When the toy industry gets together for its annual hoo-ha this month in New York, participants will be looking at a sales picture considerably different from the one five years ago. Only a select few of those participants will call it a bright picture, among them TSR Hobbies Inc. of Lake Geneva, Wis.
TSR, which is still a minnow among whales in the toy business, has entries in two of the hottest segments of the business: electronic games and adventure games. That's why it will close its books this June with about $27 million in revenues, up more than 100%, and why it expects another doubling in fiscal 1983 to $60 million in revenues. Those two markets, plus a distinct lack of competition in its primary market, is also why TSR is probably one of the most profitable companies in the industry. "We're used to making outrageous profits," says chairman of the board Brian Blume.
Overall, the toy industry is dominated by 20 or so mostly large companies that generate most of the $7.5 billion in sales at the retail level, more than half at Christmastime. About 30% of those sales are in games (as opposed to toys in general), and a little more than $1 billion of that is split about even between electronic and nonelectronic games.
In the electronic game category, TSR licensed Dungeons & Dragons to Mattel Inc. last year for a wired-up version of their mainstay. Although electronic-game makers experienced a downturn in 1981 as a result of overstocking the year before, Mattel reported that it had sold out its entire production of tabletop electronic D&D s two months before Christmas. The company plans to double production for the next holiday season. For TSR, whose only responsibility for the game is to collect the royalties on it, that's quite a chunk of found money.
In the nonelectronic game category, TSR virtually created its own little industry when it first published Dungeons & Dragons in 1974. Before TSR came along, the only consumer role-playing games around were known as war games, which are very complicated games based on historical records of major battles. At the time, according to TSR's president, Gary Gygax, war games represented about $3 million in annual sales, about half of that generated by Avalon Hill Game Co.
Dungeons & Dragons has created a new category of games, referred to as adventure games. TSR holds a market share of more than 50%, and is more than likely to hold on to its share. The problem for competitors is unique, because of the nature of the Dungeons & Dragons game. Once players have learned the basic rules for D&D, it's very hard to make it worth their while to forget them and learn a whole new set of rules. And the game is so flexible that players can make up their own rules as they go along anyway.
TSR HOBBIES INC. INCOME STATEMENT
Fiscal year 1981 *
* FY 1981 was nine months because of a change in year-end. Statement does not include earnings of subsidiary.
Net sales $9,789,376 100%
Cost of sales 2,484,010 25
Gross margin 7,305,366 75
Selling and G&A expenses 5,599,245 57
Operating income 1,706,121 17
Other income (interest, 302,287 3
Net pre-tax income 2,008,408 21
Income taxes 955,000 10
Net income 1,053,408 11
All of this falls through to TSR's bottom line. As its 1981 income statement shows, TSR's manufacturing costs are only 25% of sales. Because the market is growing so fast, TSR can gain enormous advantages in unit costs through volume purchasing and manufacturing, an advantage the company says will be leveraged if it can successfully integrate backwards into manufacturing itself. Finally, because the company is young and creating its systems out of whole cloth, it needn't worry about the aging plant or unionized labor the older and larger companies must deal with.