Pop Mart: How Today's Success Makes Higher Risks for Tomorrow [1/2]
Will the success of 'blind boxes' continue?
Over the past two years, Pop Mart (PM) has brought a surge in sales in the 'pop' toy (collectible figurines) market in China. In light of its recent filing for an IPO in Hong Kong, we aim to examine the merit and risks of PM and evaluate the business accordingly.
Business overview: PM is a China-based company mainly involved in the whole operation of 'pop toy' intellectual property assets.
► Commercializing IPs at a lower price has helped PM to significantly expand the pop toy consumer base, leading to explosive top-line growth for the past two years;
► Pushing in the upstream and downstream has created a comprehensive IP ecosystem, which helped PM with its margin expansion and created more energetic bottom-line performances for PM in the past two years;
► Store expansion rate decline, coupled with high dependencies on a few IPs can add on may encourage stagnation in growth rates in the long term.
Balancing price and trend to capture everyday consumers
In a sense, the rise of PM marks a change in concept of pop toys, allowing it to capture a much larger consumer population. Prior to PM, pop toys were usually limited editions and expensive (above 1,000 CNY); the consumer base was also an exclusive group of pop toy collectors.
With the vision of making quality but less expensive pop toys, PM reached a significantly more substantial consumer base. With wide coverage of retail stores and roboshops in tier-1 and tier-2cities, PM has made pop toys accessible to average consumers. With an affordable price tag of 50-100 CNY for a quality pop toy, PM has made purchasing decisions very easy for consumers who, in the past, appreciated the products but lacked incentives to buy.
Also, PM's products successfully stretch the age of the typical consumer group from very young to older kids and even adults. A survey shows 95% of its consumers are between the ages of 15 and 40. This is one influential factor that turns PM's business model into reality. Adults and older kids typically have higher purchasing power than those who are younger and need to get their parents' permission for purchasing toys. PM's toys are high quality and have fashionable designs, but priced highly enough to drive its high margins, with customers willing and able to decide using their own money to purchase the toys. Coupled with the thrill of acquiring new characters and the care put into design and packaging, the success of the 'blind boxes' and their pricing strategy becomes clear.
The ecosystem is an economic moat
PM experienced an exponential revenue increase, with an 11x boost from 2017 to 2019, as an even-better net income increased by 14.5x, and net income increased by 289x. When PM began acquiring IPs and partnering with designers for exclusive IPs in the upstream, it was able to save costs compared to its previous pure retail business and increased its margins significantly.
Before 2014, PM was a chain retail store that mainly sold fashionable and interesting toys and accessories to young customers. This was a popular model, as more post-95' consumers are spending their money on small toys or unique appliances – but just like PM, other companies like 1983 (19八3) were also eyeing the same prize. The competition was stiff and business was not taking off.
In 2015, sales grew exponentially due to PM's partnership with Sonny Angel, a popular Japanese pop toy maker at the time. This partnership has brought much success to the company, and it kicked off PM's transformation from a dealer to an IP owner.
Following the Sonny Angel collaboration, PM efficiently located the demand for Molly, an IP designed by a Hong Kong pop toy designer Kenny Wong. It signed an exclusive IP deal with Kenny and commercialized Molly in a matter of months, and the breathtaking business engine kicked off.
Sales grew by 225% in 2018 and 227% in 2019, compared to an estimated 34.6% of industry CAGR from 2015 to 2019, per Frost & Sullivan. This sharp growth in revenue cannot be separated from PM's accurate discovery of fashionable designs with great potential that can be commercialized. Its following successful purchase of several other exclusive IPs helped the company to be distinguished from other smaller shops and has made the 'blind box' a new shopping idea that has been recognized by consumers in recent years. The rapid bottom-line growth has been driven by the firm's more-than-ten-year retail management experience.
Its gross margins were 58% in 2018 and 65% in 2019, along with net margins of 19% and 27% for these two years, respectively. The completion of the whole ecosystem for IP with this upstream expansion also provides the company with higher bargaining power. Being the largest IP operator and the highest market share (8.5% per prospectus) in China with the most sales-generating pop toy downstream network, PM has increasingly become the destination for top IP designing talents.
This article is part I of our analysis on Pop Mart (PM). Please continue to part II.