YOW - Yowie Group

[galumay]

Personally, I think the patent protection is not really meaningful. Most parts of the world don't require a patent to sell toy encapsulated in a chocolate... yet Kinder Surprise still dominates them.

As I understand it, the benefit of the protection is specifically that Kinder Surprise cant be sold in those outlets where Yowie is being stocked. Thats the risk that is near term, i have seen how popular Kinder Surprise is where they are sold!

 

[McLovin]

As I understand it, the benefit of the protection is specifically that Kinder Surprise cant be sold in those outlets where Yowie is being stocked. Thats the risk that is near term, i have seen how popular Kinder Surprise is where they are sold!

Kinder Surprise is not approved for sale by the FDA because of a decision in 1938 that makes it illegal to sell food with embedded toys. YOW has got around this because their patented capsule is the only one currently approved for sale with an embedded toy. My concern is that KS has probably already come up with a modified product that uses the patent technology so day one after patent expiration they'll be competing. The three year patent does give YOW a good head start, especially as KS is virtually unknown in the US.

 

[galumay]

Kinder Surprise is not approved for sale by the FDA because of a decision in 1938 that makes it illegal to sell food with embedded toys.

Thanks for the clarification McLovin.

 

[McLovin]

Digging around further, YOW does not own the patent, it's owned by an American, Hank Whetstone. I believe he also owns the contract manufacturing facility in Florida, but am not certain. YOW has exclusive right to use the patent until 2018. The technology protected by the patent is actually in making the product, once unwrapped, fall into three pieces (two pieces of chocolate and the encased capsule).

The long run thematic of the business seems to be around licensing. There's a whole suite of other products that will be launched with the chocolates. Whether that takes off or doesn't is the $2b question. In the meantime these guys have plenty of cash, a capital light business model, plenty of inventory and the ability to scale up their production to 20m units very quickly. Further production increases will have an eight month lead time from ordering the machinery to it being commissioned. Aside from the general market acceptance risk the other big risk is that they will be deriving almost half their revenue from WM.

I'll keep reading.

 

[Ves]

What about the patent infringement claims by Yowie / Whetstone against Candy Treasure? I believe that CT does have FDA approval, but the claim is their product is based on the patent owned by Whetstone (see McLovin above).

There was some stuff in the news back in May 2014 I could find here, but it appears they were unsuccessful in the initial injunction as the judge didn't believe it would result in an immediate material loss of market share & cited lack of similarity in price point & marketing, but did comment that they would probably be successful in the trial to uphold the patent infringement.

Has there been anything since? Is it relevant? I think it definitely shows that there are competitors in the wings (there would have to be since they have been locked out of the market in the US for 75 years!).

Yowie is an interesting story, looked like a gimmick / pipedream at first, nice for a laugh, but I can see why you guys are looking at it.

 

[Ves]

What about the patent infringement claims by Yowie / Whetstone against Candy Treasure? I believe that CT does have FDA approval, but the claim is their product is based on the patent owned by Whetstone (see McLovin above).

Out of court settlement? See here for possible reference.

Maybe I'm being a bit slow, but I can't see where YOW announced this to the market? Is there anything stopping the owners of Kinder Surprise from buying this company for instance as an entry point into the US market?

I think these companies like YOW, are really marketing companies, that are using chocolate as their conduits. Guys like Whetstone probably don't have the marketing nous, so they license the patent, and do the manufacturing (where his expertise probably lies) on contract. It's all in selling an experience, and any competitive advantage probably comes from there.

 

[omac]

Aside from the general market acceptance risk the other big risk is that they will be deriving almost half their revenue from WM.

There are a number of other retailers looking at distributing. I believe a decision for Valeros is due in the next few months and then there is another large retailer due October-ish. Currently it is heavily weighted towards WM but longer term the plans look to roll out to all 'tier 1' retailers, which will help with the diversification.

 

[omac]

Out of court settlement? See here for possible reference.

Is there anything stopping the owners of Kinder Surprise from buying this company for instance as an entry point into the US market?

I think these companies like YOW, are really marketing companies, that are using chocolate as their conduits. Guys like Whetstone probably don't have the marketing nous, so they license the patent, and do the manufacturing (where his expertise probably lies) on contract. It's all in selling an experience, and any competitive advantage probably comes from there.

Agree wholeheartedly. The patent gives them a headstart to build a market, but the moat is in the brand. if kids dont take to it, then the patent isn't useful to YOW.

its an interesting story. my concern to potential upside is a buyout as soon as they have done the hard work in establishing a market, the sweets/chocolate industry is pretty concentrated.

 

[Value Collector]

I don't see the patent as being useful at all, at the end of the day it's a toy in a chocolate shell, there is more than one way to skin a cat and there is more than one way to achieve the results this patent does, It wouldn't take much for a competitor to imitate.

