Spin Master Corp T.TOY

ROB Article

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Spin Master’s CEO Ronnen Harary spent nearly 30 years building a toy powerhouse. Now he’s going to the next level with digital games

Launched 27 years ago on the back of a sock head stuffed with sawdust and grass seeds—pause here and try to imagine a humbler beginning than Spin Master’s first product, Earth Buddy—Canada’s whizbangiest children’s entertainment company has become a global powerhouse. It owns a 3.9% share of the world’s toy market, and now, thanks to a hit movie and a cache of popular digital properties, it has commandeered the screens of millions of preschoolers. Not that it’s been all fun and games for Spin Master. With net income declining steadily since 2017 and supply chains disrupted by COVID-19, co-CEOs Ronnen Harary and Anton Rabie vacated the C-suite earlier this year. Of course, a billionaire in motion usually stays in motion, and a toy company needs a constant stream of new products. That’s why Harary is focused on guiding Spin Master toward the area of its greatest growth potential—digital games—and why it recently launched Spin Master Ventures, to seed (if you’ll forgive another Earth Buddy reference) more innovation. You see, when it comes to mining the possibilities of toys and games, the company’s co-founder and chair isn’t playing around. Harary spoke to us from his apartment in Tel Aviv.

We’ve been in the midst of a global pandemic for about two years. What has that done for your business?

You know, it actually helped the sales. (1) There was a shift in discretionary spending. People were spending more time at home and not spending money on experiential activities. Part of those dollars went into toys. A lot of it went into games. So we saw a big uplift in our games business—chess, checkers and games like Hedbanz. Our mobile games division got a lift, which is Sago Mini and Toca Boca.

How is the supply chain crunch affecting you? (2)

So many discretionary dollars, and money given out from governments, went into the home, into renovations and consumer goods. That created a lot of congestion in shipping, and we’ve definitely been affected by it. We can’t ship all the demand, and definitely the cost of goods has gone up. I mean, freight costs are probably four times what they were a year ago.

Do you have products tied up in containers right now?

Probably. The big problem was during the summer. A lot of our FOB [Free on Board] goods, which were supposed to be picked up by the retailers, were just not getting picked up. June’s orders were getting pushed to July, and July’s were getting pushed to August and September. We’ve caught up. By next year at this time, we’ll probably be back to 80% or 85% pre-COVID in terms of the supply chain and congestions.

The holiday season is around the corner. What has you excited?

PAW Patrol has me excited. The movie did very well. (3) It was our first time doing a feature film, and the amount of awareness that got attributed to the film was very high. We’ve never partnered with a major motion picture company like Paramount, which goes out and advertises the firm globally. That has really helped the franchise.

Beyond sales, what’s the movie’s value to you?

The most important thing is the ability to tell a story in long format. You’re not doing an 11-minute episode; you’re doing 80 minutes on the big screen. How do you tell that long, arching story but stay true to the tone of PAW Patrol and the characters, and then give the kids something a bit deeper, where they can connect to those characters? Also, the fact that we produced it ourselves. We green-lit that movie without a studio partner on board. We took the risk financially. Our team produced it in Canada. We created the story. We found the writers, the directors, the animation studio—Mikros, in Montreal. PAW Patrol: The Movie was 95% Canadian. It’s an incredible thing. And now it gives us the ability to create future PAW Patrol films and the confidence to create other films based on other characters.

You’ve said you were the inspiration for the character Rocky, who you described as “not perfect, but he’s got a lot of heart.” What’s not perfect about you?

How much time do you have? Let’s start with I have a learning disability called dysgraphia.

Help me understand what that is.

It’s the inability for your hands to keep up with your thoughts. That’s why I love writers—I have a huge amount of respect for the ability to take a stream of consciousness and put it into the written word. My stream of consciousness gets interrupted. My hand cramps up, and my handwriting gets illegible. So, it really interrupts my thought process. It was very, very difficult to go through school. But it teaches you fortitude.

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In the past, you were described as “dour” and “all business.” I’m wondering how somebody with that personality ends up in the world of play.

I think I took myself a little too seriously for a lot of years. It took me a long time to not let certain emotions affect my management style. I had to do a lot of work on myself. I also think part of it is a mischaracterization. People are quick to judge. Because I’m shy, sometimes introverted and sometimes extroverted. Maybe they caught me on my introverted day. At my core, I am very youthful and very playful.

Recently, about PAW Patrol, you said: “The conventional norm is that you shouldn’t do a film for younger children like this, and we wanted to break the conventional norm.” What was norm-breaking about PAW Patrol: The Movie?

Typically a preschool property doesn’t make it to the big screen. The studios are always looking for a four-quadrant film. Two quadrants are not gonna bring in enough audience to pay for the costs of the film and advertising.

Quadrants, meaning?

Like, kids, parents, teenagers... This is a two-quadrant film—just parents and young kids. Anybody from 10 to 20 is not going to see this film. Four quadrants is a much broader spectrum of age groups. But the cost of animation has come down to a point where we were able to make the economics work.

Is there value, in general, in breaking norms?

It’s critical to moving things forward. Or else, as a business or as a society, people just get stuck, and things become stale. I think it’s dangerous not to break the norms and not to push forward.

How has Spin Master broken norms?

