Sanrio to cut reliance on Hello Kitty

Company to spend up to ¥30 billion to buy rights to new character to diversify lineup

by Naoko Fujimura and Emi Urabe

Bloomberg

Sanrio Co. aims to spend as much as ¥30 billion to buy the rights to a character for the first time and cut its reliance on Hello Kitty.

“We want to diversify our character portfolio instead of spending time to boost recognition of our existing characters in overseas markets,” Managing Director Susumu Emori, 62, said in an interview.

He declined to say whether the company is in talks with any candidates.

Sanrio, which ended a decade-long sales slump in 2010, relies on Hello Kitty goods for 80 percent of its overseas licensing revenue. Character-goods deals with Wal-Mart Inc., Inditex SA’s Zara brand and Austrian luxury crystal maker Swarovski helped Sanrio more than double operating profit since 2009 and amass ¥21.1 billion in cash, the most in a decade.

“Sanrio depends on Hello Kitty too much, so it’d be good to add a major character,” said Takashi Oka, a Tokyo-based analyst at TIW Inc.

The company needs the rights to a character that is already well established as a brand, he said.

Tomy Co., the maker of Transformer and Pokemon toys, bought RC2 Corp., the maker of Thomas the Tank Engine products, in April for $640 million (around ¥51 billion).

Sanrio, whose market value has quadrupled since the start of 2010, is prepared to spend ¥10 billion in cash and ¥20 billion borrowed from banks to finance the character purchase, Emori said Monday. The ideal candidate won’t clash with the company’s mainstay cartoon kitten.

“We want to buy a character that won’t harm Hello Kitty’s image,” Emori said. “Our overseas sales team is looking for deals.”

Sanrio’s search for an already established character compatible with Hello Kitty may take some time, Oka of TIW said.

“It may be faster for Sanrio to market its own characters, because it’s rare for characters to be on the market,” he said.

Sanrio’s stock, which is trading at around ¥3,000, has surged 58 percent this year, compared with a 4.3 percent drop in the Topix.

The company, which owns rights to about 200 characters, including Little Twin Stars and My Melody, may also raise dividends, Emori said.

“We shouldn’t limit our target of dividend payout ratio at 30 percent and would consider boosting dividends to reward shareholders, as cash increases,” he said.

Sanrio, founded by 83-year-old President Shintaro Tsuji in 1960, has yet to use a character that wasn’t developed inside the company, spokesman Hideo Yamaguchi said.

The company has focused on Hello Kitty and other characters it developed to win deals to use the images for 50,000 items, including Zara Hello Kitty T-shirts, sold in more than 70 countries.

U.S. pop singer Lady Gaga posted a photo of herself with a Hello Kitty stuffed animal to her Twitter account on June 28.

Swarovski plans to sell jewelry, including earrings, featuring Hello Kitty worldwide following their debut in Japan last month. The companies also unveiled a 20-cm Hello Kitty figure decorated with crystals last month.

Sanrio’s operating margin may rise to 27 percent in four years from 20 percent last year, driven by expansion of the licensing business in North America and Asia, Emori said. By comparison, Walt Disney’s margin, or operating profit divided by sales, in its consumer products division was 25 percent last fiscal year.

Profit is rising as Sanrio added Wal-Mart, the world’s largest retailer, as one of its licensees in the U.S. this year, Emori said. Wal-Mart stores that sell clothes, stationery and other products featuring Hello Kitty may reach about 3,000 of the 4,427 total in the U.S. by the Christmas season in December, he said. Sanrio also has a licensing agreement with Target Corp., Wal-Mart’s closest rival.

Operating profit will probably rise to at least ¥21 billion in the year ending in March 2015 from ¥15 billion last fiscal year, the company said in May.

“Our goals are very conservative,” as the company formed the plan in March, after the megaquake and tsunami, Emori said.