Disney Frets as the Mouse Ears Wear Thin at Its Retail Stores
For years, it has been an increasingly important cog in Walt Disney Co.’s well-oiled entertainment machine. Whenever the company releases a hit animated film, scores of figurines, pajamas, clocks, lunch boxes and toys appear in the windows of its retail stores in malls throughout the U.S. in an effort to squeeze out every possible merchandising dollar.
But lately the engine has been running out of steam. The Disney stores aren’t the hugely profitable operations they once were, and some analysts believe the trend of entertainment companies selling their products in their own venues is a fad showing its age.
“The novelty of it has worn off over time,” said Barry Hyman, market strategist with New York money manager Ehrenkrantz King Nussbaum Inc. “The foot traffic has slowed down. Themed stores usually work for only a short period of time.”
Analysts see more promise with wares being marketed over the Internet.
They suggest that both Disney and Warner Bros.--the two Hollywood studios that dived head-first into the retail store business in the late 1980s and early 1990s--have over-exploited their library of characters, from Mickey Mouse to Bugs Bunny, and saturated the market, failing to refresh the stock and keep up with trends.
Wall Street analyst Jessica Reif Cohen of Merrill Lynch said sales at Disney stores open at least a year have been down more than 10% in the last couple of quarters, a troubling development that has prompted Disney Chief Executive Michael Eisner--who spends time walking through the stores of Disney and its competitors--to take a more direct role in trying to figure out how to reverse the trend. As of early this year, Disney has a new management team focused on taking a top-to-bottom look at the merchandise, insiders say.
“Eisner knows the merchandise is tired and doesn’t have the excitement it used to,” a Disney investor said.
Prudential Securities analyst Katherine Styponias, noting that Disney has been working on how to reverse problems in its consumer products division (which includes licensed merchandise as well as the stores), said in a report last week: “We are still unsure as to how long these issues take to work themselves out.”
Other analysts agree that there doesn’t seem to be a quick fix.
Disney declined to comment, but executives said privately that the stores remain profitable, albeit not nearly as much as in the past, and that the sales are softest in the U.S., where two-thirds of its stores are located. They say sales have improved in Europe and are recovering in Asia, where they were hurt by the recent economic crisis. Store closings aren’t expected in the U.S., the sources say, although the company may move some to better locations when leases expire.
Sources also say the company believes the Internet will supplement the stores, not replace them, and that the stores can be reinvigorated, as successful retailers do every few years. Indeed, the new management team has been working to freshen the merchandise, plans to spend less time chasing fads such as bean-filled characters, and wants to find new ways to market classic Disney characters such as Mickey Mouse, Snow White and Cinderella.
“We let the scales tip too much. We were putting far more behind movies because they were new and were walking away from our classic heritage,” one executive said.
One reason they cite for problems in the U.S. was a major slowdown this year in the sale of bean-filled Disney characters. Indeed, a large part of the sales at Disney stores over the last two years has been driven by Winnie the Pooh merchandise, insiders say.
Warner Bros., though a distant second to Disney in the store arena (180 stores worldwide compared with 713 for Disney), is grappling with similar problems. Like Disney, Warner is concentrating on revamping and expanding its product line beyond its classic Looney Tunes characters. It helps that Time Warner owns three different movie-producing entities: New Line Cinema, the company behind the powerhouse “Austin Powers” series; Castle Rock; and, of course, Warner Bros., which supplies TV shows as well as movies.
The problem Warner has faced is that while it built 140 stores in the United States (and largely franchised another 40 abroad), it never bothered to expand them. The company has no plans to open any new stores.
In the first quarter of 1999, revenue for the stores was virtually flat, down a slight 1%, according to a Warner spokesperson. However, licensing (which Warner reports separately) was up more than 10% for the comparable period.
Both Disney and Warner face the reality that movie-related merchandise they license has proliferated in other stores, especially in discount chains such as Wal-Mart, which means consumers may opt to shop there. Disney sources say their stores, which generally charge more than discount retailers, is aimed heavily at the gift business and often offers items not available elsewhere.
Other entertainment giants, such as Sumner Redstone’s Viacom Inc., have dabbled in the retail business and given up when they failed to catch on with consumers. Disney also has been developing ESPN stores, aimed at sports fans, especially young males, who watch its sports network.
But Disney is clearly the industry bellwether. Consumer products were once viewed as icing on the cake when the company had a hit movie. They also provided the company an annuity in the form of sales of merchandise from past hits such as “Snow White and the Seven Dwarfs,” “Beauty and the Beast,” “Cinderella,” “The Lion King” and “101 Dalmatians.”
Now it’s become clear to investors and Wall Street that the company has become increasingly dependent on sales of merchandise and the performance of its stores to bolster its bottom line. Indeed, one of several reasons why Disney’s profit has been down lately and its stock has suffered is its lagging consumer products business. (Another is a slowdown in its home video business.)
As Disney tries to sort out the problems with its stores, the company is about to release its next major animated film, “Tarzan,” which has been getting good reviews and generated good buzz in Hollywood.
But that merchandise was overshadowed by toys and products pegged to “Star Wars: Episode I The Phantom Menace.” Indeed, Disney executives concede toy retailers bought light on “Tarzan” and other movie merchandise, channeling their dollars toward “Star Wars” products.
Some of Disney’s animated films of recent years, among them “Hercules,” “The Hunchback of Notre Dame” and “Mulan,” have failed to drive sales the way earlier offerings such as “The Lion King” and “Aladdin” did. Some analysts believe Disney overdid it with some of those movies by cutting too many licensing deals. For “Hercules,” the company had a staggering 85 licensees for everything from candy bars to sandals.
“Pocahontas” merchandise moved well, which may be largely attributable to the movie’s having followed “The Lion King.”
Disney, of course, is hoping that if “Tarzan” is a big box-office hit, retail sales will catch up with the movie over the holiday season, which is what happened with “Toy Story” after the film became an unexpectedly huge success. Disney executives also hope that because toy retailers didn’t buy much “Tarzan” merchandise, the Disney stores will benefit because they will have more items not available in other stores.
Some analysts believe that for Disney and other entertainment firms, the Internet offers more promise than stand-alone stores as a place to sell its merchandise.
‘Why do you need a physical store when people know the products?” Hyman said. “You know the Disney products. You know the toy and the dolls. You know what they look like, and that is a business designed for the Internet.”
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A Store’s Life
Are the Disney stores running out of steam? They aren’t as profitable as they once were, and some analysts think the novelty is wearing off. The troubles at the stores reflect a wider cooling in merchandising profits from Disney’s animated features. Profits from consumer products in recent years, in millions of dollars:
1992: “Aladdin”: $110
1994: “The Lion King”: $250
1995: “Pocahontas”: $180
1995: “Toy Story”: $100
1996: “Hunchback of Notre Dame”: $100
1997: “Hercules”: $85
1998: “Mulan”: $85
1998: “A Bug’s Life”: $110
Source: Analysts and other industry sources
