Hasbro 2007 Annual Report Download - page 13

and other entertainment. Royalty expense in 2007 and 2005 was more significant in those years due to the
release of SPIDER-MAN 3 and TRANSFORMERS in 2007 and STAR WARS EPISODE III: REVENGE OF
THE SITH in 2005 and the corresponding increases in sales of the related products in those years.
Marketing and Sales
Our products are sold nationally and internationally to a broad spectrum of customers, including
wholesalers, distributors, chain stores, discount stores, mail order houses, catalog stores, department stores and
other traditional retailers, large and small, as well as internet-based “e-tailers.” Our own sales forces account
for the majority of sales of our products. Remaining sales are generated by independent distributors who sell
our products, for the most part, in areas of the world where we do not otherwise maintain a direct presence.
While we have thousands of customers, including over 2,000 in the United States during 2007, there has been
significant consolidation at the retail level over the last several years in our industry, which we expect to
continue. As a result, the majority of our sales are to large chain stores, distributors and wholesalers. While
the consolidation of customers provides us with certain benefits, such as potentially more efficient product
distribution and other decreased costs of sales and distribution, this consolidation also creates additional risks
to our business associated with a major customer having financial difficulties or reducing its business with us.
In addition, customer concentration may decrease the prices we are able to obtain for some of our products
and reduce the number of products we would otherwise be able to bring to market. During 2007, sales to our
three largest customers, Wal-Mart Stores, Inc., Target Corporation and Toys “R” Us, Inc., represented 24%,
12% and 11%, respectively, of consolidated net revenues, and sales to our top five customers, including
Wal-Mart, Target and Toys “R” Us, Inc., accounted for approximately 52% of our consolidated net revenues.
In the North American segment, approximately 70% of the net revenues of the segment were derived from our
top three customers.
We advertise many of our toy and game products extensively on television. Generally our advertising
highlights selected items in our various product groups in a manner designed to promote the sale of not only
the selected item, but also other items we offer in those product groups as well. We introduce many of our
new products to major customers during the year prior to the year of introduction of such products for retail
sale. In addition, we showcase many of our new products in New York City at the time of the American
International Toy Fair in February, as well as at other international toy shows.
In 2007 we spent $434,742 on advertising, promotion and marketing programs compared to $368,996 in
2006 and $366,371 in 2005.
Manufacturing and Importing
During 2007 substantially all of our products were manufactured in third party facilities in the Far East,
primarily China, as well as in our two owned facilities located in East Longmeadow, Massachusetts and
Waterford, Ireland.
Most of our products are manufactured from basic raw materials such as plastic, paper and cardboard,
although certain products also make use of electronic components. All of these materials are readily available
but may be subject to significant fluctuations in price. We generally enter into agreements with suppliers at the
beginning of a fiscal year that establish prices for that year. For this reason, we are generally insulated, in the
short-term, from increases in the prices of raw materials. However, severe increases in the prices of any of
these materials may require renegotiation with our suppliers during the year. Our manufacturing processes and
those of our vendors include injection molding, blow molding, spray painting, printing, box making and
assembly. We purchase most of the components and accessories used in our toys and certain of the components
used in our games, as well as some finished items, from manufacturers in the United States and in other
countries. However, the countries of the Far East, and particularly the People’s Republic of China, constitute
the largest manufacturing center of toys in the world and the substantial majority of our toy products are
manufactured in China. The 1996 implementation of the General Agreement on Tariffs and Trade reduced or
eliminated customs duties on many of the products imported by us.
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