From the August 2002 issue of Entrepreneur

Cabbage Patch Dolls, Tickle Me Elmo, Razor Scooter. Toys that set the toy world on its ear and made consumers rush the stores. But lately, the products coming out of the toy industry seem, well, boring. Where has all the innovation gone?

To start, 2001 wasn't a great year for the toy industry. Though $25 billion in sales meant an increase of 1.7 percent over 2000, that's a downer in an industry that's used to 3 to 4 percent increases. September 11 depressed toy sales during the fourth quarter, which constitutes 50 percent of the industry's annual sales, says the Toy Industry Association's Diane Cardinale. Nor was there a blockbuster movie last spring to spur sales of licensed toys for the first three quarters.

It's no surprise that the industry is now looking for safe bets. "There's been a big return to classics and basic toys," says David Niggli, president of FAO Schwarz in New York City.

So how do innovation-prone entrepreneurs fit in to today's market? We've found three cases where the answer is "Quite well, thank you."

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Click here to find out about 2001's hottest toys, the newest trends for 2002 and insider tips on breaking into this hot industry.

Cranium Inc.: Heading for the Big Time

Imagine watching the first board game you've ever created sell more than 100,000 copies in its first year and then go on to sell more than one million copies just a few years later. Oh, and throw in an award as the Toy Industry Association's 2001 Game of the Year.

This is real life for Whit Alexander, 41, and Richard Tait, 38, two former Microsoft employees who co-founded Cranium Inc., their Seattle game development company, in 1997. Their board game, Cranium, which retails for $35 and encourages players to draw, sing, sculpt and impersonate, has built a loyal following of "Craniacs."

The board game category can be a gold mine if the idea is good. Monopoly, after almost a century on the market, is still a huge seller and show no signs of stopping. "I don't think one other category has the longevity of board games," says Jim Silver, New York City publisher of Toy Wishes, a monthly consumer magazine following the industry.

One thing is for sure: The board game category is never boring. There's been a big increase in product licensing, Tait says, as TV shows such as Who Wants to Be a Millionaire? are turned into board games with instant brand awareness and are aggressively launched and cross-promoted by behemoth companies. For companies working without the benefit of an already well-known licensing property, success is increasingly determined not only by a knockout idea, but also by creativity in distribution and marketing. "We have to just survive and thrive on the success of our games," he says.


"I don't think one other category has the longevity of board games."

Consolidation has been another big trend over the past few years. How does a small, 25-employee firm compete? "The game industry is now driven by two very large corporations: Hasbro and Mattel," Tait says. "They own a lot of the shelf space that's available to young entrepreneurs. So people like us have to get increasingly creative in terms of building a success and trying to break through."

A large part of Tait and Alexander's initial success-besides having a cool idea-was a distribution deal with another Seattle-based company: Starbucks. It was a stroke of luck after they had shopped their game around only to learn a fundamental lesson: Toy companies and retailers book the release of a product anywhere from nine to 18 months in advance. They also determine price-point, distribution and number of products in a given category they will run, and once they have their marketing plans in place, they aren't as likely to buy an idea or license it unless another product is pulled from the lineup at the last minute, says Carol Rehtmeyer, president of Rehtmeyer Design and Licensing Co. Inc. in Naperville, Illinois.

Tait and Alexander suddenly faced a big problem: They had done a whole production run and needed to find an outlet for Cranium, and fast. Sitting in a Seattle Starbucks one day, they looked up to see their target demographic--25- to 35-year-olds-standing in line. As fate would have it, a friend of Tait's knew Starbucks' CEO, Howard Schultz. It turns out they were in the right place at the right time: Starbucks had been knocking around the idea of selling a game in their stores but hadn't found the right one yet. The duo landed an audience with Schultz and persuaded him to play Cranium with them. Schultz liked what he saw, and Tait and Alexander inked a distribution deal that put Cranium in more than 1,600 Starbucks locations nationwide by the winter of 1998. "We had games and nowhere to sell them," Tait says. "Starbucks was pivotal."

In a competitive market, Tait and Alexander know they have to stay fresh. In addition to Cranium, which now comes in 11 international editions and two booster kits, they are continually releasing new products, including Cranium Cadoo (aimed at kids 7 to 11), which sold 250,000 units within three months. Up next is a new two-player game that will come out this summer, as well as Cranium Caribou, which will be aimed at 3- to 6-year-olds. Though the Cranium line started selling exclusively at Starbucks, it now sells at Target, Toys "R" Us, Amazon.com and specialty stores. Tait and Alexander are taking Cranium into mass distribution for the first time, and now that Wal-Mart is on board, mainstream success is a no-brainer. Says Tait, "You just have to be incredibly innovative."

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Talk Inc.: Hoping for Some Pillow Talk

Rehtmeyer estimates toy companies license less than 5 percent of the outside ideas they receive. "Amateur inventors think their germ of an idea is going to be worth $1 million," she says. "It may be, but until it's proven to the toy world, it is not." Roughly half the inventors she works with produce their own toys. "If you can get shelf space, you might as well sell it yourself," she says.

