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Hello Kitty in Mid-Life Crisis as Sanrio Changes Strategy

By Chris Shimamoto
May 23, 2014 4:27 AM EDT 3 Comments
A Sanrio Co. Hello Kitty figure made of Swarovski crystals is on display during the 'SWAROVSKI presents "House of Hello Kitty"' event at Omotesando Hills in Tokyo, Japan.
Photographer: Junko Kimura/Bloomberg
A Sanrio Co. Hello Kitty figure made of Swarovski crystals is on display during the 'SWAROVSKI presents "House of Hello Kitty"' event at Omotesando Hills in Tokyo, Japan.

Hello Kitty is having a mid-life crisis.

Sanrio Co., the owner of the 39-year-old white cat character with no mouth and a red bow on her ear, has made a fortune licensing its brand to other companies, letting them bear the risks of making and selling the goods. Now, it’s shifting strategy to sell more of its own merchandise, prompting the biggest stock drop in 19 years and wiping almost $450 million off its market value yesterday.

“If you do it yourself and start advertising and opening up stores, you could lose a lot of money,” said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo. “If you’re licensing, you don’t take any risks. It’s been a great short-cut to growth.”

Sanrio plunged 16 percent yesterday in Tokyo after it gave a presentation announcing a plan to expand its “core business,” in retail stores, including advertising, greeting cards and expansion of sales channels. The shift represents a move away from the licensing strategy that more than doubled operating margin, which averaged 27 percent over the past five quarters, according to data compiled by Bloomberg.

The shares rose 1.1 percent to 2,627 yen as of the close in Tokyo trading, while Japan’s Topix index gained 1 percent.

Founder Shintaro Tsuji’s Sanrio reduced the reliance on marketing Hello Kitty goods as licensing revenue climbed. The company is now going back toward creating and marketing its own goods.

“The changes are part of our effort to supplement the licensing business, which is our profit driver,” Hideo Yamaguchi, a spokesman for the Tokyo-based company, said yesterday.

Higher Costs

The shift raised concerns that costs would rise as the company moves beyond licensing, Sho Kawano and Jingyuan Liu, analysts at Goldman Sachs Group Inc., wrote in a May 21 note.

“We see little prospect of a rapid turnaround given that this is a transition period,” Kawano and Liu said. The death last year of Kunihiko Tsuji, the founder’s son and the company’s vice president, left overseas operations under the sole charge of Vice Chairman Ray Hatoyama, they said.

They lowered their 12-month target price from 3,800 yen to 3,200 yen, also citing sluggish U.S. sales as a negative factor. The shares closed at 2,598 yen yesterday.

Sanrio surged 61 percent last year, after dropping 31 percent in 2012 and more than doubling in the previous year.

Profit Targets

Sales of Sanrio, also the creator of the Little Twin Stars and My Melody, will probably rise 3.4 percent to 79.6 billion yen ($782 million) for the year ending March 2015, compared with 3.7 percent growth a year earlier, the company said on May 15. Operating profit will increase 4.7 percent to 22 billion yen, the company forecasts.

Investors could be concerned that the company’s profit targets may no longer be achievable, Mia Nagasaka, an analyst at Morgan Stanley MUFG Securities Co., wrote in a note to clients, after the company held a briefing on May 21.

Sanrio has become too dependent on its flagship character, said Amir Anvarzadeh, manager of Japanese equity sales in Singapore at BGC Partners Inc.

“You have to grow your revenues beyond one particular character,” he said. “They’ve done so much with Hello Kitty that what they can still do is limited.”

Within Japan, Hello Kitty’s star is still rising. The iconic cat was the country’s third-highest grossing character last year, up from No. 4 in the previous year, according to the Character Databank, a marketing consulting company.

Pop singer Lady Gaga and reality television performer Paris Hilton drew attention to the brand by participating in Hello Kitty’s 35th birthday celebrations in 2009. Singer Avril Lavigne more recently released a music video called Hello Kitty.

“They’ve been pretty good at keeping the brand at the forefront,” said John Easum, CEO of brand management firm One Bridge. “They’re going to continue to find new ways of making Hello Kitty exciting for new demographics.”

To contact the reporter on this story: Chris Shimamoto in Tokyo at cshimamoto@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net; Frank Longid at flongid@bloomberg.net Dave McCombs

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