Case: Funskool India: Defend, Lead and Counter rivals

Content

About the company

Toy industry in India

Funskool in India

Funskool Strategy in 2016

About the company

Founded in 1987, Funskool is India’s leading toy manufacturing company. Established as a joint
venture between MRF and American toy manufacturer Hasbro, the company manufactures and
distributes products in India market under the license from foreign toy brands. The company has a
state-of-the-art manufacturing facility at Goa, and a second factory at Ranipet. Funskool has been
pioneering the concepts of quality and safety in toys and has been instrumental in raising the
quality standards of toys in the Indian Market.

Funskool’s vision to help every child grow into a successful human and its contribution to the
Indian toy industry has helped it emerge as one of the largest toy companies in India. With
indigenously designed toys that have been manufactured to exacting standards of quality and
safety, Funskool has introduced a new meaning to fun for millions of children across the country.

Toy Industry in India

What is a toy? A toy can be defined as an object for a child to play with, typically a model or
miniature replica of something. For.eg super heroes, cartoon characters etc.
Existence of toys in India dates back to the Indus valley civilization. Being the second most
populated country, with around 20% of the Indian population falling under the age group of one to
twelve, India provides a huge consumer base for toys. The growing economy and the rising
disposable income has led Indians the capacity and willingness to spend on toys. Along with
spending capability, consumers also are willing to spend from quality that provides longer life and
security. From traditional toys, these behaviours have made the manufacturers move from simple-
battery operated toys to more sophisticated and intelligent electronics toys.

Funskool in India

Since 2010, Funskool’s strategies were always aimed at strengthening its position and achieving
market leadership in the toy industry. This was achieved by reducing manufacturing cost and
bosting export by entering into license agreement with many international toy companies.
Funskool has licences for nearly 20 global toy brands. It also realised the benefits of automation.
In 2010, Funskool obtained exclusive distribution rights from the Danish Lego Group to distribute a
variety of its toys in India. This resulted in a sales growth of 70%.

Strategy in 2016

Funskool remained the leader for many years. However, the demonetization effect clubbed with
other entrants hit them. They continued sharpening what worked and began introducing new
strategies in 2016.

First, license proved to be a successful affair for Funskool. In 2016, the company noticed the
emerging trend in consumers purchase toys based on movie characters. It acquired the licence for
Disney’s Frozen and singed a deal with Rainbow to market Winx Dolls. They started
experimenting with the launch of popular Indian animation cartoon character. The company knew
that there was no guarantee that this trend would continue, but were open to the idea of exploring
characters from Indian movies and promoting them along with international brands in the market.

Second, Funskool continued emphasising on introduction of innovative toys and building strong
distribution networks. To expand the portfolio of toys under the Funskool umbrella, the company
introduced new brands including Giggles, Handy Crafts, Fundough and Play and Learn series. By
2016, the company had a range of over two thousand toys, including domestic and international
brands. They understood the customer behaviour of seeking new toys and began introducing four
to five products every month. They are also building an e-commerce presence through tie-ups with
marketplaces.
Third, they leveraged the spending capacity in tier-III cities and decided to increase their footprints
in those locations. They set up stores in seventy-five towns across Chennai, Bengaluru, New
Delhi, Kolkata and Mumbai and planned to open more in the future. R Jaswant, VP sales and
marketing, strategized focusing on toys in the range of Rs. 100 to Rs. 600 for this market. It also
appointed a team of online distributors for its products and expanding the portfolio of labels under
its umbrella.

Fourth, was to build a stronger international presence. It is betting big on exports. Already
exporting to Sri Lanka, Maldives, Nepal, Bangladesh, Bhutan and UK, the company would now
enter the US market too. Funskool is also planning to set up a third manufacturing plant
exclusively for exports.

Current State of Toy Industry in India

The toy industry was classified primarily into 2 segments: the Traditional toys and games and the
video games. In 2015 the traditional segment covered about 64% of the market share. However it
was growing at a slow pace. On the other hand, the video game market was about 36% but was
growing tremendously and was expected to surpass the traditional market by 2018 (see chart
below.)

2015 Data Report

The traditional toy segment was further categorized into educational and recreational. The picture
below shows the traditional toy segment in 2015.

