Hasbro 2015 Annual Report Download - page 18

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 2015, 2014 and 2013, we incurred $379.2 million, $305.3 million and $338.9 million, respectively, of
royalty expense. In 2013, royalty expense included $63.8 million related to the settlement of an arbitration award
for a dispute between the Company and an inventor, as well as costs related to the amendment of the Company’s
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
While our global development function focuses on brand and product innovation and re-invention, our global
marketing function establishes brand direction and messaging and assists the selling entities in establishing local
marketing programs. The global marketing group works cross-functionally with the global development function to
deliver unified, brand-specific points of view. The costs of this group are allocated to the selling entities which
comprise our principal operating segments. In addition to the global marketing function, our local selling entities
employ sales and marketing functions 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, drug 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 with remaining sales generated by independent distributors who, for the most part, sell our products
in areas of the world where we do not otherwise maintain a direct presence. Notwithstanding our thousands of
customers, the majority of our sales are to large chain stores, distributors and wholesalers. Customer concentration
provides us with certain benefits, such as potentially more efficient product distribution practices and other
reductions in costs of sales and distribution; however, customer concentration can also create additional risks for our
business. These risks can create potential detriments to our business resulting from the financial difficulties of our
major customers which could lead to reductions in sales or unfavorable changes in our business relationships with
one, or more, of our major customers. Customer concentration may also 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
2015, net revenues from our top five customers accounted for approximately 39% of our consolidated global net
revenues, including our three largest customers, Wal-Mart Stores, Inc., Toys “R” Us, Inc. and Target Corporation
who represented 16%, 9% and 9%, respectively, of consolidated global net revenues. In the U.S. and Canada
segment, approximately 59% of our net revenues were derived from these top three customers.
We advertise many of our toy and game products extensively on television and through digital marketing
and advertising of our brands. Products are strategically cross-promoted by spotlighting specific products
alongside related offerings in a manner that promotes the sale of not only the selected item, but also those
complementary products. In addition to those advertising initiatives, Hasbro Studios produces entertainment
based primarily on our brands which appears on Discovery Family Channel and other major networks globally as
well as on various other digital platforms, such as Netflix and iTunes. We also introduce many of our new
products to major customers within one to two years leading up to their year of retail introduction. We generally
showcase certain 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, including in Hong Kong and Nuremburg, Germany. In 2015, 2014 and
2013, we incurred $409.4 million, $420.3 million and $398.1 million, respectively, in expense related to
advertising and promotional programs.
Manufacturing and Importing
During 2015 substantially all of our products were manufactured in third party facilities in the Far East,
primarily China, as well as in two previously owned facilities located in East Longmeadow, Massachusetts and
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