The strength is going to come from branding, if they can win the hearts of the children they will have a business, but imagine if a competitor with an established supply chain and network got wind of a growing fad of these things, brought out a similar range of chocolates, only they licenced Disney characters, Would a yowie be a strong enough brand to beat a Disney based chocolate with a Disney toy inside? I don't know.

Maybe yowie should speak to Disney first, lol.

 

[Value Collector]

Would a yowie be a strong enough brand to beat a Disney based chocolate with a Disney toy inside? I don't know.

.

Here is an interesting article posted by CNN, It is talking about the toy industry, and shows the effect of branding.

Mattel toys the owner of Barbie is in trouble at the moment, Not only did sales of Barbie crash last year, due to the success of Disney's Frozen, Suddenly the girls want Anna and Elsa dolls, but mattel also lost the contract to produce Disney princess dolls.

It's competitor "Hasbro" won the contract to produce Disney princess dolls, while also having the licence to the rights to Disneys other brands such as Marvel and Star Wars.

It really shows the power of Branding and how important good Content is.

http://money.cnn.com/2015/04/16/investing/mattel-barbie-earnings-versus-hasbro/index.html

 

[Ves]

VC, I wholeheartedly agree with you re the patent not being the big deal here for a long term holder, outside of whatever first mover advantages it make bring in the USA, at the end of the day if there is no strong brand and pricing power over competitors the valuation is much, much lower after the five year exclusive period ends because profitability will be in line with costs of capital.

And you raise a good point with this comment, and it applies to not just Disney but any major brand that may team with a chocolate manufacturer.

Maybe yowie should speak to Disney first, lol.

There's probably a few questions we could consider re: this threat to Yowie:

What incentive is there for Disney to put their name on a chocolate that sells in the $1-3 "impulse" price point?

What margin would they get, and how much margin is there for them to take before the venture becomes unprofitable or unattractive for the manufacturing partner?

Have Disney exploited confectionery, chocolates, or snack food on a major scale before? If not, why not?

Does Disney's entry into this price point cheapen their brand? Could they fit toys into the capsules on the cheap without making them look cheap? If not, is there room for premium pricing to allow for this to happen with better results outside of this pricing point?

Does the association with "junk food" add value to Disney's brand or does it hurt their image in terms of social responsibility? In other words, does it fit in with their ideals?

Would a partnership with Disney be attractive for a chocolate manufacturer? Would it leave them any profit on the table?

Why haven't Disney done the same thing in Europe and Asia? (these products have not been illegal over there as far as I know)

What I am trying to say is that Disney, even if they have stronger bargaining power, still needs to leave a profit motive for the chocolate manufacturer. This wouldn't work with Yowie, because like Disney, they are a branded / marketing company, not a manufacturer. There's a clear conflict because both companies are valued on their intangible assets and their ability to exploit that at a pricing & consumer captivity level (falling in love with the brand).

It's an interesting question, what is stopping Disney, or another major branded player, to work with a chocolate manufacturer (either with an alternative patent or after 2019)? What can Yowie do with their product that someone else cannot?

I think Yowie's digital tie-in is really interesting by the way. It has lots of potential, but it also has lots of potential for willing suitors to the industry who partner with other manufacturers.

 

[Ves]

And really, the elephant in the room, before we get stuck into the minutiae, what sort of money is there in selling branded chocolate, or chocolate in general, and is there any evidence that putting a toy inside a chocolate egg will achieve long-term profitability above cost of capital?

Anyone had a look at Ferrero's financial statements, do they break down into product segments?

 

[Value Collector]

What incentive is there for Disney to put their name on a chocolate that sells in the $1-3 "impulse" price point?

.

Disney certainly isn't shy of putting their brand on low cost things, If you have shopped at Woolworths recently, you may have noticed that when you spend more than $20 you get free Dominos with Disney characters on them, In the past Disney characters have been licenced as give away toys with happy meals etc, but if you walk into a target or kmart, Disney characters have been licenced on everything from expensive bikes, helmets and bedding, down to cheap birthday cards, crayons, pencils and colouring books.

Thinking of the free woolworths dominos, to me thats a clear example of a retailer respecting the Disney brand enough, that they think it might sway some shoppers to come to woolworths instead of coles and outlaying cash to achieve it. If it can sway you to change shopping centres, it could easily sway you to switch chocolates.

What margin would they get, and how much margin is there for them to take before the venture becomes unprofitable or unattractive for the manufacturing partner?

It depends, some deals are a annual licence fee, others are a percentage, 5% royalty is pretty standard, Disney approves the product and then just collects the checks.

Have Disney exploited confectionery, chocolates, or snack food on a major scale before? If not, why not?

Every Easter and Chrismas there is Disney confectionery, also various snack foods.

Does Disney's entry into this price point cheapen their brand?