Aimee Markelz is one inventor who's forging ahead on her own with Paddy Pillow, a colorful, stuffed toy that comes with an illustrated children's book and an original CD with the Paddy Pillow theme song that encourages kids and adults to share their feelings.

Markelz, 35, got the idea while volunteering on a Chicago abuse help line a few years ago. She noticed a lot of people had a hard time explaining their feelings. She wanted to make conversations about feelings "an everyday, normal" thing that could be fun and educational, too.

Markelz put the concept on paper in 1998, but kept it quiet until she left her 12-year marketing career to start her company, Talk Inc., in March 2001. "I knew [this idea] had market potential," she says.

Her first year in business-which she bootstrapped with $100,000 of her own money and funds from two family members-was spent developing Paddy Pillow prototypes and conducting formal focus groups to hit her target market: moms with kids ages 2 to 6. "You have to build it step by step to discover what's not working," she says.

p>Today, Markelz has an agreement with Crystal Lake, Illinois, plush toy company Senario to import her product from China. Paddy Pillow retails for $29.95 at Borders Books locations in Atlanta, Chicago and Dallas; through a growing number of Hallmark, Learning Express and Zany Brainy stores; and direct from her Web site. Markelz is working toward full national distribution within a year. She's still test-marketing the product and building inventory, so sales this year are hard to predict. "On the low end, we might sell $20,000 worth, and on the high end, $200,000," she says. "Anything can happen."

One thing she hopes will happen is that Paddy Pillow will become a hit TV show for kids. She's started a petition on her Web site, gathering signatures from people who would like to see Paddy Pillow become a TV show or video, and she's in the process of developing animation samples to shop to networks. Markelz is also working on a number of product extensions and raising awareness through in-store demonstrations. In a post-September 11 world, people "need this more than ever," she says.

So will Paddy Pillow become a megabrand like Barney? Maybe, Markelz says, but her ultimate goal is for it to become an "evergreen"-or classic-product like Raggedy Ann, which was recently inducted into the National Toy Hall of Fame in Salem, Oregon. "This industry is highly competitive and highly fickle. It moves fast," she says. "But if an educational product is good, it'll be enduring."

Playstages Inc.: Creating a Dramatic Entrance

When former strategy consultant Mary Jo Feeney entered, stage right, with her small Boston toy company, Playstages Inc., in May 2000, she wanted to add some drama to her life. Her idea? High-quality plastic stages that come with 16 multicultural, pull-string puppets called "Minikins" and are aimed at boys and girls ages 6 and up.

But in this heady age of technology, is there still a market for old-fashioned theater and puppetry? Will today's savvy and sought-after tweens want something that was cool when Mozart was alive?

Yes, Feeney says, because there's a lot of room for open-ended educational toys that let kids create their own content and tell their own stories. "This may be the oldest form of media in the world," she says. "It's a universal concept."

Feeney, 40, built a prototype and conducted focus groups in late 2000, and eventually secured angel funding to invest in product development, initial inventory and marketing. She had to pull a lot of strings, however, to find investors willing to fund a risky toy venture. "There's an old saying on Wall Street that the two types of businesses you don't want to invest in are restaurants and toys," she says. "You really have to be determined and push because you're going to face a lot of rejection."

Read On
Prefer an even tinier market than kids' toys? How about infant products-learn more about this burgeoning area in Infantile Inventions.

Playstages began shipping its products last September. Instead of seeking distribution through large retailers right away, Feeney saw an untapped market in education, where the school day is getting longer and children are participating in more after-school programs. She decided to sell to school districts, day cares and community centers she found at educational conferences. This strategy saved her the risk of planning far in advance for retailers.

"Toys may be one of the hardest things to forecast," Feeney says. "There's predictability and manageability in the education market." Playstages' products are already found in 200 school systems in 39 states.

But Feeney needs to broaden her distribution to hit the big time. In addition to her growing direct sales business, she's building additional distribution through specialty retail stores, catalogs and Web sites (she recently signed on with Imaginarium.com), and hopes to make headway into European markets just in time for the holiday season. She's also working on cheaper knockoffs of her own products, which are priced too high ($129.99 to $400) to attract cost-conscious retailers such as Target and Wal-Mart. "Cost is everything," Feeney says.

Playstages debuted in February at the Toy Industry Association's American International Toy Fair in New York City, an annual trade show that brings together nearly 2,000 importers, manufacturers, agents and distributors. Feeney says she received "tremendous response." And Playstages won the Toy of the Year award last November from the parents-oriented publication FamilyFun Magazine.

Playstages projects sales of about $1 million this year, and Feeney and her four employees are developing additions to the Minikin line as well as software that lets kids create their own dramas. Feeney isn't sure whether she wants to sell out eventually. For now, her goal is to be a $100 million firm within five years. But why stop there?

