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BANDAI Co., Ltd.

2005 5th Porter Prize Winner Toys and Games Manufacturing
Creation of a unique positioning as “character merchandiser” that perfectly synchronizes with TV programs, and achieving stable profit in the highly volatile character business.

Industry Background

The toy manufacturing industry in Japan faces the dual problems of declining market size and pressure on profit margin due the decline in population of children and the increasingly strong bargaining power of major toy retailers. Despite this adverse business environment, the character-related business can generate large sales as much as 10 billion yen for a big-hit character. This business, however, can see both sudden drops as well as very rapid growth in sales, and it is important to have the capability to respond to such changes quickly by constantly creating a flow of new characters that will become "hits". As a result, it is extremely difficult to achieve stable financial results, and many of the toy manufacturers that went into the character business are plagued by big volatility in earnings.

Popular characters that Bandai has marketed include Gundam, Kamen Rider, Ultra-Man, Go-Rangers, Power Rangers, Digimon, Dragon Ball, Sailor Moon, and Tamagotchi, among others.

According to a recent announcement, Bandai will be merged with video game company NAMCO at the end of September 2005 to become a majority-owned subsidiary of a newly merged holding company, NAMCO Bandai Holdings, and the businesses of the two companies will be integrated and reorganized in the near future. As the application to the Porter Prize by Bandai was made prior to this development, our analysis includes the financials for 2000 to 2004 that predates the merger, and Bandai is classified as a "single-business company".

Unique Value Proposition

Bandai's main business is merchandising and marketing of character goods, which accounts for 73.6% of its consolidated sales. Character goods are marketed in a wide variety of forms including toys, figurine solid models and small encapsulated figurines to be sold through vending machines or packaged with snack foods, video games, apparel and broad array of personal care products. Bandai holds a big market share of these product categories as proven in 2004 statistics: 88% of character model market (46% of the total model market), 65% of the capsule-toy dispenser market, 35% of card game market, 36.4% of toys packaged with snack foods, and 65% of children's character apparel market. Half of Bandai's sales come from so-called "standard" characters that have established popularity and have been supported by fans over the years with a series of renewed models and stories. Because of this stable source of earnings, Bandai can actively invest in new characters where there are many uncertainties.

Bandai's target customers are children, their parents, and avid collectors in their 20's through 30's. Bandai provides customers with a worldview represented by characters portrayed through various products, and the company constantly tries to enhance the consistency of the world of the character. Through this activity, Bandai fulfills the wish of children "to be always with their favorite character", while providing their parents with value by allowing them to share the same view of the world with their children. Bandai working together with production companies develops stories and produces TV programs that have become long series of stories such as Ultra Man, Kamen Rider, Gundam and others that are renewed annually. Many such series have a history of close to 30 years, and young parents can now enjoy the same favorite character they loved as children together with their own children.

Character merchandise possesses a value-added ingrained in the products as a worldview and story and thus has the advantage of being less prone to price competition.

Unique Value Chain

Acquisition of merchandising rights for a character
The sources of characters vary from video games (such as PacMan), toys (Tamagotchi), cartoons (Dragon Ball), and TV programs (Ultra Man series). Bandai is particularly good at merchandising and marketing of characters spun out of TV programs.

Rights of a character in a TV program are in most cases held by the program production company, and Bandai has established a strong partnership with many of them. Behind the fact that Bandai has developed many character goods and successfully marketed them are several factors. First, Bandai owns the largest toy wholesaler as a subsidiary (its sales are more than three times those of the number two toy wholesaler) and can introduce various products at a chosen ideal timing. Secondly, Bandai has a proven track record of developing and nurturing many characters through their planning and merchandising. Furthermore, Bandai can closely work together with TV program production companies in developing characters and stories that make it easier to merchandise. Successful merchandising of a character will result in additional royalty income for the production company, while reinforcing the character to gain even more popularity. Bandai also has the capability to develop new characters on its own in-house and turn them into TV programs (25% of Bandai's consolidated sales are from characters for which Bandai owns the copyrights). Lastly, Bandai maintains a policy to spend a certain budget amount to be invested in sponsoring TV programs for children and has become an important partner for TV stations that face a situation where the number of corporate sponsors for children's programming is declining.

Development of character goods
"Character merchandising that perfectly synchronizes with TV" is a method Bandai developed to simultaneously create a plan for a character, its story, and character goods. Bandai's merchandise designers participate in the program planning discussion held with the TV program production company and contribute by developing designs for characters and associated items. Through these joint efforts Bandai can synchronize the creation of a character and toy merchandising that is true to the original character design.

Bandai can start product design and development early on as they can share information on a character from the beginning, and as a result, they can introduce the new products precisely at the time when the character appears on the TV program. Furthermore, Bandai is able to accurately reflect a character's world based on extensive discussion with one of the character's rights holder, the TV program production company, from the early stages of planning. Consequently, Bandai can avoid misrepresentation or mismatch of their product with the character's world that are some times pointed out by the character's rights holder and avoid the risk of subsequent delay in product introduction.

From Bandai's success in character merchandising, the character rights holder can gain significant royalty income, and this relationship become a "win-win" if both parties cooperate and join their efforts.