Understanding Indian Toy Industry using Porter’s Five Force Model

Definition: It is an analysis tool that uses five industry forces to determine the intensity of
competition in an industry and its profitability level. Created in 1979 by M. Porter, the model helps
to understand how the five key competitive forces affect an industry. The five forces are shown
below.
These forces determine an industry structure and the level of competition in that industry. The
stronger competitive forces in the industry are the less profitable it is. An industry with low barriers
to enter, having few buyers and suppliers but many substitute products and these forces
determine an industry structure and the level of competition in that industry. The stronger
competitive forces in the industry are the less profitable it is. An industry with low barriers to enter,
having few buyers and suppliers but many substitute products and competitors will be seen as
very competitive and thus, not so attractive due to its low profitability.

Porter’s Model Application:

Threat of Entry: The Indian toy market had always been challenging, mainly because of the
customer’s extreme price sensitivity. Despite an increase in disposable incomes, per capita
spending on toys and games in India was well below compared to other countries. Increasing
urbanization has led urban young couples to opt for nuclear families and fewer children. Lower
dependency ratios and growing income levels resulted in parents spending more on games and
toys for their children. Globally, the toy market was dominated by China as the world’s largest
manufacturer of toys. These imported Chinese toys were a threat to Funskool which is an Indian
brand, for several reasons. The main reason was the Price. It was difficult to compete with the
Chinese price for the same product of Funskool, since China has lower costs of production.
Second threat of entry was Mattel, Funskool’s biggest competitor which produced content for
television, films, and video games, with Mattel toys as the protagonists. But Funskool made a
clever move by obtaining the licenses from international brands, such as Star Wars, Cartoon
serials such as Tom and Jerry and etc., hence the chances of new threat entry were minimised
here by the Funskool.

Threat of Substitutes: The biggest threat of substitute in Indian market for Funskool was of the
often duplicated Chinese products which were available at relatively cheap prices then the
Funskool. For e.g. NERF (blasters and darts) game, which is a licensed product of Funskool, is
priced at Rs. 225 (having 5-6 darts) while product of similar product from China is priced at Rs.160
(12-15 darts). So customer not only gets reduced price product but also get more for less.

But the government guidelines of mandated BIS compliance for imported toys helped Funskool to
maintain its position with the annual rate of more than 20%.

Another major threat was the digital games which were expected to surpass the traditional toy
segment in 2018 and Funskool had no presence in this category.

Bargaining Power of Suppliers: The Chinese market had lower costs for various reasons,
including low costs of land, labour, and raw materials. Another was Funskool’s rivals, such as
Mattel, took advantage of China’s cost advantage by outsourcing production to Chinese
companies or their subsidiaries in India.

Bargaining Power of Buyers: The majority of toys sold in the unorganized sector had little
product differentiation, poor safety and quality standards, and competed heavily on price. These
toys catered to a large section of price-conscious Indian buyers who sought economical and
affordable goods.

Environmental Challenges faced by Funskool:

Major Environment factors and challenges affecting Funskool can be divided into Micro and Macro
Environmental Challenges. Following are the main aspects:

Micro Environment Factors

 Marketing: Approximately 4-8% of annual revenue was allocated to marketing. TV
commercials, display boards, store promotions was taken up to push the brand and make
an impact with the customers directly.
 Retailers: Under Baby, Funskool developed strong sales and distribution network, including
four regional sales offices in New Delhi, Mumbai, Chennai & Kolkata, as well as 18 caring-
and-forwarding agents that catered to over 100 stock lists and 4500 retails stores.

 The Resellers: To attract Sellers/ reseller, Funskool CEO Baby, decided to go for the
strategy of capturing the market share in 2006. His thinking was that once market is
captured, price can be increased and seller can be dictated favorable terms leading to
profits of company.
 The Customers: Factors affecting Indian toys market and Funskool related to customer as
such are
o Rising disposable income of India customer leading to increase in per capita
spending on toys purchase per year
o Child Population in India is approaching 40 % of total India population, which is a
huge number and a large potential market for Funskool.

