It is often said, when the going gets tough, the tough get going. This, perhaps, best sums up the entrepreneurial journey of Anuj Mehta and Shyam Makhija, the duo who founded Mumbai-based Pegasus Toy-Kraft in 2007. Makhija, who holds a PhD in organic chemistry, left his job as a research scientist at Searle India to scale up his family business in electronic equipment distribution. He then diversified into distributing toys and worked with companies such as Blow Plast (who sold toys under the Leo Mattel brand) and India Book House. However, his business suffered in the late 1990s when the bigger stores started bypassing him and went directly to the manufacturers.
Around the same time, Mehta, a computer programmer by education, used to handle his family business of making traditional toys and was a supplier of original equipment to Blow Plast. However, with increasing imports of toys, the company suffered huge loss and shut shop, leaving its suppliers in the lurch.
But both Makhija and Mehta were determined to turnaround the business, and joined hands to launch a new range of innovative toys under the brand name Toy-Kraft in 2007. It has since been renamed as Pegasus Toy-Kraft, after the mythical winged horse. And their perseverance has paid off.
Over the past 11 years, the company has established itself as a strong toy manufacturer in India, with over 200 products across categories ranging from art and craft hobby kits, metal construction toys, jigsaw and educational puzzles to board games. “We are the only company to be present in so many categories. We have original IP and offer strong differentiation in each of our products,” says Makhija, gesturing towards the wide array of toys lining the walls of his cabin. Their toys are sold across 2,000 retail outlets, including stores such as Crossword, Big Bazaar and HyperCity as well as on their own e-shop and online sites such as FirstCry. They also export to 25 countries including Poland, Middle East, Lebanon and Sri Lanka and are targeting revenue of Rs.80 million this year.
Toy-Kraft not just makes toys for the retail market, but also creates original product ranges for companies such as Pidilite, Reliance Retail for Hamleys as well as Club Mahindra, which stocks Toy-Kraft toys at its resorts’ creative corner.
“Pegasus is one of the few companies which has an excellent business model in India,” believes Manish Kukreja, president of The All India Toy Manufacturers' Association (TAITMA). “The company has, in many ways, gone against the tide, and with good success. It is their out-of-the-box thinking that helps them make excellent products. Their willingness to help others and share their knowledge, in my opinion, is the main strength they bring to the toy industry,” he adds. Toy-Kraft has won about 20 awards at the annual Toy Awards held by TAITMA.
Makhija believes that both the founders bring in unique strengths to the company. ”My experience in distribution comes in handy as I look after market research and marketing, while Anuj takes care of the entire production, as his family has been in this business for a long time,” explains Makhija. They started the company with an initial investment of Rs.10 million, and began researching on the type of products they could launch. “We chose arts and craft as it had lesser competition. Our first product was sand art rangoli,” he recalls, adding that they then created a range of 25 do-it-yourself kits. These kits were fully manufactured at their factory in Vasai.
“The first break for our company came from Pidilite, who had opened up their Hobby Ideas stores focused on promoting art and craft learning,” shares 64-year old Makhija.
Shantanu Bhanja, chief operating officer, consumer products, Pidilite Industries says that the idea of the Hobby Ideas craft kits was to create outstanding products that would unleash the creativity of children — and even adults — through the use of the designs, tools and the latest learning techniques from across the world. “Our experience of working with Toy-Kraft has been excellent since we find that they share our values of the highest standards of quality and reliability. They have also proved to be able to offer the quick scale-ability that we look for in our supply partners, and have often come to us with ideas that we have mutually worked on,” he adds.
Simultaneously, Toy-Kraft began expanding the range of metal construction toys, which Makhija refers to as the ‘beginners craft to engineering’. Toys combined with education and learning have always been popular with parents, and this led to improved sales for the company. They also launched puzzles and games, where Makhija believes they brought in a strong differentiation. “Earlier, all the puzzles in the market were straight-forward ‘match the following’. There was no external play or probe,” he says. To solve this, they hired graduates from the National Institute of Design to reinvent traditional puzzles. This led to the creation of games like Alphabet Pizza, Shadow Theatre and Add and Subtract, which combine learning, play and entertainment in a unique manner and garnered a positive response. They also secured business orders from Sab TV to create games based on their popular show Baalveer; with Hindustan Times for Literature Festival in Mumbai and Delhi; and with Tara Jewellers.
