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Toys & Games

Company Spotlight: On Scaling Niche to Mass

Since filing for an IPO last year, Funko has released some of its financial data and offered a few key insights on the fast-growing, ever-volatile market for pop culture collectible merchandise. Here are some of the top takeaways and most interesting tidbits gleaned from a licensee generating around $800 million in licensed retail sales a year.

While the company seems to occupy the most niche of markets—namely, low-price collectibles based on nerdy, geeky, or otherwise fanatic pop culture phenomenons—there is surprisingly broad appeal behind Funko’s business model that can be easily exploited, if done right. But as its financial sheets make clear, even if a company commands significant pop culture expertise, the licensing model turns out to be largely a betting game.

According to the NPD Group, the global collectibles market grew by 14% to $3.9 billion in 2017, thanks in part to properties like L.O.L. Surprise!, Hatchimals, and LEGO Minifigures. Collectibles accounted for about 8% of the total general toy market. On the licensed side, one licensee that helped the category grow is, of course, Funko.

Please note that any calculations in this story were made in reliance on publicly-available information and guided by proprietary insights on the part of TLL. Numbers should not be used to benchmark brand performance, but instead, offer guidance regarding relative scale when navigating the landscape of licensed brands in the licensed pop culture and collectibles space.

Breaking Down the Sales Figures

As of Q3 2017, Funko generated around $350 million in net sales worldwide—while we don’t have any numbers for Q4 yet, we will update the story when they are made available. For the 2017 holiday season, the company offered around 5,000 products across product categories including vinyl figures, action toys, plush, apparel, housewares, and accessories. Figures made up around 82% of 2016 net sales, and are expected remain at around 80% for 2017. More specifically, sales of Pop!-branded products accounted for approximately 64% of net sales for 2016.

Note that for 2017, Funko’s financial sheets include sales and expenses from new acquisitions Loungefly, Underground Toys, and A Large Evil Corp.—which makes a year-to-year comparison for certain financial metrics a lost cause. Sales outside of the U.S. constituted 20% of the total in 2017, and constitute a major area of potential growth. One interesting disclosure: For the nine months ended Sept. 30, 2017, the company recorded $2.7 million in net sales through U.K. retailer Forbidden Planet.

According to its IPO documentation, Funko did $426.7 million in net sales in 2016—and according to its latest Q3 2017 filings, $294.3 million in net sales for the nine months ended Sept. 30, 2016. That leaves $132.4 million in net sales to make an impressive Q4 2016. The company has historically generated around 60% of its net sales in Q3 and Q4. Assuming that the share of sales remains the same from year-to-year (30% of 2016 sales were made in Q4), that means Funko’s sales would go up 12% in 2017.

As a bit of background, Funko claims to hold active license agreements with over 110 different licensors covering around 1,000 properties. In any given quarter, however, the company is monetizing less than half of those, with just 300–400 licenses generating sales. On average, active properties generated $700,000 and $900,000 in yearly net sales in 2016 and 2017, respectively, not including sales during Q4 (the top-earning holiday period). In Q3 for 2016 and 2017, the average property generated around $400,000 in net sales. Presumably, then, the average net sales for a property would hover just over $1 million annually—yielding an average licensor tens of thousands in royalties for one property.

This is, of course, assuming that an “average” property exists. Given the relatively short life cycles of pop culture brands, the number of licenses it has on its roster, and the comparatively low sales it gets from each average property, it makes sense that Funko has a development cost of just $5,000–7,500 for new figurines. As discussed below, however, given its obligations as a licensee, the company expects that a set percentage of licenses will operate at a loss.

According to its filings, the company’s license agreements typically have short terms (2–3 years), are not automatically renewable, and, in some cases, give the licensor the right to terminate the agreement at will. While it is a pretty precarious position to be in as a licensee, such terms would presumably help lower minimum guaranteed payments and royalty fees by providing licensors with an acceptable trade-off: greater control. Funko reserves around $4.5 million on its balance sheet solely for ongoing and future royalty audits. And for the nine months ended Sept. 2017, it kept another $2 million on hand to pay out minimum royalty guarantees for agreements where the company estimated it could not meet sales targets—that is, for licenses operating at a loss.

The company is overly dependent on brick-and-mortar shelf space, citing the shift towards ecommerce as a key reason that its products have been given prominent shelf space over the last couple of years. At the same time, it acknowledges that its capabilities in that space are relatively few.

Like other licensees, the company will face a reckoning as retailers such as Barnes & Noble, which had previously embraced pop culture merchandise in stores, downsize their non-book offerings. On the other hand, retailers like GameStop reported double-digit increases in collectibles sales—and the specialty retailer is the largest individual distributor for Funko (while accounting for under 12% of sales). The next-largest retailers by volume are Hot Topic, Underground Toys, Walmart, and Target.

Top Brands

Somewhat fittingly, considering its niche pop culture focus, the collectibles company had an indie video game to thank for its financial success in 2016. Products based on Five Nights at Freddy’s generated approximately $63.1 million (or 15% of net sales) for the year ended Dec. 31, 2016. The game’s sequel was released at the end of 2016; Funko’s license for the franchise expires at the end of 2021.

For the full year 2016, Funko’s net sales came primarily from evergreen/classic (43% of net sales; incl. brands like Star Wars, Disney Princess, and Teenage Mutant Ninja Turtles), theatrical (24%; Guardians of the Galaxy, Coco, and Thor: Ragnarok), video game (20%; properties like Call of Duty and Overwatch apparently contributed to only 5% of total net sales), and TV (12%; Game of Thrones, Stranger Things) brands. Note that 1% of net sales came from “other,” undefined, brands.

Funko’s top ten licensors collectively accounted for approximately 70% and 80% of net sales for the nine months ended Sept. 30, 2017 and 2016, respectively. While Funko didn’t explicitly call out the House of Mouse as its biggest-earner, its combined licensing agreements for Disney, LucasFilm, and Marvel accounted for approximately 31% and 33% of net sales for the nine months ended Sept. 30, 2017 and 2016, respectively.

More recently, in Q3 2017, no single property made up more than 10% of sales. Of 400 active properties, the biggest-earners were evergreen/classic (44% of sales; incl. brands like Harry Potter), theatrical (27%; Moana), TV (14%; Stranger Things), and video game (14%; World of Warcraft) brands. Despite recent moaning and groaning over the allegedly poor performance of Star Wars-branded goods, the company reported that its figures sold more in 2017 than they had in 2015.

Demographics

The most surprising tidbit of data that Funko offered its investors was the average age of its consumer demographic: 35 years-old, or the forgotten Gen X. Its products apparently have broad appeal among men (49%) and women (51%), with 33% of consumers identifying as enthusiasts, 36% as collectors, and 31% as the occasional buyer.

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