The blind box, which literally means a box containing a random assortment of novelty items, has grown exponentially over the past few years. As of 2019, the blind box industry is expected to soar over 75% to reach 30 billion yuan ($4.7 billion) by 2024, making it a major draw in the toy market. ‘art.

Consumers, often driven by a certain gambling mentality, are eager to spend on blind boxes, which could offer high levels of emotional or social satisfaction for a relatively low price. According to Tmall, China’s largest online B2C marketplace, around 200,000 post-95 consumers purchased blind boxes on its platform in 2019, each spending an average of CNY 20,000 per year; some fanatics even shelled out CNY 1 million on this “game of chance” to get the coveted limited edition toys.

This blind box mania is such that it has even spawned a new buzzword – the blind box economy.

In a consumerist frenzy, in the primary market, the blind box economy has also become the darling of venture capitalists. More than 50 art toy brands received funding in 2021 from renowned investors, including Alibaba (BABA:NYSE), Tencent (0700:HK), JD.com (JD:NASDAQ), Sequoia China and a host of other leading institutional venture capital funds.

Pop Mart dominates the market

A bunch of art toy brands have received a good deal of attention for their role in realizing the psychology of play and the emotional value of people. They include IP Station, ToyCity, Xinghui Creations, IPSTAR, Alpha Group (002292:SZ), 52Toys, to name a few, and Pop Mart is one of the best examples and the face of the industry.

In December 2020, this 10-year-old company was listed under stock code 9992 on the Hong Kong Stock Exchange, making it the first blind box stock. Its share price rose more than 100% on the first day of trading, with the market capitalization crossing the HKD 100 billion mark once. Previously, the company had received eight rounds of investments; Loyal Valley Capital and China Renaissance (6RN:FRA) were two disclosed strategic investors for recent funding rounds.

The satisfactory financial and operational performance of the company is the main reason why it has won the favor of venture capitalists.

It is China’s fastest growing art toy brand by retail value, according to a report by Frost & Sullivan, a research firm hired by Pop Mart to write its introductory prospectus. in stock exchange. As of June 30, 2021, Pop Mart had 11.42 million cumulative registered members, who contributed 91.8% of the company’s sales with a redemption rate of 49%; in other words, half of the members will make a second purchase.

Pop Mart’s revenue has also grown by leaps and bounds since 2017, with growth rates of over 220% in the first two years. In 2019, the blind box became one of the top-selling items at China’s biggest online shopping festival, Double 11, which was equivalent to Black Friday in the United States. The Molly series, one of its best sellers, generated CNY 456 million in revenue for Pop Mart. In the same year, the company’s gross margin reached its highest level since its creation, at 64.8%. It was also the year when, spurred on by the bright prospects, many art toy brands flocked to this segment and competition further intensified, causing Pop Mart’s revenue growth rate to drop to 49%; this figure was 226.8% a year ago.

One of its main elements of competitiveness is intellectual property. As of 1H20, the company operates 93 IPs, including 12 proprietary, 25 exclusively licensed, and 56 non-exclusively licensed. According to its 2021 interim report, revenue from these proprietary products contributed 89.3% of total revenue, representing an increase of 130.4% from CNY 686.9 million in the first half of 2020 to 1,582. CNY 4 million in the first half of 2021. With its leading position in the market, Pop Mart continues to attract high-quality IP resources, increasing proprietary IP revenue by 220.7% in the reporting period.

However, this remarkable success has come at the expense of an acceleration in advertising and marketing expenditure. According to the prospectus, Pop Mart reported advertising and marketing expenditure of CNY 92.2 million in 2020, up 71% from the previous year; and that figure for the first half of 2021 exceeded the full-year spend for 2019. We look forward to its full-year performance announcement to see if the second-half results would deepen this trend further.

How long would the craze last?

In January 2022, Shanghai issued a directive to regulate the blind box market, prohibiting the sale of blind box products to children under the age of eight and limiting the price of each box to less than CNY 200 (USD 30).

“The blind box should be mainly for entertainment purposes, while an unreasonably high price will deviate from its original entertainment attribute,” said Wu Yandong, deputy director of the competition department of the municipal administration. of Shanghai for market regulation.

This regulation is the first of its kind to be enacted at the municipal or provincial level, which aims to protect the rights of consumers and promote the healthy development of the industry.

Two months later, a top Chinese lawmaker proposed at the annual meeting of the National People’s Congress that authorities step up efforts to strengthen their oversight of the hot but problematic blind box market.

The annual consumer rights television program “315”, broadcast about two weeks ago by China’s state-owned broadcaster China Central Television (CCTV), has also cast a negative light on the blind box industry. He explicitly named and shamed the KFC x Dimoo promotional campaign launched jointly by fast food giant KFC and Pop Mart, for causing irrational and excessive purchases of food and leading to wanton waste. The quality of blind box products was also criticized in CCTV coverage.

Fears have intensified further over a potential Chinese government crackdown on the company gone awry, driving Pop Mart shares down 32.2% from HKD 47.00 on the first trading day of 2022. At press time, its share price closed at HKD 31.90 with a market capitalization of HKD 43.88 billion.

At the end of the line

The increased regulatory scrutiny will undoubtedly end the “Wild West” era of the blind box industry, while in the long run it is a necessary step towards forming an environment benign trade. Therefore, we don’t expect Pop Mart to be much affected by the changing regulatory climate, as it’s more than just a blind box maker; instead, given the Matthew effect, the viability of small businesses will be further compressed.