Back on track?

Melanie Stern is Section Editor of Families in Business magazine.

Sweden's iconic wooden toy company has been something of a slow train in a locomotive race, but has total faith in its plan to sideline its multi-million dollar debt and return to profitability by 2005

There's optimism, and there is blind faith. One can't be sure which side of the tracks the brothers Dag and Bengt Ivarsson, fourth family generation and board members of iconic toy company Brio, stand.

The company turned 120 years old this year but birthday cheer is in short supply; Brio once again reported shrinking sales (SEK1,871m in 2002 to SEK 1,595m last year), and begun 2004 with a bottom line SEK200m in the red. A profit and expanding program launched in 2001 failed to reign in crushing operational costs contributing to some SEK56m debt, though this was relieved in part by the sale this April to a Nordic venture capitalist of Brio Educational, the company's Nordic pre-school toy distribution arm. A cost-cutting move of production from Brio's home town Osby to China "will save us a substantial amount of money" say the brothers, but at the cost of hundreds of jobs and the souring of government-company relations; not only has Brio been one of the biggest employers in Osby but Dag is deputy chairman of the municipality and the local Kristianstad University's council.

Despite this now typical state of affairs at Brio, Dag and Bengt say they are totally confident their company will rebound by the end of 2004, and their goal is to announce profitability in the first quarter 2005. All essentials for this being present – healthy international demand for their products, competitive prices, reasonable operating costs and a strong board of directors – then their plan would add up to success. But one cannot help being concerned when the reality of a company's situation does not seem reflected in the words of its patriarchs. Isn't achieving break-even in 6 months a bit ambitious? "We're confident we can do it because although our position was really bad last year, it included a lot of one-time restructuring costs and moving production to China," Dag tells Families in Business. If this fails is there a contingency plan? The brothers don't seem to work on this wavelength; "We will lose some profitability from the sale of Brio Educational, but from all the measures we've taken recently, we expect profitability to resume anyway. We have to stick to the opinion of the board that the plans we've put in place for 2004 will absolutely work," Dag concludes.

Old values, new market
Whatever, one cannot help but query some fundamentals. One striking difference between Brio and the rest of the toy market is the vision. Today in the 21st century, just as at inception, the company pledges to 'add value to children's lives', placing itself as 'the parents' partner' in its offering of the highest quality toys, rigorously tested, made with the finest materials and designed to maximise educational play for children up to seven years old. The most profitable companies in the market focus instead on crushing the competition by marketing blitz, constantly churning out new products on existing power brands to cater for children of all ages. Japan's Bandai is home to the Tamagotchi, Digimon and Hello Kitty crazes, while the world's biggest toy maker, Mattel (in addition to owning Fisher-price, My Scene and Matchbox), has taken its longest-serving brand Barbie from a conservative prom queen to seductive matriarch of a mega-cool girl's dynasty. This covers everything from Astronaut Barbie through to make-up, mobile phone ring-tones, clothing and even lap-tops.

These and most other leading rivals in the toy industry regularly pay billions of dollars to secure lucrative merchandise licenses on the back of children's film releases. According to research by NPD Group, 2004's international toy market will be buoyed by these licenses. "Licensed product generally comprises 25–30% of all toy product sales in any given year and helped keep the toy industry afloat in 2003," according to NPD senior analyst, Michael Redmond. "We expect licenses to show some very bright spots in the market in 2004 thanks to the myriad of kid-centric movie releases planned." So brands with universal long-term recognition and established mass-market share appear to have Brio in a proverbial headlock.

The brothers don't seem too worried about responding to the challenge. "While big-brand toys are a large part of the international toy industry today, it is not the whole of the market," Dag says. But Brio is in no state to turn its nose up to the new order. This year it finally reduced its famously high prices in preparation for a shift to distribution patterns more in line with the mass market.

The golden age
Brio's origins lie in the manufacture of wooden baskets. In 1884 17-year old Ivar Bengtsson established a business as a dealer in handmade baskets in a sleepy Swedish village, before moving his wife and three sons to Osby in 1902. Before long Ivar had begun offering other wooden products including a rocking horse in several different designs that reportedly became the best-selling toy in Sweden in the first half of the 20th century.

Large-scale emigration of Swedish families to America in the early 1900s meant the company was in danger of not being handed over to Ivar's sons: two of them had decided to follow suit. To keep them at home Ivar signed the company over to all three sons in October 1908 and the company entered the second generation under its current moniker – the Brothers Ivarsson Osby.

By 1945, Brio saw its first mass-produced toy, a wooden dog named Sampo, followed shortly by its iconic wooden ring stacking toy with the appearance of a clown. Growing interest outside of Sweden could now be met as the company warmed to mass production and both cross-country transport and telecommunications systems were well established. Inger Ivarsson, wife of third generation CEO Lennart, pioneered international Brio's international presence in her role as the company's first export manager.