We had a very open mindset from day one. We made a few critical statements that have guided us for 27 years. The first was, we want to be open to ideas, wherever they come from. We never turn down an opportunity to get a pitch. We also said, we want to design and develop our own products; we want to create our own IP. That was really important for us. We said we wanted to be based in Canada but sell globally. The fourth thing was, we’re really into partnering with other people. We were always willing to earn a bit less, because we believe you can create something much bigger.

You mentioned creating your own IP. You’ve purchased a number of product lines lately, such as Gund and Batman. Why that shift?

As the company gets bigger, we’re always looking for diversification and for recurring, sustainable revenue. The toy part of the business can be a bit “excited”—I’ll use that word. You can get a product line that gets super-big, and then it tapers off. (4) Underneath that, you want to build a solid base of recurring revenue. That’s why we bought Gund, because it’s very stable revenue every year. We’re the largest manufacturer of chess sets, poker chips and puzzles in North America. Very stable business. Batman we didn’t buy, but we’re the licencee to make those toys. We’ve worked really hard to get those licences, to get Monster Jam, because they’re big chunks of business.

Apparently the North American toy market has been stuck at about US$22 billion since you began in 1994. Where are your opportunities for growth?

In digital games. We’ve seen some incredible growth in the past year. We’ve always wanted to get into gaming. We tried a number of times to do it internally, and we failed. In 2008 we probably put $10 or $12 million into building our own studio. We were gonna create a virtual skateboarding world for Tech Deck, our finger-board brand. It would’ve been great, but we didn’t have the fortitude to stick with it. So, in 2016, we bought Toca Boca and Sago Mini. Fifty-four million active people come into the Toca Boca universe. It’s a staggering amount of individuals playing our games.

Play is so formative for kids. Do you put thought into how a child’s mind will be developed by what you make for them?

I would say if the creativity is high in the toys, then that’s the bar for us. We don’t do learning toys. Our toys are fun, they’re playful. The most important thing about the toy part of the business is that it’s all about creativity, but it’s also about fantasy and sparking your imagination. We’re not heavyhanded, but we want to give kids something special, so their minds can go somewhere. That’s where the beauty is. We just need to provide dynamic elements and let the kid’s imagination flow from there. That’s our job. You got me passionate for a second.

How much room for imagination is there in the digital world?

I think quite a lot. I mean, Toca Life World, our biggest game, is all about imagination. There’s no scoring, there’s no competition, there’s no fighting. It’s basically a digital dollhouse for kids, and they create their own characters. They decorate their rooms. Kids are telling stories in Toca Life with the characters, and they’re filming themselves. They’re doing voiceovers, and then they’re uploading them to TikTok and sharing them with their friends. So, it’s another medium for self-expression.

At the beginning of the year, Max Rangel became Spin Master’s global CEO, while you and Anton Rabie shifted roles. But you’re still there, overseeing the same areas. What actually changed?

Quite a lot. Finance doesn’t report to me anymore. Legal doesn’t report to me anymore. Operations doesn’t report to me anymore. HR and sales don’t report to Anton anymore. All the functional reports in the C-suite are going into Max.

How hard was it to give up day-to-day control?

It was very difficult. But through a process and having some good people around me, I was able to transition. One of the most important things to myself, Anton and Ben (5) is to build a company that grows beyond its founders. We want to build a great Canadian company that’s built to last. And this is part of that evolution.

Is Spin Master Ventures part of your transition into other projects? Would it have happened without this shift?

It definitely gave space to actually think about Ventures. (6) We spent eight or 10 months figuring out how to do it right.

What sorts of trends are you targeting with Spin Master Ventures?

I don’t know if I would say “trends.” I would say it’s focused on the kid space. It’s focused on incredible entrepreneurs doing unique and dynamic things, and wanting to help grow those companies, and then potentially acquire them in the later stage. There’s so much innovation happening, you want to be part of it and not miss out on stuff and not be blindsided. I think trends is a much more limited scope.

“Trends” is the word your press release used. (7)

Okay.

It’s pretty remarkable that three people who started a company together 27 years ago are all still involved.

I have a whole thesis on why you should start a business in your twenties. The ability to form relationships is very easy. The ability to know a human being, to their core, is much easier. The reason the three of us are still together is because we have the same drive, the same values and integrity. Usually your friends are of the same ilk, and that’s the glue that keeps you together. Because this is the pitfall: You may not be friends in 10 or 15 years. Because it’s very taxing to be in a business relationship. But you know the person to the core, because you knew them at that very genuine age.

1. Total 2020 sales were down 4% from 2019, but Spin Master saw growth in digital games (193%); activities, games, puzzles and plush (12%); boys action and construction (6.2%); and outdoor products (5.2%).

2. In October, Hasbro announced supply chain disruptions had cost it US$100 million in lost sales in Q3. Harary declined to give a number for Spin Master, citing an upcoming earnings call.

3. Worldwide box office for PAW Patrol: The Movie as of October had reached US$130 million, with international sales more than double those in the North American market, where Paramount Plus is streaming the movie.

4. The typical lifespan of a hit toy is said to be three years.

5. The third co-founder of Spin Master is Ben Varadi, who continues as the company’s chief creative officer. Anton Rabie remains on the board.

6. Spin Master Ventures was launched in October with an initial US$100-million investment.

7. According to the company’s press release: “SMV’s investment mandate will be centred on medium and long-term trends, including emerging technologies, pioneering services and other areas where Spin Master’s offering can be strengthened.”