Capitalising on the growth momentum, the founders began participating in international toy fairs, such as the Nuremberg International Toy Fair, Hong Kong International Toy Fair and the Toy Fair in New York, which helped them secure orders internationally. “We also won the prestigious Dr. Toy award in the US in November 2015 under the 10 best creative products category,” says Makhija, adding that they are the only Indian player to ever receive such an honour. Toy-Kraft also secured the Disney license for the entire art and craft and metal construction range.
Gradually, the company created a portfolio of 200 toys, which include 130 products in the arts and craft segment, 25 toys in the metal construction segment, 20 board games and 25 puzzles. Each year, the company adds about 25 items and withdraws close to 20 products. “We constantly keep the R&D going, because as time passes, the life-cycle of products has come down drastically from eight years to an average of three years. Customers want something new all the time, and we are more than ready to cater to this need,” says Makhija.
Solving the puzzle
However, being in the business of toys is no child’s play. While revenue and popularity rose, simultaneously, there was an increase in replicas of their successful product ranges. “Toys are a low-tech product category and clones are a common phenomenon. So we have to keep innovating to stay ahead,” admits Makhija.
Additionally, the Indian toy market finds itself in a paradoxical situation. On one hand, India has one of the youngest population in the world and toys are arguably an integral part of childhood for most people. On the other, the Indian toy market constitutes less than 1% of the global industry size of $80 billion. A handful of companies, such as Funskool, Lego, Mattel and Hasbro dominate the market, leaving limited room for regional players to compete and grow.
A 2017 study by Euromonitor notes that the traditional toys category is expected to grow further but it continues to be impacted by the rising number of imports from China. Even today, about 75% of toys are imported from China, says Makhija. Many of these imports are illegal and are sold through unorganised retail at cheaper prices, thereby affecting the growth.
Government policies aren’t helping either. In the past two years, business was hit severely owing to demonetisation and implementation of the Goods and Services Tax (GST). “GST was hiked from 6% to 12% for toys and 18% for electronic toys. We lost two months sales and all the goods came back. Nobody wanted to take a hit,” says Makhija. Internationally too, the growth was slow. In September last year, US-based retailer Toys"R"Us filed for bankruptcy. Consequently, international business dropped from 30% to 15%, and revenue dropped too.
However, the founder duo remains unperturbed. After all, this isn’t the first time that they have faced challenging times. They have now decided to focus more on corporate clients and international expansion to scale the business. “The kind of numbers we make by supplying to corporates is not comparable to retail. It saves the company the burden of having a large-scale inventory and instead manufactures exactly what the client requires,” he explains.
Kukreja shares that the growth potential is excellent for small-scale toy manufacturers. “With demonetisation and GST now factored in, organised manufacturing is all set to get a boost. The only threat being unofficial imports, which needs to be curbed. Once that is done, the growth will be phenomenal, as most Indian toy manufacturers actually make excellent quality toys. This is reflected in the gradually increasing exports from India,” he explains.
Having moved past the impact of GST, Toy-Kraft is channelling efforts into scaling operations and expanding geographies. At present, they have a team of about 10 salespeople who help scale their business in Delhi, Gujarat, Maharashtra, Banglore, Chennai and Kolkata. They are focusing on increasing international revenue back to the original levels of 30%. The company is also moving its manufacturing to a new factory in Kalyan. The plant, located in the Renaissance Industrial Smart City, Padga has 15,000 sq ft carpet area of which manufacturing space is 7,500 sq ft. They aim to get the International Council of Toy Industries' ICTI Care seal for this new facility. Makhija believes this will increase the chances to secure and deliver bigger international orders.
As they scale up, the founders state that they are open to raising investments and are optimistic about strong growth this fiscal. And whatever the challenges are, Makhija reminds us, “In the toy industry, most businesses are family run. And we just don’t let go.”