1- Analysis (Please look at the example of how to do)

UNO CAPSTONE CUP | ROUND 3, FALL 2019 1

“Sorry!” Children love the satisfaction of shouting this while playing the infamous board game of the same name. Whether it was playing Sorry or crafting with Play-Doh, almost every person in the United States has played a Hasbro game at some point in their life. As home to some of the biggest names in toys and games including Monopoly, Nerf, Marvel, Star Wars, Operation, Playskool, and G.I. Joe among many others, Hasbro is a prominent player in the toy wholesaling industry.i

Founded in 1926, Hasbro was initially known as Hassenfeld Brothers Inc. The Polish Hassenfeld brothers, having experience in the textile remnant business, began to make pencil boxes and cloth zipper pouches, eventually adding pencils to their business line as well. It was not until the 1930s that Hasbro began making toys. While not a direct connection to school supplies, this extension to the business proved successful in 1942 as demand for school supplies tapered off and toys became the powerhouse revenue source for Hasbro.ii

Since its entrance into toys, Hasbro has become one of the market leaders with 9.4% of the global toy wholesaling industry.iii However, net income has declined 58% since 2016 ($533M to $220M), hitting its lowest point since 2005.iv Couple this with missing earnings expectations, its stock price has continued to plummet. In fact, immediately following the earnings announcement in the third quarter of 2019, Hasbro stock dropped by 17.7%.v

Hasbro blames the United States–China trade war as the primary reason it missed forecasts. However, Mattel, Hasbro’s number one competitor, exceeded earnings forecasts and stated that the trade war played only a minor role.vi Another big contributor to Hasbro’s struggles is that it is still reeling from the bankruptcy of Toys R Us. Toys R Us was an integral part to Hasbro’s sales, and mid-2019 was the first time Hasbro began to find its footing following this massive shakeup in the industry.vii

Hasbro’s largest direct competitor is Mattel, with a market share of 8.9%.viii These two companies constantly compete head-to-head and are always in a battle for higher revenues, better products, and more market share. However, Hasbro also faces steep competition from Lego which has more revenue than both Mattel and Hasbro.ix In addition, Hasbro also competes with other forms of entertainment including online video games and streaming, highlighting a need to diversify beyond the wholesale toy industry.

Succeeding in the toy industry is no easy task. Just like the game of Risk, crafting a strategy is vital to winning the game. Having faced many problems, Hasbro is in dire need of developing a way forward to not only overcome its own problems, but beat out its competition to find a more sustainable competitive advantage.

Hasbro University of Nebraska Omaha

Capstone Cup

Finals

Fall 2019

Hasbro: The Game of Strategy

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Hasbro Hasbro’s mission is “to create the world’s best play and entertainment experiences.” It does this with more than 1,500 brands across three toy and game categories: franchise and partner brands, Hasbro gaming brands, and emerging brands. As depicted in Figure 1, franchise and partner brands include Disney’s Frozen, Star Wars, and Marvel; Hasbro gaming brands include Operation, The Game of Life, and Clue; and emerging brands include Furby, Power Rangers, and Playskool. In addition to this wide variety of toys, Hasbro also focuses on its entertainment labels, Allspark Pictures and Allspark Animation, which brings its toys to life through television shows and blockbuster movies. In addition, Hasbro also dabbles in music, publishing, and location-based entertainment.x Across all of these brands and entertainment outlets, when deciding which ones to incorporate into its business model Hasbro looks at the brand’s storytelling and consumer-focused opportunities. If these align, Hasbro will then conduct further analyses to decide whether or not to officially introduce the new brand to the well -established Hasbro family.xi

*Source: Hasbro Annual Reportxii

Within its business operations, Hasbro places a significant focus on corporate social responsibility. Two of its most prominent corporate initiatives include Hasbro Toy Recycling where it attempts to reduce the number of toys in dumps, and Toybox Tools wherein it partnered with The Autism Project to make play accessible for all kids. These initiatives have led to Hasbro being honored as one of the world’s most ethical companies by Ethisphere and being ranked number 13 on the 2019 Best 100 Corporate Citizens list by CR Magazine.xiii While seen as highly ethical, Hasbro has struggled with diversity as exhibited in its leadership team. Overall, seven of the eight executives are male, and all eight are Caucasian which represents another internal issue the company has yet to address.xiv

Financially, Hasbro has been struggling. Revenues have plateaued between four to five billion in the past five years as detailed in Figure 2. However, net income has plummeted from 2016 ($533,151,000) to 2018 ($220,434,000). Across the board, Hasbro has seen ROE, ROA, and ROI all decrease since 2015 which has contributed to decreasing stock prices.xv

The consolidation of customers in the toy retail market has led to more efficient product distribution. This consolidation has contributed to an increase in Hasbro’s ability to accurately analyze and forecast consumer demand, allowing it to more effectively select brands and entertainment mediums. However, this also means Hasbro is relying more heavily than before on its forecasts, namely on its predictions of the performance of blockbuster movies. For example, Hasbro saw an expected increase in revenue from the 2019 release of Avengers: Endgame and is placing a heavy emphasis on the success of Disney’s Frozen 2 for a boost in holiday sales.xvi

Figure 1.