"$350 million would be great," she says. "We want to be a brand." And, maybe, just maybe, set the toy world on its ear again.

Insider Tips & Hot Trends

Insider Tips
Toy companies receive thousands of ideas from inventors every year, and accept only a fraction of them. So how can you increase your chances of success? We got some advice from Scott Masline, senior vice president of marketing for Wham-O in Emeryville, California. Wham-O receives nearly 2,400 ideas from inventors each year, but it usually accepts fewer than 10. Here are his tips:

  • Don't reinvent the wheel. Don't say you'll re-do Slip-N-Slide-or any other classic toy-to make it even better. A lot of inventors make this mistake, Masline says, or submit a "new" idea that's already on the market. Do your research, and leave product updates to a company's internal R&D staff.
  • Target the right companies. Wham-O doesn't manufacture board games, but inventors send their ideas, anyway. Target toy companies that produce products most similar to your idea. You may find more success with small and mid-sized toy companies. An agent can be helpful in opening doors.
  • Show proof of your concept. "The inventor has to bring more to the table than just an idea," Masline says. "Show me that it works." This means developing a prototype and working out the bugs. Aim for simplicity in presentation. "If it takes the inventor 20 minutes to explain how something works, there's not a chance I can explain it in 15 words or less."
  • Understand the review process. In disclosing an idea, things often come down to who had the idea first. "There are times that we have to tell people that we had the idea before you [submitted it] or we thought of it before you did," Masline says.

    Wham-O documents every interaction with an inventor. "You can steal an idea once, but then no one's going to work with you again," he says. "We have to depend on our integrity and honesty." The company creates a few co-inventor relationship each year, in which two ideas are combined to create one product and the co-inventors share royalties. Professional inventors document every interaction they have with toy companies.

  • Figure out your production costs. Surprisingly, many fledgling inventors do not. The lower your cost per unit, the better. "There are a lot of magic price points in this industry," Masline says. "$20 is a big, magic price point." Cost control will also help you achieve your overall point: selling someone on your idea.

Hot Toys of 2001
Here were the 15 top-selling toys introduced in 2001 heading into the holiday season (ranked by dollar sales):

1. Pixter (Fisher-Price)
2. E-Kara Karaoke (Hasbro)
3. Barbie Karaoke Machine (Kid Designs)
4. Tony Hawk Skateboard (Mattel)
5. LeapPad--new model (LeapFrog)
6. Barbie Nutcracker Princess (Mattel)
7. Imagination Desk (LeapFrog)
8. Holiday Barbie (Mattel)
9. Sesame Street Tickle Elmo Surprise (Fisher-Price Characters)
10. Monsters Inc. Babblin Boo Doll (Hasbro)
11. Rumble Robots (Trendmasters)
12. Basic Harry Potter Hogwarts Castle (LEGO Systems)
13. Screamin Serpent Coaster (K'NEX)
14. Rescue Heroes Aqua Command Center (Fisher-Price)
15. Diva Starz 2001 (Mattel)

Source: Toy Industry Association, Inc.

Toy Trends for 2002

Like the fashion business, the toy industry lives and dies by trends. So what's hot this year, and what will grab consumers' by their pocketbooks this holiday season? We asked the industry experts.

Diane Cardinale, Toy Industry Association: "Licensing [of movie-driven products] is going to be the biggest trend, and high-tech. This is going to be a comeback year, so anything goes. One thing people will be buying is Teddy Bears, because it's the 100th anniversary, and there's so much hoopla going on about them. They're a classic."

Christopher Byrne, "The Toy Guy": "The trends this year are switching back to a focus on basic play, what I call an authentic play experience. You're seeing it in lines like Hasbro's re-done Star Wars [toys] and what Mattel is doing with Slime and Hot Wheels. There's a lot more emphasis on arts and crafts."

David Niggli, president, FAO Schwartz: "I think there's going to be a lot of entertainment-driven and literary properties [this holiday season]," he says. "Action is going to be great. But is there going to be any one particular toy this year that anyone is saying is the sure thing? I don't think so."

Jim Silver, publisher, Toy Wishes magazine: "The educational area is very hot, and the Tween category. The toy industry lost the 9-to-13-year-olds and has been looking to get them back over the last few years," he says. "Kids are growing up a lot younger."

Sean McGowan, toy industry analyst: "This should be a pretty good year for licensed products, with Spider-Man, Lord of the Rings, Star Wars and another Harry Potter book coming out this year."

Carol Rehtmeyer, president, Rehtmeyer Design & Licensing: After 9/11, fun with a serious tone is in-consider the sudden popularity of rescue action figures and toys Also expect to see the "playful, silly, slightly retro doll look with the big, apple head and over-exaggerated features and makeup," she predicts. What about the holidays? "I don't think there's anything that's going to be super-hot, nothing that people are really going to be waiting in line for," Rehtmeyer says. "It's going to be a very bad year for some toy companies because of their need to be so conservative."


Chris Penttila is Entrepreneur's "Staff Smarts" columnist

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