I don't think so, Disney has licenced everything from things that cost a $1 through to expensive jewellery.

Does the association with "junk food" add value to Disney's brand or does it hurt their image in terms of social responsibility? In other words, does it fit in with their ideals?

Why haven't Disney done the same thing in Europe and Asia? (these products have not been illegal over there as far as I know)

I guess it's up to a partner to come do them with a deal, Disney isn't in the business of making clothes, bed linen, bike helmets, lego, dolls, colouring books, pencil cases, skate boards, push bikes, jewellery, key rings, bed lamps etc etc, the simple licence the use of their charaters and other companies do the work.

even if they have stronger bargaining power, still needs to leave a profit motive for the chocolate manufacturer.

I think a Disney princess or Buzz lighter year chocolate could easily sell for an extra 50cents.

But look, Disney is just an example, it could be Transformers, Peppa pig, Bob the builder, anything really.

 

[Ves]

Thanks for that. I'm certainly not discounting the threat, I think you're right on the money, and if it's not Disney, it will be a well resourced company or lots of other companies attacking the strength of their brand and its profitability, if it is indeed as successful as they hope initially.

I do however think that a lot of the food related stuff you've mentioned in relation to Disney is probably more "promotional" in nature, and used to promote awareness of their brand, rather than strictly compete for profit against existing competitors like Yowie (ie. most of it is more temporary or seasonal in nature, and not fixed at all times). I think any additional income they get from this type of thing probably attests more to the strength of their core businesses, rather than act as a decision making focus. But I guess, as you said a willing confectionary competitor may strike a permanent deal with them, like some other merchandising companies have.

Very interesting train of thought. Really makes me think about who the potential competition is in my mind.

 

[McLovin]

Wal-mart rolling out YOW to all 4,300 stores from August. There was this little teaser at the end too...

The Company is excited about the permanent ranging in all of Walmart’s U.S. stores and is working towards being in a position to make further announcements in the coming weeks regarding additional major accounts.

 

[Ves]

Anyone still watching this?

Looks like they've told Hank Whetstone (owned the patent + manufacturing facility) that they no longer require his services. (Who knows if it's relevant, but I note he's in the middle of a nasty law dispute with his sister).

Since that announcement on 31 December 2015 the share price has crashed.

They are now contracted to a manufacturer in New York with better facilities and lower costs (their claims, not mine).

It looks like they're claiming that they are still able to legally sell chocolates with encapsulated toys in the US (they do have a newly developed patent, but I don't think it's been approved yet). How is this possible? Apparently they don't need to get FDA approval again, but the question remains if the new patent will infringe the old patent and whether there will ever be a challenge.

Sounds risky to me.

However, there could be a lot of upside if the patent does not breach (I assume since it's a new patent it has a much longer lifetime than 2018) and could create an artificial moat for the length of its existence? Then again, if it was that easy for Yowie to get another new patent, then why can't anyone else?

Something doesn't seem 100% right.

 

[McLovin]

I ditched this in mid-November. A lot of talk but no real action. New contracts were supposedly imminent in June (see my post above), but then total silence. I think whatever chance they had of this being the next big thing has probably passed. It all smells a little BSey to me. Fun ride up though.

 

[omac]

Im still following, not sure where I stand though. I like the idea and it seems like a simple business and previous success in Oz shows potential. However, nothing has happened in the last 6mths wrt sales and those imminent contracts have vanished.
I have my suspicions about the switch in manufacturers. That would have taken a fair while to sort out, along with the patent and I wonder whether they have been managing supply for a while due to the change they had planned. The announcement came out of the blue pretty much at the last minute which I find odd.

Its all speculation but I wonder whether there were manufacturing issues (not quality but supplier related) that forced management to keep it on the down low and announce at the last minute or it's just amatuer hour.... There is currently a dispute over the wrapping machine at the old manufacturer which suggests its not a clean break.

If the manufacturing gets up and running cleanly then the next question is whether lack of sales momentum is real or was a result of the changes that have happened.

Still mulling it over, nature abhors a vacuum and I've filled it with my own take on things which may be a couple of steps too far.

 

[McLovin]

I ditched this in mid-November. A lot of talk but no real action. New contracts were supposedly imminent in June (see my post above), but then total silence. I think whatever chance they had of this being the next big thing has probably passed. It all smells a little BSey to me. Fun ride up though.

Annnndd....They land Walgreens less than a week after I said the above.

 

[Ves]

Annnndd....They land Walgreens less than a week after I said the above.

Lol... I just noticed that myself.

So you've got a contract announcement of sorts on the same day as an update on the legal dispute (which sounds more complicated than they are making it out to be).

I'd actually feel sorry for them if they made headway in the USA and it all unravelled due to patent / legal issues.

edit: I think it's too much of a possible torpedo (even if it is remote) to risk a long-term hold for me even if I was convinced re their competitive position.