Hasbro: The Game of Strategy

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Recently, Hasbro announced the intended acquisition of Entertainment One Ltd., which is a Canadian-based publicly traded company that produces a number of popular films, television series, and music.xvii Some of its most prominent productions include Spotlight, Peppa Pig, and The Walking Dead.xviii This acquisition would significantly enhance Hasbro’s film and television capabilities, adding to its entertainment resources. Relatedly, in November 2019 Hasbro also announced that it would be offering additional common stock to help pay for this acquisition.xix Overall, Hasbro’s internal operations exhibit many strengths, however the company continues to struggle financially which may indicate strategic missteps and/or volatile markets .

The Market Within the toy wholesaling industry, Hasbro has the lead with 9.4% market share, but Mattel is close behind with 8.9% (see Figure 3 for a comparison). The remaining 81.7% is made up of a number of other players including Lego and Jakks Pacific among others. In addition to these direct competitors, over the years Hasbro and the rest of the toy wholesaling industry has witnessed increased competition from other forms of entertainment. It has become increasingly difficult to grab children’s attention with the rise of technological entertainment including online video games and streaming.xx While industry experts note that gaming and other forms of entertainment have now been around for some time and aren’t necessarily taking more of the market, they also acknowledge that consumer shifts are far from over.

Figure 2

Source: Statista1

Hasbro: The Game of Strategy

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Figure 3

Source: Klosters Retailer Panel

Overall, the $28.7 billion industry in the past five years has seen an average yearly decline of 0.9%, and this is expected to get worse with an annual five-year projection of -1.6%. This decrease is a result of a number of factors. One of the most prominent is the decline in demand from department stores, which coupled with an increase in vertical integration, has spelled disaster for many small companies. To remain competitive and avoid a reduction in profit margins, companies have had to find ways to reduce costs so they can offer further discounts to large-scale retailers and department stores such as Walmart and Target as well as online retailers such as Amazon.xxi Given the importance of these retailers, the Chapter 11 bankruptcy of Toys R Us has sent ripples through the industry, and many companies are still suffering.xxii As shown in Figure 4, overall brick and mortar sales are declining while online sales are increasing, showing that large retailers are still important for the industry.xxiii

Figure 4

Source: Muller, 20181

Hasbro: The Game of Strategy

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Last December the Wall Street Journal published an article “Toy Sorry: Why the Holiday Season May Give Hasbro, Mattel a Lump of Coal” which predicted a tough year ending for both companies. The Toys “R” Us bankruptcy left a large void and manufacturers are still recovering. The total revenue of the global toy market has increased year over year (see Figure 5), though it did fall in 2018 in the U.S.

In addition to shifts in competition, the United States-China trade war has caused a threat to the industry. While some companies are being hit worse than others, any company that manufactures in China is being impacted. Hasbro in particular has been significantly impacted. Because of the inexpensive labor from China, Mexico, and Vietnam, offshoring and outsourcing is likely to continue despite the trade war increasing costs.xxiv This trade war, among a number of other factors such as the inverted yield curve, have also increased the fear of an impending recession beginning in the next five years. Given that this industry is particularly susceptible to recessions and recession fears, this presents a concern for companies.xxv

Overall, the toy wholesaling industry is faced with a number of threats and few clear options are available for the vast number of competitors that exist. As profit margins are attacked and forecasted trends appear negative, it is more imperative than ever to address the challenges faced within the changing marketplace. With the most market share, albeit by a minimal margin, Hasbro must address these challenges head on. It has numerous capabilities at its disposal, yet its net income and stock prices continue to slip downward. Hasbro is coming up on 100 years in business, but it has never faced issues as drastic as those it is experiencing now. Is it possible for Hasbro to remain number one? How can Hasbro develop a strategy that will create a sustainable competitive advantage?

Figure 5

Source: Statista1

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Resources

Utilize the case brief as well as outside resources (consider the source) to help your team build strong

recommendations for the client, Hasbro. This is meant to be used as a starting point for your research.

