Stonks…Hasbro – Like Taking Candy from a Baby

I’ve always been a fan of Hasbro. I’ve wanted to invest in the company because toys seem to be like they will always be en vouge in some way, shape, or form. And while the actual toy itself was likely to morph over time (it’s probably better for the company that toys morph over time), parents were still going to buy toys for their kids.

Especially millennial parents. That whole generation of emos (of which I am a part of) complain of never having anything. It’s true! I grew up feeling so deprived and always wanting. That new toy or video game, that new pair of sneakers. My parents would never buy them for me, claiming it was “too expensive”. So now, in order to avoid subjecting their kids to the same trials and tribulations they had growing up, millennial parents are likely to swing the pendulum to the opposite extreme and buy their kids all sorts of toys.

Society in general (at least here in the U.S.) has also gotten more sociable, at least with respect to play dates and birthday parties; things I don’t remember attending as often as a kid (perhaps I was…unpopular?), so overall, it seemed to be a boon for toy manufacturers, especially Hasbro.

And why Hasbro? Well, they had been partnered with Disney for so long, and continue to hold some of the master toy licenses. And if you don’t know, I’m very bullish on Disney.

So all of this made me bullish on Hasbro.

Sorry, if you were expecting a deep dive into their numbers, you’ve come to the wrong place. I’m here to give you the touchy-feely angle of stonks, looking for connections that others likely also see but aren’t talking about as much because the numbers are just so much more interesting. If you want the numbers, you’ll have to go out and find a data jockey to talk you through them because I won’t be doing that here.

What has recently (like in the last twelve months) is that they seem to be expanding their customer base to not just target children (and indirectly, their millennial parents), but now they’re also targeting middle-aged nerds.

Hasbro is currently employing a dual advantage strategy …well, Wizards of the Coast (a Hasbro subsidiary) has really been the one employing the strategy. One of the products Wizards of the Coast creates and distributes is a trading card game called Magic: The Gathering.

Prior to 2019, Wizards of the Coast distributed Magic: The Gathering cards through Draft booster boxes. Each draft booster box contained 36 booster packs with 15 cards per pack (for a total of 540 cards per Draft booster box). Let’s say this was the baseline product (i.e. “the average”) that was being distributed. Their distribution model as also such that they would sell the Draft booster boxes to distributors for approximately $75/box. The distributors would then turn around and sell the Draft booster boxes to local game stores for $85/box and finally, the local game store would sell those Draft booster boxes to the consumer for about $100/box.

However, since 2019, Wizards of the Coast released a new product/version of Magic: The Gathering cards – Collector booster boxes. This new product included new “treatments” or variants of the same cards that one would find in the Draft booster box, but because of these special “treatments” or variants, it’s created a situation where the consumer is willing to pay more for the product. The Collector booster box only contains 12 booster packs with 15 cards per pack (for a total of 180 cards). Wizards of the Coast is able to sell the Collector booster box to distributors for about $175/box. The distributors would then turn around and sell the box to local game stores for about $190 to $200 per box and finally, the local game stores would sell to the consumer for anywhere between $225 to $250 per box.

This new Collector booster box has created a situation where the actual cost of creating the product has decreased significantly (67% lower in cost because the Collector booster box only provides 33% of the actual number of cards that one would find in a Draft booster box – i.e. the cost leadership strategy), but because of the possible contents within the Collector booster box (in comparison to the Draft booster box), consumers are willing to pay the significantly higher price for the Collector Booster Box (i.e. the differentiation strategy), even though they are actually getting significantly fewer cards.

At the same time, Wizards of the Coast also announced a partnership with Amazon to directly distribute their products direct-to-consumer instead of through distributors as noted above (i.e. the Wizards of the Coast -> distributor -> local game store -> consumer path). I’d argue that this is also a differentiation strategy as other trading card game companies still use the more “traditional” distributor distribution strategy. This way, Wizards of the Coast is able to retain more of the actual revenue. For example, a draft booster box could be sold to Distributors for $75/box. However, by partnering with Amazon and having Amazon ship the product directly to consumers, Wizards of the Coast is able to sell a draft booster box for $100/box (the same price as local game stores), and the only added cost is the percentage (let’s say 15%), so Wizards of the Coast ends up netting $85/box instead of the original $75/box. This is even greater for them with Collector booster boxes, where instead of selling to the distributor for $175/box, they can sell direct to consumer for $250/box and net $212.50/box (assuming 15% Amazon fees) instead of $175/box.

This drive to employ both the cost leadership and differentiation strategies for Wizards of the Coast is due to a commitment from Hasbro’s CEO to “double Wizards of the Coast’s revenue…from 2018 to 2023.”

And you know why they can do this? Because their target market is no longer kids or teenagers with a limited budget. No, their target market now is middle-aged nerds, generally men, who have jobs and significantly more disposable income. This is because the game itself started in 1994. The game has been around for twenty-seven years…so people who were thirteen, fourteen, fifteen, were now in their early 40s, and likely more successful (in relative terms). So now, these middle-aged men, looking to revisit their childhood and teenage years are spending money by the fistfuls in an effort to capture that nostalgia…or you know…maybe they just still like the game.

Either way, they’re still spending money on the game, and in certain cases, significantly more money for either more cards or the “premium” versions of cards because they have the disposable income to do it.

Now a risk to all this is what many players are calling “wallet fatigue” as the number of Magic: The Gathering products released by Wizards of the Coast has been increasing over the last few years. However, Wizards of the Coast has defended this practice by indicating that each of the product is aimed at different sectors of the Magic: The Gathering market and coined the phrase “this product is not for you” (whatever marketing genius that came up with this saying must have been promoted and made the Global Head of Marketing). I get this, because Magic’s largest audience is a very casual group of players. People who occasionally buy a pack or two, then build a deck with whatever they have to play with friends. Wizards of the Coast is trying to capture more of this market by releasing a wide array of products to draw in the casual player. And they’re likely doing it at the expense of the enfranchised players. They’re also trying to draw people in from other genres in an attempt to continue growing the audience for the game.

From a player perspective, some of these choices seem questionable because it seemingly dilutes the game, but from a business perspective, which is the way we should be looking at it here, everything seems to be pointing in the right direction. More products, reduced costs with premium prices, and the ability to capture more of the direct revenue from the customer all seem to point to increasing earnings for Wizards of the Coast and Hasbro. Wizards of the Coast only makes up about 20% of Hasbro’s revenue, but they’re significantly more profitable than Hasbro’s toy segment.

Another risk is that Wizards of the Coast is following in a similar pattern to sports cards in the 90s. The one benefit Wizards of the Coast has though is that Magic: The Gathering is their own intellectual property, so they are the only company designing and printing Magic cards, but that doesn’t mean the company can’t still be greedy and price out players. With all the different treatments of cards in every set now, nothing seems to be special anymore. This is something the company has to manage. I’m honestly not sure if they’ll be able to see, seeing as how humans in general, especially those working in corporate entities, are greedy ass motherfuckers.

So the question remains, is Hasbro stock made for you?

That depends. Are you looking to invest in a toy company, or are you looking to invest in a company looking to make its money on the backs of hardworking geeks, but also has a toy/consumer division? If it’s the former, keep looking, because Hasbro would not be for you. If it’s the latter, welcome to the fold…