 Market Segment: The traditional toy category in divided into two segments: educational
and recreational. In 2015, educational toys contributed 20-25 % of the market share,
whereas recreational toys accounted for 75-80 % of all traditional toys.
 The Suppliers/ Manufacturers / Licenses: In 2006, under the leadership of Baby, the
company abandoned the ritual of 5 % price increase to stay competitive. Rather, it started
focusing on obtaining many more licenses for manufacturing or distribution from reputed
international toys companies other than Hasbro.
  Innovation: Innovation is essential to stay afloat in the toy markets as parents and children
keep expecting and demanding fresher products. However, innovation being a weak area of
Indian toy market can be a challenge.
 Labor/ Labor Cost: With Labor cost increasing in India rapidly, with was / is imperative for
Funskool to move towards automation. This will lead to significant cost reduction and
increase profit margins for company.
 Licenses / Distribution Rights:
o Movie licenses like that of Star Wars: The force Awakens, Frozen, lead to advantage
for Funskool as it could exclusively set related toys in Indian market.
o In 2010, Funskool obtained exclusive distribution rights from the Danish Lego Group
to distribute toys in India. Within a year, Funskool’s sales from Lego grew to 70%. As
per Baby, this was a move in right direction for the company.

 Competition:
o Funskool main rival is Mattel, which took advantage of China’s cost advantage by
advantage by outsourcing production to Chinese companies or to subsidiaries in
China. But, since Funskool is a purely India-based manufacturing operations
company, therefore it becomes a problem.
o Mettel also created and produced content for TV, film and video games with was not
the case with Funskool. Hence, Mettel had advantage here.
o Other competitors who entered the market after 2010 were, Simba, Hamley’s and
Prowl. They brought with them huge investments and partnership with Indian
retailers to establish manufacturing and retails outlets in India. This is sure to be a
threat to Funskool in the near future.
o Unorganized sectors that imports toys from China are a big treat to growth of
Funskool as it is cheaper in price and hence preferred with lower-middle class in
India
 Quality / Standards: in 2000, Funskool differentiated itself from other local manufacturers
by adopting Bureau of India Standards (BIS) norms for the quality and safety of toys. Due to
this the company was able to charge a slight premium on its toys owning to superior quality.
 Export: As a result of BIS compliance, Funskool was able to sign several export contracts
from international firms such as John Adams Leisure Ltd and increase in global imprints.

Macro Environment Factors

 Demographic forces:

 Age: about 40% on Indian population in between 0-14 years with places Indian toys
market as a high potential markets for Funskool to expand its operations.
 Price Sensitive: India is a price sensitive nation and so it the toys market. Funskool’s
strategy needs to be focused on keeping the price moderate to low, to gain the market
share.
 Different market segments: Toy industry in a highly fragmented industry in India with
nearly 75% of the industry market share captured by unorganized companies,
dominated by low priced imports, mainly from China
 Country/Region/ World Economy: Slowdown of Western markets has also tempter
many global toy brands to enter the Indian market. This change is likely to expose
Funskool to potential threats from its current partners.

 Technological factors:
o Skills: Funskool India has a clear disadvantage here as compared to its main rivals
in China as China has easy availability of skilled and trained labor with workers
having completed diploma courses which was not available in India. This lead to
better and faster production, hence reduction on time and cost.
 o Technology: When started in 1986, Funskool was established as a partnership
between MRF and Hasbro. This helped both. MRF gained access to world class
design and technology, while Hasbro gained access to the Indian market, which, at
the time has high import restrictions on toys.
o Materials: Toys can be segmented on basis of the material used for manufacturing:
plastic and cardboard toys. , electronic toys, battery – operated toys and plastic and
soft toys. OF all this, Funskool had no penetration or exposure in video games toys
which was gaining ground recently.
o Digital Video Games Segment: With advent of electronics and technology, high
definition digital games are being made available and presented as alternate to
physical toys. This possesses a significant danger to future prospects of Funskool as
it does not have any presence in this market or any technological knowhow in this.

 Governmental Import Laws/ Taxes: The import duty on raw materials used in
manufacturing toys was around 24 %, compared to 5 % duty for import of finished toys,
which resulted in Chinese imports flooding the Indian markets.
 Government Initiative: Chinese Govt. provide incentives to their manufacturers due to
which they require lower capital investment costs, have higher economics of scale and are
better placed than Indian toy companies.
 Taxes: In 1986, 1st manufacturing unit for the company was established in Goa as it had a
tax holiday for 10 years from the government.

Micro and macro environments have a significant impact on the success of Funskool, and
therefore the factors of these environments should be considered in-depth during the decision
making process for Funskool. Considering these factors will improve the success of the company.