LeapFrog 2004 Annual Report Download - page 15

In key retail stores, we feature our products via our Learning Center shelf displays, which are designed to
highlight our LeapFrog brand as the “one stop” solution for technology-based educational products. We have
received additional brand exposure through television appearances by senior management and other television
spots showcasing our products, often during the key holiday season.
Our SchoolHouse division utilizes a variety of advertising and marketing tools to build brand awareness in
the education market, including placing advertisements in leading education publications targeting school
administrators and teachers, and participating in key education trade shows and events.
Sales and Distribution
A limited number of customers historically have accounted for a substantial portion of our net sales. In 2004,
sales to Wal-Mart (including Sam’s Club), Toys “R” Us and Target accounted for approximately 28%, 23% and
13%, respectively, of our consolidated net sales. In 2003, sales to Wal-Mart (including Sam’s Club), Toys “R” Us
and Target accounted for approximately 31%, 25% and 12%, respectively, of our consolidated net sales.
U.S. Consumer
We market and sell our products primarily through national and regional mass-market retail stores as well as
specialty toy stores. In 2004, sales of our products to Toys “R” Us, Wal-Mart (including Sam’s Club) and Target
accounted for over 86% of net sales in our U.S. Consumer segment and 64% of our consolidated net sales. Our
remaining U.S. Consumer retail sales came from sales of our products to specialty toy stores and, to a lesser
extent, to book, electronics and office supply stores and other retailers.
Our sales team works in conjunction with store buyers from our key retailers to forecast demand for our
products, develop the store floor footprint, secure retail shelf space for our products and agree upon pricing
components, including cooperative advertising allowances. The large retail chains generally provide us with a
preliminary forecast of their expected purchases of our products early in the year. While these and subsequent
forecasts are not contractually binding, they provide important feedback that we use in our planning process
throughout the year. We work closely with our key retailers during the year to establish and revise our expected
demand forecasts and plan our production and delivery needs accordingly. Most retailers issue purchase orders to
us, as they need product. Based on these purchase orders, we prepare shipments for delivery through various
methods. We sell to smaller retail stores through a combination of independent sales representatives and direct
salespeople.
International Consumer
In 2000, we established our U.K. office, located outside London, England, which sells our products directly
to Woolworth’s, Early Learning Centres, Toys “R” Us, Argos and other leading U.K. retailers. Our emerging
success in penetrating the U.K. consumer market is exemplified by the British Association of Toy Retailers
choosing our LeapPad platform as the top preschool toy for each of 2001, 2002 and 2003 and naming LeapFrog
as company of the year in 2004. We coordinate distribution of our U.K.-localized British English products into
Australia and New Zealand from our office in Emeryville, California. In 2002, we began selling directly to
retailers in Canada and in France and in 2003 we began selling directly to retailers in Mexico.
Prior to the establishment of overseas offices or subsidiaries, we utilize distribution arrangements to sell our
products in other non-English speaking countries, using separate distributors for the consumer and school
markets as appropriate. In markets where we do not establish direct sales, we plan on continuing to use these
distribution arrangements. Paralleling our segmentation of the U.S. market between consumer and school
markets, we believe that overseas markets represent similar dual opportunities. Although we plan to develop
most key consumer markets directly, we expect to seek a strategic education partner in key overseas markets
given the costs and challenges associated with developing country-by-country curricula.
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