A Shifting Market

Over the last several years, the coloring and activity book market has been in flux. Long dominated by Western Publishing, later Golden Books—which commanded as much as 90% market share at its peak—the industry began to evolve in the mid-1990s when Golden's sales declined (eventually resulting in its declaring bankruptcy). In 2001, Golden's publishing assets were acquired by Random House, which is now the market leader; sources estimate its current share at around 40%.

Meanwhile, Landoll, which rose quickly through the 1990s and stole business from Golden with its combination of licenses and low prices, also fell into financial difficulties and was sold, first to Tribune Co. and then to McGraw-Hill, as part of the latter's 2000 acquisition of Tribune Education. McGraw-Hill subsequently left the C&A market.

Coloring and activity books rang up $230.2 million in sales in 2002, with unit sales at 104.6 million, according to Ipsos BookTrends. That translates to a 12% share of the overall children's book market in dollars and 22.7% in units. The C&A segment is more competitive than it's ever been, challenging publishers and retailers alike.

Segmentation by Price and Distribution

C&A is primarily a mass-market business. Overall, the average price for coloring and activity books is $2.20, versus $4.15 for children's books overall, according to Ipsos BookTrends. While Wal-Mart and other discounters comprise the biggest channel in terms of total sales, C&A is the dominant type of children's book in several other channels, according to Ipsos, including drugstores (where the category represents 67.3% of all juvenile book units), dollar stores (50.8%), craft/hobby/card stores (42%) and supermarkets (40.6%).

The market is segmented into three tiers. Publishers at the low end focus on price clubs and dollar stores as well as discounters such as Wal-Mart; those at the upper end target trade channels as well as discounters; and those in the middle compete on both ends.

The high-end tier consists of the trade publishers, including Random House, Scholastic and HarperCollins, some of which are new in the market. Random has published C&A for decades, but its activity has been increasing over the last four to five years—starting before the Golden purchase. When Sesame Street C&A rights (previously held by Golden) became available, Random added them to its existing trade program, according to Felicia Frazier, v-p and director of brand management. It then acquired Disney C&A rights as part of its larger deal with the studio. The Golden acquisition rounded out its portfolio; prices for its C&A titles range from $2.99 to $6.99.

Scholastic got into C&A when it acquired the Barney license in 2001. "That really marked our entry into the whole mass market world," says Josh Hanft, director of licensed publishing. "It's a big piece of the market, and we wanted to be part of it." Scholastic has since released G.I. Joe and Hamtaro titles. It recently took back rights to Norman Bridwell's Clifford books from Modern Publishing. Prices fall between $2.99 and $4.99.

HarperCollins's first foray into C&A was early this year with The Hulk, for which it released two titles. The Hulk reusable color sticker book was one of HarperFestival's strongest titles for the spring season. "We were blown away by the success of it all," says Emily Brenner, editorial director of HarperFestival. "Now we're opening up the throttle a little bit." Harper recently shipped My Little Pony coloring and activity books and plans further titles next year. Price points range from $3.99 to $4.99.

At the opposite end of the market are value-priced publishers that produce books for $2.99 and under, with many below $1.00 and some as low as $.25. "This business is all impulse- and price-point—driven," says Jon Horwich, president of Playmore Publishers, founded in 1968. The company sells its C&A products, which account for 60% to 70% of its business, to dollar stores, drugstores, discounters, supermarkets and wholesale clubs.

Similarly, Paradise Press, an 18-year-old company, sells its books mainly to discounters and dollar stores. While it packages some higher-priced products for Wal-Mart and other retailers upon request, 95% of its products are designed to retail for $1. "We don't pretend to compete with the huge publishers of the world," says v-p Randy McDonald.

While the value players and the trade publishers rarely face off directly, the middle tier of publishers release products that compete to a degree with both the low-end and trade players. Some of these, including Bendon Publishing International and Dalmatian Press, have grown substantially over the last few years.

Bendon was created by former Landoll employees three years ago and offers books priced from $.99 to $19.99, with a focus on the $1.99 to $2.99 range. "It's all about value," explains president Ben Ferguson. "It's an impulse buy. No one goes to the store to shop for a coloring and activity book."

Dalmatian was launched in 1994 by two former Golden employees and is thought to have the second-largest market share after Random House. Prices range from $.50 to $5.99, with the majority under $3.50. Dalmatian has worked to develop a brand identity for its products, using black-and-white spots on its spines to differentiate its offerings, according to vice-chair Chris Hilicki. "Moms see the spots [on a book] and they know they can afford it, that it has value, and that it's squeaky-clean."

A long-time C&A specialist is Modern Publishing, which sells licensed and generic titles for the $5.99-and-below market. "That's the sweet spot in coloring books," says president Andrew Steinberg.

Educational workbooks sometimes are considered part of the coloring and activity market. That segment is dominated by specialty players, led by School Zone and McGraw-Hill. Learning Horizons and DK are among the other publishers producing workbooks and educational activity titles, which are sold in trade, mass and classroom channels.

Sharon Winningham, School Zone's v-p, sales, notes that workbook publishers are seeing increased competition from traditional educational publishers such as Teacher Created Materials, which historically have distributed through the classroom market. "We never used to see them at retail," Winningham says.

C&A specialists are also increasing their presence in workbooks. Bendon will introduce Bendon Education on January 1, with titles tied to the Muppets, Bear in the Big Blue House and an as-yet-unannounced license. Dalmatian has a line called Home Learning Tools, co-produced with Harvard University, while Modern produces educational lines under its Fisher-Price and Barbie licenses.

