A turnaround story for Funtastic

Founder and Chief Investment Officer of Montgomery Investment Management
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Christmas is a magical time of the year. Yet when the excitement of Christmas morning abates, and the wrapping paper is left discarded in a frenzied mess on the floor, which of the gifts will the children play with? How long does it take the must-have to become the must-had?

Brand power

This demand for continual change creates a difficult operating environment for toy manufacturers. Considerable resources are spent on the development of toys, which often have a very short shelf-life. The key to generating long-run profitability is developing a product that has a lasting connection with the customer base.

Think about the longevity of brands like Barbie, which has been around since 1959. Mattel owns the Barbie brand, and has developed a very sustainable model by combining a core product with sufficient innovation to stimulate demand. While Barbie may not be the must-have product this season, Mattel’s long-term focus means that it will still feature prominently beneath the tree this Christmas.

Funtastic (ASX:FUN) is an Australian toy producer that traditionally relied on short-term promotions to generate sales. The company had poor inventory management, which meant they were overstocked when the “must-have” hype subsided.

This issue was compounded by the company’s reliance on debt, which left Funtastic close to bankruptcy after the GFC. The promotion-driven strategy left the company in such a poor financial position and it is yet to satisfy our investment criteria at Montgomery Investment Management.

Funtastic (FUN)

A change of direction

Management has since realised the impediments of this promotion-driven strategy, and has endeavoured to build a portfolio of core brands across its media and toy divisions. Funtastic is now purchasing brands, rather than distribution rights, so it can drive innovation of its core products over the long-term. This strategy is starting to generate meaningful returns.

The foundation of this strategy has been the Pillow Pets brand, which has the hallmark of a sustainable asset. A Pillow Pet is a pillow in the shape of an animal that appeals to both boys and girls. Children carry these pillows wherever they go, and in the process develop very close bonds with the brand.

Like Mattel, Funtastic has stayed true to this core product, but has broadened the offering by incorporating Disney characters and a glow-in-the-dark range. Pillow Pets accounted for half of the Toy Division’s revenues in the 2013 financial year. Funtastic is now hoping to emulate this success with a new “must-have” product this Christmas.

“Chill Factor” is a silicon gel cup that makes slushies in minutes. The product was launched in May 2013, and has since sold 2.4 million units worldwide. Funtastic acquired the brand for $10 million and it intends to drive innovation like it did with Pillow Pets. Its first will be the launch of an Ice Cream Maker in December.

A brighter future

If the company can establish a deep connection with the consumer, by making the Chill Factor synonymous with summer, it may become a profitable long-term venture.

If your child receives a Chill Factor from Santa this year, take note how popular it remains after Christmas Day. If it is well used in the subsequent months, then Funtastic may have a winning acquisition on its hands!

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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