Brio's popular wooden train sets with their magnetic connects became its signature toy, followed by the Labyrinth game (which have sold 2.5m worldwide). At home in the Nordic countries, Brio toys achieved the status of best-loved toys and a recognised brand; Carl XVI Gustaf, King of Sweden, was given Brio's SJ Express train set on his third birthday and the family was a known fan of the Labyrinth game. American, British and other European parents quickly warmed to their ethos of high quality toys, worthy of passing down generations. This global popularity – and higher than average prices – saw Brio grow healthily throughout the 1950s to the 1980s. Subsidiaries established throughout the Nordic countries and in Germany, Britain, Canada and France set the stage for the next decade which was to become the most profitable in the company's history.

Changing fortunes
Those same winning attributes became sticking points for Brio by the turn of the century with the advent of a new, brutally competitive and corporate-led business order. Brio's train sets and its prized Labyrinth game were being copied using cheaper materials and labour by companies with larger economies of scale behind them, and sold at prices with which the Ivarssons could not compete. The baby boom combined with a frenzied consumerism saw the advent of the hypermarket – Wal-Mart, Toys 'R' Us et al – selling hundreds of different toy brands cheaply and under one roof, making it as easy as possible to purchase toys with the family's groceries.

Toy companies were becoming heavily ensconced in television and media advertising, presenting untold play choices to children of all ages. Film merchandise licensing took grip and, sticking to its now uncompetitive ethos, Brio fell below the mass-market radar.

To their credit, however, the brothers took the dominance of licenses on board several years ago, managing to take part without compromising their cherished ideals. They now boast a stable of licenses including Playmobil in the Nordic region; Meccano in America; and Ravensburger jigsaw puzzles and board games in the Nordic region and across Poland. Most recently, the brothers signed a trademark license with the company that bought Brio Educational in April. This means the unit will continue selling Brio-branded toys for another ten years. On the entertainment side, the company scored a coup in 2001 when it signed up for the rights to use the Bob the Builder brand, shown in over 100 countries worldwide, on its wooden train and Builder toy ranges. Other licensees of the brand include Hasbro and Lego, so the company is now pitched more competitively against the market leaders. The company also confirmed this year that it will launch a license for the internationally-known cartoon Babar the Elephant – a move they expect to be successful.

Facing change
Brio has, however, missed some ideal opportunities. It failed to secure the coveted Thomas the Tank Engine license in the early 1990s and the board has decided not to renew its US licence for Bob the Builder at expiry this Christmas. The brothers acknowledge the growing pressures from this market and are seeking out more deals this year, albeit with caution.

"We must stay focused on combining high-quality toys with a long-term license because licenses are not only very expensive but carry a big risk of not paying off," Bengt says. "Some toy companies have been hit very hard by such deals. Star Wars is an example of a license that proved to be a disaster for all concerned." In 2001 Hasbro was forced to cut 850 jobs and reported a staggering US$23m loss attributed to poor sales of three leading products – one of which was its Star Wars portfolio. The company reportedly paid US$600m and offered 7.5% of company equity to brand owners LucasFilm for a 9-year license.

Facing competition
A second critical disparity between Brio and its market is its distribution patterns. The dominance of hypermarkets has all but killed off independent toy stores and smaller specialist chains cannot compete on price or choice. Focusing on its most stable relationship with parents willing to pay more for toys of higher quality and educational value, Brio has avoided distribution to the mass market in the US, sticking instead to the dwindling clutch of toy shops across Europe ex-Scandi and the US. It also owns an unsuccessful chain of own-brand stores across Norway, Sweden and Poland. Most of these are now being phased out or converted to franchises to allow the company to refocus on its historically more successful core wholesale business. Would exclusivity for Brio's discerning customer base really be eroded if the company stocked its wares in Wal-Mart? Hasn't this strategy proved too restrictive? The brothers are exploring this possibility and are currently in talks with some of the major hypermarket players but remain cautious about making such a fundamental change in strategy.

"Brio has historically focused on being a distribution business and during the first half of the 1990s we were the sole distributors for almost 50% of toys sold in Scandinavia, where we are already established within the mass market," explains Bengt. "We avoided hypermarkets to date because we have been able to fulfil the toy market as far as our production levels could go in Sweden and I'm not sure we could serve both hypermarkets and the speciality stores. We have recognised that our mistake was not responding to changing price and distribution issues, especially in the US," the director adds. "I think we now have to change with the times."

Dag concedes "The hypermarket's main selling point is price but that isn't our goal – we are about quality toys. We chose to stick with independent retailers that employ sales individuals who can talk about our products and explain their benefits to customers. Admittedly times have changed and we're examining different parts of the market and different revenue streams."

In view of the facts, the brothers' outlook could be seen as being a little too confident. "The international toy market is probably going to be quite stable in the next year and there doesn't appear to be any new big licenses to watch for. In our Scandinavian distribution business we are pretty stable," Dag says, before adding, "but the distribution patterns will continue and the hypermarkets across the US and Europe will continue to expand their dominance."

Depending on which attitude prevails, Brio could be on track to renewed stability – or stuck aboard the slow train.