Playmates Toys

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Playmates Toys

100 Canton Road
Kowloon
Hong Kong
852 2730 7388
Fax: 852 2735 2058
Web site: http://www.playmatestoys.com

Public Company
Incorporated: 1966 as Playmates Industrial
Employees: 200
Sales: HK$1.2 billion (1996)
Stock Exchanges: Hong Kong
SICs: 5092 Toys, Hobby Goods & Supplies, Wholesale

Playmates Toys is a Hong Kong-based toy manufacturer whose American subsidiary, Playmates Toys Inc., is one of the leading marketers of toys in the United States. Founded in 1966, Playmates Toys entered the big leagues of the toy industry in 1988 when it purchased the license to manufacture action figures based on the Teenage Mutant Ninja Turtles comics. The “heroes in a half shell” were an instant mega-hit among the under ten set and in 1990 Playmates became the first toymaker in history to net more than $100 million in one year. Although plagued by family feuding through the 1990s, Playmates has managed to remain profitable through most of the decade in spite of a predictable decline in the Ninja Turtles fad. Other successful product introductions, including WaterBabies, a line of water-filled dolls, and Nano Pals, the company’s entry into the virtual pet craze that swept the toy world in 1997, helped to cushion the company from the boom and bust pattern of the promotional toy industry.

Company Origins in the 1960s

Playmates Toys was founded as Playmates Industrial in Hong Kong in 1966 by Chan Tai Ho (later known as Sam Chan) as a small manufacturing subcontractor for foreign toy producers. Chan and his family were refugees from China’s Guangdong province, from which they had escaped in tiny sampans only a few years earlier. For almost a decade the company built a steady business making generic dolls and preschool toys for other toy companies. In 1975 Playmates took an important step toward becoming an independent toy producer by establishing a division to produce and market its own line of preschool toys, opening an American subsidiary in Boston two years later.

Through the 1970s and early 1980s Playmates continued to manufacture toys for other toy companies as well as to produce its own line. A new California subsidiary named Playmates Toys Inc. was opened in 1983 specifically to move the company into the lucrative but risky promotional toy market. Looking to raise investment for further expansion, in 1984 Playmates Industrial went public, trading shares on the Honk Kong stock exchange under the new name Playmates Holdings, Ltd.

In 1986 Playmates had their first big success in promotional toys with Cricket, a talking electronic baby doll. Cricket had been created by a Los Angeles area inventor who brought his idea to the company’s American subsidiary, which by this time had been consolidated in La Mirada, California. Sales of Cricket more than doubled the company’s total sales, which rose from $32 million in 1985 to almost $78 million the following year. The mid-1980s were a boom time for electronic toys and after the success of Cricket, Playmate management, now under the direction of Sam Chan’s son Thomas, felt that electronic dolls were the wave of the future. The company invested heavily in a much more complex follow-up version of the doll to be named Jill. Jill could blink her eyes and swivel her neck while she talked but with manufacturing costs of $200 a piece, the doll stood little chance of making money for its creators. Jill was introduced in 1987 and almost immediately plunged Playmates into the red, with a $4.8 million loss recorded in that year. Managing director Thomas Chan told Forbes in 1991 that the disaster was a formative experience for the company. “I learned that parents are not going to pay $200 for a doll, and that complicated, expensive toys have very little upside potential.” Richard Sallis, president of the company’s American subsidiary, suggested that the lesson ran even deeper, commenting to the Orange County Register in 1990, “After Jill, the chairman won’t even have an electronic doorbell in his house.”

Launch of the Teenage Mutant Ninja Turtles in 1988

Fortunately for Playmates, the debacle of the Jill doll was followed in quick succession by one of the greatest success stories in the history of promotional toys. The idea for the Teenage Mutant Ninja Turtles had been dreamed up in 1984 by two would-be comic book artists, Peter Laird and Kevin Eastman, in their living room in Northampton, Massachusetts. The Turtles, off-the-wall namesakes of Italian Renaissance artists, Donatello, Leonardo, Michaelangelo, and Raphael, had their fictional home in the New York City sewers, where they had been flushed as babies. After an encounter with radioactive goo, the turtles were mutated into surfer slang English-speaking, martial arts warriors with a craving for pizza. Laird and Eastman published an initial run of 3,000 copies of a comic book based on their quirky idea, which sold out in only three weeks. Soon the two were producing a bimonthly series that quickly garnered a small but loyal following of some 150,000 fans.

