Business

Hatchimals: this year's Christmas blockbuster toy — and a Canadian innovation

Spin Master is the Canadian toy company behind this year's international Christmas craze, Hatchimals. Although little-known outside business circles, the company is a Canadian success story now worth $3.5 billion.

Company behind ‘Hatchimals’ is a little-known Canadian success story

Spin Master co-founder Ronnen Harary holds the company's latest hit, the Hatchimal. (CBC)

Quick. Can you name the Canadian toy company that's growing faster than Mattel, Hasbro and Lego?  

No need to worry if you can't. But ask any child between three and nine years old and they probably can.  

Toronto-based Spin Master is the maker of this year's impossible-to-find Christmas toy, "Hatchimals," a furry little robot that hatches from an egg and responds to its owner's cues.

"We have an advance concept team, and they had the idea that wouldn't it be amazing if you could actually do an unboxing like you see on YouTube, but in real life?" explains co-founder and co-CEO Ronnen Harary. "And what would be more magical than a character that actually comes out of an egg and comes to life?"

A 'penguala' Hatchimal. (hatchimals.com)

As it turns out, the product and its popularity can be linked to YouTube. Amateur reviews of the toy uploaded to the video-sharing website boosted demand worldwide, says Harary. Now parents from London, England, to Fayetteville, Ga., to Corner Brook, N.L., are scouring stores, desperate to find one.

In the past 10 years Spin Master has gobbled up 15 other toy companies, including the iconic Meccano brand and Etch-A-Sketch. It also produces the highly rated Paw Patrol children's television series. But its public profile isn't nearly as dynamic as its growth.

"This is one of Canada's biggest success stories and nobody knows about it," says David McFadgen, a financial analyst with Cormark Securities.

Co-founders were in their 20s

Spin Master's founders barely seem to care whether or not their company is a household name.

"We [were] a private company for 21 years," explains Anton Rabie, now 45, who started the business along with childhood friend Harary shortly after they finished university. "And usually in the toy industry you promote based on the brand; you don't promote based on the maker's mark."

Both Rabie and Harary appear to be far more interested in revenue and expansion than public profile. Spin Master is worth $3.5 billion, and its biggest problem right now is not a bad one to have: Hatchimals have been sold out since mid-November and demand is through the roof.

"We've been on the phone with Asia every night," Rabie says. "We're increasing the capacity and we're air freighting."

Meanwhile some online re-sellers are exploiting the shortage to charge as much as $400 for the $80 toy. "Our goal is to ship in as much product as possible so everybody can get one for Christmas at the regular retail price," says Harary.

Thank you, K-Mart

Spin Master started selling shares on the Toronto Stock Exchange last year, but the story really begins in 1994, when Rabie and Harary launched their first venture: a novelty product called the Earth Buddy. A ball of soil with a glued-on face, its only trick was the ability to grow a head of hair made of grass. When K-Mart's American head office placed a massive order for a half a million of them, the company was off and running.

Spin Master co-founders Ronnen Harary and Anton Rabie, seen here with their first product — the Earth Buddy — started the company after graduating from university. (Spin Master)

Next came Devil Sticks, Air Hogs, Flick Tricks Finger Bikes and more, followed by numerous industry awards for innovation. Rabie and Harary, along with third partner and chief creative officer Ben Varadi, were inducted into Canada's "Top 40 Under 40" program in 2000. At the time they were the youngest entrepreneurs ever to receive the award.  

But it hasn't been glory all the way. A Polly Pocket-style toy called Key Charm Cuties was Spin Master's first "large scale financial failure," according to the company's own website. The site also notes that "when the item crashed at retail, tooling and media costs were significant, and a key lesson was learned: do not compete against the big players without a significant point of difference."

Today the company's entertainment division is booming. Financial analyst David McFadgen estimates that a full quarter of Spin Master's profits for 2016 will come from Paw Patrol, the television series it produces for pre-schoolers.

In all the company has five different TV series in production — a new one called Rusty Rivets has just launched on Nickelodeon and is set to air in 150 countries around the world.

McFadgen has a "buy" rating on the stock.

"The company is likely going to be making many more acquisitions," he tells CBC News. "And that will be another source of growth in the future."

Who's to blame for the Hatchimal shortage?

However McFadgen also estimates that the shortage of Hatchimals means the company has lost out on sales of between $3 and $9 million this holiday season.

No one is blaming Spin Master for not being better prepared for the craze, however. That's life in the toy industry, according to market analyst Michelle Liem of the NPD Group.

When the Earth Buddy was watered, grass seed on his head spouted into a hairstyle. (CBC)

"If you look back on the history of toys, it's always been very hard to predict," she says, noting that the 1996 rush for Tickle Me Elmo and the 1983 Cabbage Patch Kids frenzy also came out of the blue.

"Obviously if Spin Master had considered that there would be this big of a demand, they certainly would have planned for that, because they wouldn't want to be missing these lost dollars."

Demand climbed in tandem with YouTube views

Ronnen Harary points to YouTube reviewers as a major factor in the unexpected Hatchimal phenomenon.

"We started to see various different people creating videos with Hatchimals," he says. "There's probably over 35 million views on those YouTube videos. I would actually say as the video views went up — and the variety of videos went up— the sales started to go up. Everything worked in concert together, which is quite amazing."

Now the company is on the move again — literally. Team members are packing up their desks and memorabilia at the massive rabbit warren they've inhabited for the last many years, in order to move a couple of blocks to a shiny new home in downtown Toronto.

Anton Rabie says his new office will include a display of Spin Master's flops over the years. "We learned from all of them," he says proudly.

It's a safe bet that the showcase of successes will be quite a bit larger.

About the Author

Dianne Buckner has reported on entrepreneurs for two decades. She hosts Dragons' Den on CBC Television and is part of the business news team at CBC News Network.

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