Publishers in all segments, from workbooks to low-end generics, say they benefited from Golden's travails a few years ago. "Retailers were calling and saying, 'I need to replace that Golden fixture,' " Winningham says.

"Golden used to be the Cadillac," Horwich explains. "They owned the real estate, the programs, the racks. We'd fill in with niche in-and-out programs around their basic program." He points out that the changes in the market have made life more difficult for retailers. "Now they're dealing with an entrepreneurial group of smaller publishers that are fighting for space."

Landoll's disappearance also was a boon for C&A houses. "That was like a gift," says McDonald: "We got a ton of business from it."

The Role of Licensing

Trade publishers focus almost exclusively on licensed C&A. Scholastic is publishing titles for its own properties, including Clifford, along with external licenses such as Shrek 2, Spider-Man 2, Rubba-Dubbers and Boobah. "For new licenses, we almost always ask for coloring and activity rights," Hanft says.

Brenner considers C&A applicability for any license she evaluates. "We're relying on licenses," she says. "Licensing is so strong in the mass market and they're so geared to it." Harper will release Little Critter C&A in 2004, with other deals pending.

"Licensing really drives the business these days," Frazier notes. "A hot property can carry wonderful price points in all channels." Random has C&A rights for Nickelodeon properties, including Dora the Explorer, SpongeBob and Blue's Clues (S&S has trade rights), as well as Barbie, Disney Princesses, Bob the Builder, Koala Bros. and Thomas the Tank Engine. This fall, it will release Cat in the Hat coloring and activity books for the first time.

Bendon, Dalmatian and Modern each generate well over half their business from licensed titles (65% for Bendon, 60% for Dalmatian and 75% for Modern). "[Customers] buy what they know. If you get a good license and put it together right, you'll get the book sold," Steinberg says.

Licensing isn't as common on the low end, but that's starting to change. Over the last two years, Paradise has acquired rights to Marvel superheroes, Peanuts, Raggedy Ann and Play-Doh, among others. It can profitably sell licensed titles of 144 or more pages for $1 or less, even given a royalty of 8% to 15% of net sales, says McDonald, who estimates that about 30% to 40% of Paradise's C&A business is licensed. "[Retailers would] much rather buy licensed, but the cost has to be right," he says. "They'd rather have a generic if that's how they make their margins."

"Licensing does play a big role, but it doesn't always play a positive role," notes Horwich of Playmore, which shuns licensing. "It's a real dangerous game. If it fails, it's a huge production for the retailer, who comes back to the publisher for help. You can clog up distribution channels with licenses that aren't moving."

Value-added features, such as crayons, tattoos and paints blister-packed on the cover, as well as foil, embossing, spiral bindings, padded covers and jumbo sizes are nearly as important as licensing. "The challenge is to be innovative at very competitive price points," Hanft comments.

Nowhere is that more true than on the low-priced end of the business. McDonald notes that Paradise does some blistering on its covers, but has to reduce the size of the book substantially. "We're totally controlled by price point," he says. "We back into the product. [Retailers] like the idea of added value but they don't want to pay for it."

Retail Trends

In some mass channels, C&A space has declined, partly due to the financial difficulties of retailers such as K mart. Even at more stable chains, economic pressures have affected the market. "Buyers are being pushed to get higher cash register rings," says Hilicki. "There's been a slight shrinking in shelf space, not because of demand, but because it's hard for a $2.00 book to compete with a $10.00 CD." The fact that mass distribution has become a 100% returnable business, she adds, means customers often overorder, resulting in returns of 35% on shelved product and 50% on displays.

Growing channels include dollar stores, which comprise the top-volume channel for Paradise and rank third, after discounters and drug chains, for Bendon. Drugstores also are on the rise (although some chains have reduced their activity), as are supermarkets such as Kroger and Wegman's.

Steinberg reported that QVC, where Modern sells an "instant library" in 12-minute on-air segments, has become an important channel for the company; so have warehouse clubs, which prefer packs and assortments. "They push us to be more creative," Steinberg says.

While trade channels maintain a small market share, they are important, especially on the high end. The average Borders store has a large waterfall display that holds 160 face-outs, plus display space for prominent licenses, according to buyer Kerith Lee. Most prices are between $2.50 and $6.99. "It's a category that's always changing and one that maintains its audience," says Lee.

At Barnes & Noble, C&A is growing, according to children's buyer Susan Meehan, with the average store devoting one or two bays to the product, at prices from $2.99 to $6.99.

Both chains reported that licensed products get the most space and that "color-plus" items are the top format. Both carry workbooks and merchandise educational-content C&A with them. "I prefer not to have licensed characters on educational product," says Meehan. "It makes it seem less serious."

Publishers recognize that each channel of distribution—and each individual chain—has its own needs and they tailor programs to each. "We're always managing our price point strategy and our format strategy in each channel of distribution," says Frazier. "We have to find the right product mix for each customer. No single product works across the board."

Several publishers predict an eventual shakeout in the market, as some players leave this impulse-driven, low-margin business. But there will always be demand for coloring and activity titles that feature the right combination of format, content, value and price.

Coloring and Activity Books as a Percentage of All Children's Books Sold by Distribution Channel, 2002

Snapshot of the Coloring and Activity Book Industry, 2002