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LEGO Group is the longtime leader in the construction toy category for Latin America and has maintained double digit growth in sales for multiple years. (Photo: Alan Chia)
Wednesday, October 21, 2015
Special Reports

Latin America: LEGO, Video Games Grow

Construction toys, led by LEGO, and video and mobile games help drive growth in Latin America’s toy and game market.

BY ALIXA SHARKEY

While sales of traditional toys and games in Latin America are strongly correlated with economic performance and changes in disposable income, sales of video games seem to play by a different set of rules.

Sales of toys and games grew in 2014 buoyed by significant growth in video game sales while traditional toys and games sales floundered. In spite of stagnated economic growth this year, sales of toys and games are projected to grow in 2015 and beyond.

SLOWDOWN HITS TRADITIONAL TOYS

Traditional toys and games (e.g., action figures, dolls, games, plush toys) are not viewed as basic necessities and therefore sales of these products in Latin America are strongly dependent on each country’s economic performance and changes in disposable income. In 2014 we witnessed varied performance in this industry across the region. Latin America as a whole experienced real GDP growth of 1.3 percent, significantly lower than the 2.9 percent growth of 2013. This slowdown in economic growth and decline in disposable income led to a negative performance for traditional toys and games in the region, posting a decrease of 1.8 percent in constant US dollar sales.

Brazil’s stagnant economy in 2014 was reflected in traditional toys and games sales, with flat growth in constant terms. The drop in the Brazilian Real against the US dollar further exasperated the situation, raising prices for toy importers and domestic toy manufactures who import parts from abroad. With rising prices, consumers turned to less expensive toy options, with low and mid-priced toys faring better than more expensive price bands. Brazil’s real GDP is expected to contract 3 percent in 2015 with energy shortages, waning exports, and cutbacks in public spending. This will result in further decreases in spending on toys and games.

Consumer spending in Argentina has been adversely affected by incredibly high inflation which has eroded disposable income. Prices of toys and games increased dramatically in 2014 due to the increased price of imports, costs of local manufacturing, and reduced product availability due in part to import restrictions. For these reasons toys and games value sales decreased 0.9 percent in 2014 in constant terms. Sales are expected to decline even further in 2015 as the adverse economic environment remains unchanged.

Mexico, on the other hand, showed a positive performance in 2014 due to improving economic conditions. Consumer confidence returned as the real GDP grew 2.1 percent. Traditional toys and games sales saw the largest year on year increase in recent years, with an increase of 3.6 percent in constant terms. Continued positive economic performance is expected to buoy traditional toys and games in 2015 and through the next few years.

Through 2015 and the following years growth in toys and games sales will remain muted as economies continue to struggle and recover. The economic forecast remains dubious for Argentina, Brazil and several other countries in the region; while Mexico is showing a positive outlook.

CONSTRUCTION TOYS GROW

The birthrate in Latin America has been declining steadily with a 7.2 percent decrease in births per 1000 people between 2009 and 2014.  Due to the decline in birth rate, the proportion of the population between the ages of 0 and 14 years has also been decreasing; while this age group accounted for 28.4 percent of the population in 2009, it only accounted for 26.5 percent in 2014. With fewer children to buy toys for and with increased knowledge about child development, parents, grandparents etc., are choosing to spend money on toys and games that will not only serve to entertain but will also educate and help develop skills.

This trend can be observed in the increased spending on construction toys and education and scientific toys, the traditional toys and games categories with the highest growth in Latin America in 2014. With an increase in constant value sales of 13.6 percent according to Euromonitor International, growth in construction toys sales was significantly higher than any other traditional toys and games category in 2014. Despite the difficult economic conditions discussed above, consumers continue to invest in this category, while growth in other categories stagnates or declines. It is believed that construction toys will foster creative play and help develop problem-solving skills and fine motor skills and therefore consumers are more willing to invest in these toys. 

LEGO Group is the longtime leader in the construction toy category for the region and has maintained double digit growth in sales for multiple years. 2014 sales were propelled by the release of The Lego Movie in February of that year. In 2014 LEGO group expanded the production capacity of their factory in Ciénega de Flores, Nuevo Leon, Mexico, which supplies both Latin America and North America. Local production in Mexico helps lower costs for local consumers and increases brand awareness. While Lego is not manufactured locally in Brazil, margins are kept low to ensure the product is accessible to a larger demographic. In Brazil, Lego benefits from a wide distribution network and strong brand awareness that is reinforced through Lego’s global advertising partnerships with films and the video game industry. In Argentina the construction toy category is led by Dimare SA, a local producer, with its brands Blocky, Rasti, and Armatron. Due to this local production, construction toys is the category least dependent on imports and therefore least affected by the rising costs of imports in Argentina.  

This trend is not expected to change in the coming years. Euromonitor International expects that construction and science and education toys will remain the highest growth categories within traditional toys and games through 2019 with respective compound annual growth of 8.3 percent and 3.2 percent expected for Latin America. 

NEW CONSOLES SPUR VIDEO SALES

Video game hardware and software sales seem to play by a different set of rules than traditional toys and games. While sales of traditional toys and games declined in constant terms in 2014 due primarily to poor economic performance, video game sales showed strong growth propelled largely static video game console sales.

As in many other parts of the world, the gaming population in Latin America has expanded. The demographic shift can be seen in the increased average age of gamers and the increased number of female gamers. As the gaming demographic has aged, it has also developed greater purchasing power.  As a result, gamers are able to seek out the latest technology and games as soon as they reach the market. The time lag between international launches and availability in Latin American countries is decreasing, allowing consumers to purchase products more quickly and further driving demand for the latest products. The release of the latest generation game consoles at the end of 2013 led to 22.9 percent growth in constant terms for static video game consoles in Latin American in 2014. 

Video game sales in Brazil were strong in 2014, despite the decline of the Brazilian Real against the strong US dollar which led to increased unit prices for both video game hardware and software in 2014. Increases in unit price occurred in Argentina as well due to high inflation and import restrictions. Video game sales in Argentina in 2014 were primarily driven by demand for video game hardware. Import restrictions in Argentina on game software resulted in growth for PC and console game downloads, though PC and console game downloads remain a small percentage of total game sales.

Despite difficult economic conditions in 2015, Euromonitor International forecasts continued growth for video games in Latin America through 2019. Short term growth will be driven by innovations in software and new game launches. Growth in console sales will wane as we move further from the PlayStation 4 and Xbox One launch dates and these consoles reach market saturation.  Forecasted growth for Argentina remains low as the country enters recession in 2015 and gamers have decreased purchasing power.

MOBILE GAMING

Though mobile gaming only accounted for 4.9 percent of video game sales in Latin America in 2014, it is the fastest growing video game category with significant room to grow as mobile device penetration continues to expand. Household penetration of smartphones has risen exponentially in Latin America over the past few years, Brazil, for example, has seen household penetration of smartphones increase from 35 percent in 2012 to 130 percent in 2015. While household penetration of tablets remains lower across the region, it is also experiencing significant year on year growth.

With increased smartphone and table penetration, the potential mobile gamer population continues to expand. The gaming population has expanded to include all ages and more females. This expansion contributed to the 25.4 percent constant value growth seen in 2014 and will continue to play a role over the next few years as the category continues to growth with a 17.7 percent CAGR through 2019.

Alixa Sharkey is an analyst at Euromonitor International. This article was written for Latinvex. 

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