Harry Potter and the Magical Profit Margins Under the Tree

I’ve long been under the spell of Harry Potter’s wand. Not the one in the books or the movies, but the Chinese-made wands you can buy for $37.50 at Amazon, or $42.95 from harrypottershop.com.

I first encountered the wand when I visited Universal Studios in Florida. I can’t say much about the trip, because I felt somewhat concussed after a spin on the roller coaster that simulates Quidditch. I spent the ride with my eyes closed and hunched over. It was not a good look.

A wand was purchased that day, and not long afterward an overenthusiastic young wizard cast a spell with a little too much elbow rotation. The wand snapped in half. Until then, I didn’t believe much in magic, but examining the wand closely for the first time, I marveled that a such a thin reed of resin could require the heft of a credit card to own.

As a business reporter, guessing the profit margins under the tree is a pastime of sorts, because there has to be more to the holidays than watching the Hallmark Channel. But it’s not the easiest game. We live in an age when fidget spinners can cost more than $16,000. There was a period where I tithed much of my income to Pokémon cards. Legos once were so plentiful they lurked painfully underfoot in my house.

Granted, the best toys are the ones that can spin gold from pennies. Of the 65 toys inducted into the National Toy Hall of Fame in Rochester, N.Y., many are not all that complicated: The Slinky, Little Green Army Men, marbles and alphabet blocks. That said, the Hall of Fame itself should be viewed with a degree of suspicion. They have also inducted the stick, justifying it by saying it “may be the world’s oldest toy,” and the cardboard box, explaining that “children sensed the possibilities inherent in cardboard boxes, recycling them into innumerable playthings.”

I’ll keep that in mind. Cardboard boxes are not to be underestimated, actually. If you watch the many “unboxing” videos of Harry Potter wands on YouTube, the box gets significant airtime. One such review, which has been viewed more than 77,000 times, began with a close perusal of the box’s “dark red, maroonish color,” the stickers that replicated the look of those from Ollivanders, the wand store in the books, movies and theme parks, and the “red velvet squishy foam” that the wand itself comes nestled in. Lesson learned: Packaging counts.

So what are the highest profit margins in the toy business? Brand Finance, a brand consulting company based in London, pointed to Lego, putting its operating margins at 34 percent over the last half-decade, compared with 14 percent for Hasbro and 13 percent for Mattel.

Gerrick Johnson, a toy analyst at BMO Capital Markets, named both Lego and Thomas & Friends, the maker of toy trains for little kids, which he said also had an operating profit margin in excess of 30 percent.

“Really, it’s the brand and the brand quality,” he said, adding that high sales volumes eased overhead costs.

“Parents feel good about letting their kids play with LEGO. There’s a lot of play value (hours and hours of playtime),” he added in an email. “Thomas is similar. Wood connotes quality and education.”

Toys aren’t the easiest business, though. Even Lego, whose revival over the last decade came with a popular movie and adroit licensing deals, had a tough year. Toys ‘R Us, once dominant, is wheezing.

Harry’s wand endures, though much is left to the imagination. Warner Brothers licenses the Harry Potter wands to other companies that produce and sell it. A Warner Brothers spokeswoman, in a brief phone interaction, went through a series of disclaimers involving what she was not going to say about sales and financial figures.

“I sound like I work for the C.I.A. right now,” she said.

The costs for the resin used to make most of the wands is pennies per pound. The main Harry Potter replica wand — one of 60 varieties produced by the Noble Collection, the largest licensee — has a weight measured in ounces. But there is also the tooling, labor and intellectual property to factor in, and the fact that some of the newer wands light up or have other features.

When our wand broke mid-spell, we had already left the Florida theme park. But I course corrected, winding my way back to Ollivanders, conjuring with each step a Hermione-like list of reasons this product should be replaced. Brandishing the broken pieces at the counter, I had some things to say, but in the end I barely said a word.

The kid at the register shrugged and handed me another for free, which was a keeper. They say the wand picks the wizard, but sometimes the wizard’s dad has a role to play.

Content originally published on https://www.nytimes.com/2017/12/23/business/harry-potter-wand.html by DANNY HAKIM