In 1986 Laird and Eastman, ready to expand their idea to a larger market, met with Mark Freedman, a licensing agent. Freedman was familiar with the people at Playmates because of some work they had done for his former employer, Hanna Barbera, and he felt that the midsized company was in the perfect position to promote aggressively the offbeat character of the Turtles comic books. Although accounts differ as to whether Playmates was the first company Freedman approached or a last resort, Richard Sallis, the top official of Playmates’ American subsidiary, was instantly enamored with the concept of the Ninja Turtles. The action figure market was then in a slump but Sallis felt that the tongue-in-cheek turtles were just what the industry needed as an antidote to the strictly serious market leaders like G.I. Joe. “The turtles put fun back into action figures,” Mr. Sallis said in a 1988 interview with the New York Times. “They love truth, justice and a slice of pizza. You can’t even take the name seriously, and the kids see that.”

Playmates launched the Teenage Mutant Ninja Turtles at the 1988 New York Toy Fair to a less than enthusiastic reception. In spite of the company’s optimism about the toys, retail outlets were skeptical, ordering only in small quantities, if at all. Confident in their product, Playmates began an aggressive promotion of their new action figure line, paying for the first five episodes of a cartoon series featuring the Turtles. To the industry’s surprise, the Turtles action figures began flying off of toystore shelves as kids fell in love with the wisecracking, pizza-eating heroes. Playmates sold $23 million worth of the toys in 1988, an impressive figure for a new toy. If the writing was on the wall that these quirky characters were hot, no one could have predicted the phenomenon they were to become. By Christmas of 1988 retailers could not stock enough of the toys and by mid-1989 the Turtles had become one of the best-selling toys ever. A stunned toy industry watched while the small green dolls, retailing at only about five dollars, took over the boys’ toys market. The television show that had begun as a promotional tie-in became the top-ranked Saturday morning kids show in the United States and the first Teenage Mutant Ninja Turtles movie, released in 1990, grossed more than $135 million. By 1990 the Turtles had captured more than 60 percent of the action figure sector and it was estimated that 90 percent of American boys under ten owned at least one Ninja Turtle.

The phenomenal success of the Teenage Mutant Ninja Turtles propelled Playmates, now officially named Playmates International Holdings, into the big leagues of the toy industry. In 1989 sales doubled to $145 million and, even more impressively, net income increased tenfold to $21 million. By the following year sales had topped $500 million and Playmates became the first toy company in history to net more than $100 million.

Decline of the Turtles in the 1990s

Thomas Chan, managing director of Playmates International, refused to allow the sudden, spectacular success of the Turtles to change his tightfisted management style. Instead of increasing staff to handle the sales boom, Playmates subcontracted the manufacture of the action figures to give the company more flexibility in case of a sudden drop-off in demand. Company headquarters remained spartan, with only 110 employees in a small, drab building in Hong Kong’s Kowloon district. Chan also maintained a policy of subcontracting all design and relying on freelance inventors and designers for new toy ideas. To try to keep the Turtles fad alive Chan deliberately restricted supply to retailers of the best-selling items and extended the product line every year with new collectibles like surfer Turtles, samurai Turtles, and rock ’n roll Turtles. New product introductions like the Toxic Crusaders and entertainment licenses like Dick Tracy were also designed to cushion the impact of a fall in Turtles’ sales. In addition, Playmates International Holdings began investing Turtles’ profits in the Hong Kong real estate market, which was booming in the speculative environment of the early 1990s. In 1991 Chan confidently asserted to Forbes, “If Turtles’ sales were to collapse from nearly $500 million today, even to $100 million, we’ll still make a profit.”

Inevitably, Turtle sales did drop off, slipping to $200 million by 1992 and to only about $30 million by 1995. For the first three years of this decline Playmates International remained profitable, as Chan had predicted. New product introductions took up much of the slack in Turtles’ sales, which dropped from more than 80 percent to less than 60 percent of the company’s business. Most notable was the introduction in 1991 of Waterbabies, a line of water-filled dolls invented by an American banker named Dan Lauer. Lauer and his siblings had devised the idea for the doll as children when, for a lack of toys, they had filled rubber gloves with water and drawn faces on them. Convinced of the attraction of his homemade toy, Lauer spent years trying to sell the idea to the big toymakers, to no avail. The first time he pitched the idea to Playmates President Richard Sallis, using a crude prototype made of water-filled balloons and condoms, Sallis was not impressed. “It leaked all over my desk,” Sallis recalled in Forbes in 1992. “They said, ’Can you imagine this as a doll?’ I said, ’No, I can’t. Get it off my desk. “Two years later, however, after Lauer had used money borrowed from family members to manufacture a leakproof version of the doll and sold 15,000 of them to area discount stores, Sallis took another look. Feeling that the doll might do for Playmates’ girls’ line what the Turtles had done for their boys’ toys, Sallis agreed to buy the license for Lauer’s toy baby. Playmates sold 2.2 million of the warm, cuddly dolls in 1991, making WaterBabies the number one promotional doll in the country, a position that the doll maintained for the next four years.

