nearly 40% of a February high of HKD 105.

 

The original article was written by Qiao Xue and Xue Yujie for Tech Planet of 36Kr, KrASIA’s parent company.

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