General Resources

• Criss Library: https://www.unomaha.edu/criss-library/

Hasbro Resources

• https://shop.hasbro.com/en-us

• https://shop.hasbro.com/en-us/brands

• https://corporate.hasbro.com/en-us/community-relations

• https://newsroom.hasbro.com/

• https://csr.hasbro.com/en-us

Financial Information

• https://hasbro.gcs-web.com/financial-information

• https://hasbro.gcs-web.com/stock-information

• https://finance.yahoo.com/quote/has?ltr=1

Industry Information

• http://clients1.ibisworld.com.leo.lib.unomaha.edu/reports/us/industry/default.aspx?entid=954

Industry Evolution

• Business Wars Podcast by Wonderly: Mattel vs Hasbro:

https://www.stitcher.com/podcast/wondery/business-wars/e/59522294?autoplay=true

References

i Hasbro. (2019). Corporate. Retrieved from https://hasbro.gcs-web.com/corporate. ii Encyclopedia.com. (2019, October 31). Hasbro, Inc. Retrieved from https://www.encyclopedia.com/social- sciences-and-law/economics-business-and-labor/businesses-and-occupations/hasbro-inc. iii O’Connor, C. (2019). IBISWorld Industry Report 42392. Toy & craft supplies wholesaling in the US. Retrieved from IBISWorld database. iv (2019). Hasbro, Inc report. Retrieved from Mergent Online database. v Shore, R. (2019, November 1). Toymakers and trade wars: Hasbro and Mattel face off. Retrieved from https://www.fool.com/investing/2019/11/01/toymakers-and-trade-wars-hasbro-and-mattel-face-of.aspx. vi Duprey, R. (2019, November 3). Mattel drives past tariff troubles that sunk Hasbro. Retrieved from https://www.fool.com/investing/2019/11/03/mattel-drives-past-tariff-trouble-that-sank-hasbro.aspx. vii Rossolillo, N. (2019, October 16). Is Hasbro a buy ahead of the 2019 holiday shopping season? Retrieved from https://www.fool.com/investing/2019/10/16/is-hasbro-buy-ahead-2019-holiday-shopping-season.aspx. viii O’Connor, C. (2019). IBISWorld Industry Report 42392. Toy & craft supplies wholesaling in the US. Retrieved from IBISWorld database. ix O’Connell, L. (2019, September 27). Top companies revenue worldwide 2018. Retrieved from https://www.statista.com/statistics/241241/revenue-of-major-toy-companies-worldwide/. x Hasbro. (2019). Corporate. Retrieved from . xi Hasbro. (2019). Investor factsheet July 2019. Retrieved from https://investor.hasbro.com/static- files/8dc080cb-70e3-4a4d-b351-658e9bafe783. xii Hasbro. (2018). Hasbro annual report. Retrieved from https://investor.hasbro.com/static-files/cee88521-71dc- 4b58-89bd-7adb7bb04b84. xiii Hasbro. (2019). Corporate. Retrieved from https://hasbro.gcs-web.com/corporate. xiv Hasbro. (2019). Executive management. Retrieved from https://investor.hasbro.com/corporate- governance/management.

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xv (2019). Hasbro, Inc report. Retrieved from Mergent Online database. xvi O’Connor, C. (2019). IBISWorld Industry Report 42392. Toy & craft supplies wholesaling in the US. Retrieved from IBISWorld database. xvii Business Wire. (2019, November 4). Hasbro announce public offering of common stock. Retrieved from https://www.businesswire.com/news/home/20191104006010/en/Hasbro-Announces-Public-Offering-Common- Stock. xviii Entertainment One. (2019). About eOne. Retrieved from https://www.entertainmentone.com/about-eone/. xix Business Wire. (2019, November 4). Hasbro announce public offering of common stock. Retrieved from https://www.businesswire.com/news/home/20191104006010/en/Hasbro-Announces-Public-Offering-Common- Stock. xx O’Connor, C. (2019). IBISWorld Industry Report 42392. Toy & craft supplies wholesaling in the US. Retrieved from IBISWorld database. xxi O’Connor, C. (2019). IBISWorld Industry Report 42392. Toy & craft supplies wholesaling in the US. Retrieved from IBISWorld database. xxii Rossolillo, N. (2019, October 16). Is Hasbro a buy ahead of the 2019 holiday shopping season? Retrieved from https://www.fool.com/investing/2019/10/16/is-hasbro-buy-ahead-2019-holiday-shopping-season.aspx. xxiii Muller, L. (2018, July 27). 3 challenges for the U.S. toy manufacturers in 2018 – Tariffs, Amazon and Toys ‘R’ Us. Retrieved from https://seekingalpha.com/article/4191149-3-challenges-u-s-toy-manufacturers-2018-tariffs- amazon-toys-r-us. xxiv Shore, R. (2019, November 1). Toymakers and trade wars: Hasbro and Mattel face off. Retrieved from https://www.fool.com/investing/2019/11/01/toymakers-and-trade-wars-hasbro-and-mattel-face-of.aspx. xxv O’Connor, C. (2019). IBISWorld Industry Report 42392. Toy & craft supplies wholesaling in the US. Retrieved from IBISWorld database.