In addition to WaterBabies, a number of licenses tied to top movies, including Coneheads, Star Trek: The Next Generation, and The Addams Family, bolstered Playmates’ sales through the early 1990s in spite of the waning of the Turtles’ fad. Although the United States, traditionally, had provided the bulk of Playmates International sales, the company began to look more seriously toward the European and Asian markets as a source of growth. In 1992 Playmates International purchased a 38 percent stake in the Ideal Loisirs Group, a leading European toy company. By 1994 sales outside the United States represented more than 25 percent of the company’s business.

During the same period Playmates International Holdings’ investment in Hong Kong real estate was thriving and in 1993 management decided that the two parts of the business should be run separately. The Chan family sold their real estate holdings to Playmates International in return for shares valued at HK$1.4 billion (US$181.2 million). The toy business was then spun off as Playmates Toys in a one-for-one share distribution to Playmates International shareholders and the remaining real estate business was renamed Playmates Properties Holdings Ltd. (later renamed Prestige Properties).

Although new toy introductions and licenses kept Playmates Toys profitable for the first four years of the decade, in spite of a drop in sales to $195 million in 1994, in 1995 the company recorded a net loss of $12.6 million, its first loss since the 1987 Jill debacle. Much of this loss was related to the company’s investment in Ideal Loisirs as well as the high start-up costs involved in a new video game marketing venture called Playmates Interactive Entertainment (P.I.E.). P.I.E. had considerable success with Earthworm Jim, a lighthearted game that earned numerous accolades from industry publications, but the video game industry was so dominated by a few big players like Nintendo that it was difficult to build a profitable niche within it.

Family Feuds and Nano Pals in the Mid-1990s

Playmates’ business struggles of the mid-1990s were exacerbated by a bitter family feud that pitted two of the sons of company founder Chan Tai-Ho against each other. Robert, the elder son, petitioned the court in 1996 to wind up Chansam Investments, the holding company that controlled the Chan family’s stake in Playmates, claiming that he had been ousted from the boards of Playmates Toys and Prestige Properties by his younger brother Thomas. The high profile court case, which involved numerous bitter accusations and counteraccusations, was an embarrassment to the company and had a negative effect on already suffering share prices. The case eventually was settled privately with Thomas Chan retaining managerial control of Playmates Toys.

In spite of continuing problems with P.I.E., the company’s video game division, Playmates returned to profitability in 1996 with net profit of HK$54 million on sales of HK$1.2 billion. A significant portion of this profit was provided by the company’s acquisition of the license for toys based on the hit movie Space Jam, featuring basketball star Michael Jordan. Launched in November, the Space Jam line alone netted more than $40 million for the company in the last six weeks of 1996. Although entertainment-related licenses like Space Jam could return substantial short-term profits, analysts were skeptical about the long-term profitability of the company in the absence of a solid, sustainable hit like the Teenage Mutant Ninja Turtles.

During the last half of 1997 Playmates may have hit upon such a long-term success with its launch of Nano Pals. Ironically, given Thomas Chan’s antipathy to electronic toys after the company’s experience in the mid-1980s, Nano Pals were electronic “pets” that could be petted, fed, and reprimanded with the push of a button. To the consternation of many parents and teachers, the beeping gadgets became the must-have toy of 1997. Playmates shared the $150 million market for the virtual pets with Bandai America Inc., makers of Tamagotchis, the first incarnation of the electronic toy. Unlike toys with movie tie-ins, Nano Pals had the virtue of being limitlessly extendable, such that by Christmas 1997 Playmates had already come out with talking Nano Pals and Nano Fighters, a specifically boy-oriented version of the toy.

In August 1997 Richard Sallis, the longtime president of Playmates’ American subsidiary, resigned his position and was replaced by Ron Welch, former senior vice-president. Operating in new headquarters in Costa Mesa, California, this subsidiary still provided the large bulk of Playmates’ sales, although European and Asian markets continued to grow as a percentage of sales. It remained to be seen whether Playmates would continue to survive the vagaries of the volatile toy industry into the 21st century.