Sales promotion for character goods
Bandai sponsors many TV programs for children, and commercials for its character products are run during the program while the audience is still immersed in the world of the character. Because of the wide variety of products Bandai offers through a broad array of distribution routes including toy stores, major home appliance store chains, game shops, department stores, and apparel shops, active TV program sponsoring and exposure through commercials makes a strong impact. A wide variety both in products and distribution channels also contributes to higher exposure of Bandai's characters and helps promote sales.

Bandai owns Japan's largest toy wholesaler as a subsidiary through which it gathers a vast amount of data and captures sales trends of toys marketed by Bandai and other competitors. Bandai adjusts its marketing activities and plans based on this information. Bandai's broad product line includes a wide range of price points for characters from as low as 100 yen for a pack of a toy with snacks to 10,000 yen for a hand-painted figurine. Bandai carefully decides its product lineup and launch schedule.

Supply-chain management
In order to maintain freshness and keep children interested, most of the TV programs for children are generally terminated after one year. This results in an end to heavy exposure of characters in the program, making inventory management extremely important. Bandai capitalizes on retail sales information gained real-time from its subsidiary toy wholesaler and quickly takes measures in adjusting shipments or beefing up sales promotion to reduce excess inventory.

Fit among Activities

Bandai's activities have excellent fit to reinforce one another. The company's broad product range enhances efficiency in TV program sponsorship and airing of TV commercials, while the sponsoring activity and capability in managing a broad product range merchandising business make it easy to obtain character merchandising rights. Close working relationships and adjustments in a character and its story developments improve the quality and scheduling of merchandising, while excellent merchandising strengthen the character and TV program.

Bandai delegates much authority to its Merchandising Division but at the same time carries out very good coordination and adjustments among activities. This coordination is done both vertically (from obtaining character merchandising rights, product development, product distribution, marketing, through supply-chain management of products) and horizontally (from packaged snacks with toys, figurines, video games, to apparel) handled by the Product Divisions. An organization unit named "Media Division" plays this activity coordination role. The Media Division is involved in every step of a range of activities including obtaining character merchandising rights, launching of a new character and TV program start-up, promotion of merchandising from the viewpoint of the copyright holder, and negotiation with the copyright holder on behalf of Product Division in the group. The Media Division manages and is also responsible for business profitability of each character. (Please refer to "Activity System Map" attached for more detailed accounts of relationship among these activities.)

Innovations that Enabled Strategy

  • Bandai closely synchronizes TV program planning and character merchandising.
  • Bandai develops new distribution channels and creates new product formats that best fit each of the new channels.
    • When the prevalent pricing of toys sold through toy vending machines was 20 yen, Bandai introduced a 100-yen machine to market its character toys.
    • While there already existed a market for a packaged snack with a toy piece added, Bandai reversed the concept to a character toy with a snack added.

Consistency of the Strategy Over Time

Bandai's strategy of character merchandising can be traced back to its origin in early 1970's when Poppy, a toy manufacturer which was later acquired and merged with Bandai, introduced and marketed a toy belt worn by a TV series hero, Kamen Rider. The Kamen Rider program was sponsored by Poppy, and the belt was battery-powered to light up and make noise as it did in the story. Bandai has accumulated experience in character merchandising starting from series animation TV shows with robots as main characters including Mazinger Z and the Great Mazinger in 1973, followed by the Ranger series in 1975 (including Go-Rangers and Power Rangers), and Ultra Man and Gundam in late 1970's.

About a decade ago Bandai's strategy evolved from just sponsoring TV shows and producing full-scale replica toys to the strategy of "Merchandising fully synchronized with TV show development" where Bandai works with TV show production companies from the planning stage, simultaneously developing a character, its story and associated products. In order to implement this evolved strategy, Bandai reorganized to create a system to develop producer resources. It also tightened profit management of each character and its products and established management processes to limit the breadth of product offerings to avoid excessive proliferation.

Trade-offs

  • Since Bandai's main target customers are children, Bandai neither enters a business that may destroy children's dreams or the world of a character, nor develops and markets a character that engages in such activities. For example, it never engages in the gambling business (although there are gambling machines using characters licensed by other copyright holders or merchandisers in pachinko parlors) or sexually oriented businesses.
  • Character merchandising is a highly uncertain business where success depends on whether a character becomes a hit or not. Therefore, it is necessary to endure and continue investing regardless of the short-term results. An example of such investment is the sponsoring cost for children's TV shows. Also, at Bandai investments in high risk projects are not abruptly cut just to meet short term profit targets.

Profitability

Bandai achieves higher than the industry mean in both return on invested capital and return on sales.

Return on invested capital (ROIC)   (Unit = percentage point)
Difference from industry averag
over 5 year period
Difference from industry average, by year
2000 2001 2002 2003 2004
11.2%P -2.4%P 5.4%P 16%P 23.2%P 9.4%P
Return on invested capital = Operating income / Average invested capital

Return on sales (ROS)   (Unit = percentage point)
Difference from industry average
over 5 year period
Difference from industry average, by year
2000 2001 2002 2003 2004
5.7%P 0.9%P 4.4%P 7.7%P 6.0%P 3.6%P
Return on sales =Operating income / Net sales

Activity System Map

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