Hasbro 2013 Annual Report Download - page 19

In addition to the design and development work performed by our own staff, we deal with a number of
independent toy and game designers for whose designs and ideas we compete with other toy and game
manufacturers. Rights to such designs and ideas, when acquired by us, are usually exclusive and the agreements
require us to pay the designer a royalty on our net sales of the item. These designer royalty agreements, in some
cases, also provide for advance royalties and minimum guarantees.
We also produce a number of toys and games under trademarks and copyrights utilizing the names or
likenesses of characters from movies, television shows and other entertainment media, for whose rights we
compete with other toy and game manufacturers. Licensing fees for these rights are generally paid as a royalty on
our net sales of the item. Licenses for the use of characters are generally exclusive for specific products or
product lines in specified territories. In many instances, advance royalties and minimum guarantees are required
by these license agreements.
In 2013, 2012 and 2011, we incurred $338,919, $302,066 and $339,217, respectively, of royalty expense. In
2013, royalty expense included $63,801 related to the settlement of an arbitration award for a dispute between the
Company and an inventor as well as the amendment of its license agreement with Zynga. Our royalty expense in
any given year may also vary depending upon the timing of movie releases and other entertainment media.
Marketing and Sales
As we are focused on re-imagining, re-inventing and re-igniting our many brands and imagining, inventing
and igniting new brands, we have a global marketing function which establishes brand direction and messaging,
as well as assists the selling entities in establishing certain local marketing programs. The costs of this group are
allocated to the selling entities which comprise our principal operating segments. We also maintain sales and
marketing functions in our selling entities which are responsible for local market activities and execution. Our
products are sold globally 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,
the majority of our sales are to large chain stores, distributors and wholesalers. While this concentration of
customers provides us with certain benefits, such as potentially more efficient product distribution and other
decreased costs of sales and distribution, this 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 2013, net revenues from our three largest customers, Wal-Mart
Stores, Inc., Toys “R” Us, Inc. and Target Corporation represented 16%, 10% and 9%, respectively, of
consolidated net revenues, and sales to our top five customers, including Wal-Mart, Toys “R” Us, Inc. and
Target, accounted for approximately 39% of our consolidated net revenues. In the U.S. and Canada segment,
approximately 61% of our net revenues were derived from these top three customers.
We advertise many of our toy and game products extensively on television. In addition, we engage in digital
marketing and advertising for our brands. 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. Hasbro Studios produces television entertainment based primarily on our
brands which appears on Hub Network in the U.S., other major networks internationally and on various other
digital platforms, such as Netflix and iTunes. 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 certain 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 2013, 2012 and 2011, we incurred $398,098, $422,239 and $413,951,
respectively, in expense related to advertising and promotion programs. Certain entertainment-based products,
such as products based on major motion pictures, generally do not require the same level of advertising that we
spend on other non-entertainment based products.
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