Can Retail Drive The Growth For Viacom’s Consumer Products Business?

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Viacom‘s (NASDAQ:VIA) consumer products segment has seen steady growth in the past few years led by retail expansion and continued demand for its merchandise. The company has been trying to leverage its popular brand, Nickelodeon.  It has recently opened few retail stores in some of the emerging markets and will soon open its first Europe store in London. What upside to valuation, then, exists for Viacom if it can grow this business? A look to Disney suggests an answer. Consider the following points:

Nickelodeon is an extremely popular network among kids and is home to some of the popular characters such as Spongebob Squarepants and Teenage Mutant Ninja Turtles. It makes sense for the company to take the retail route and strengthen its brands. Disney (NYSE:DIS) has been very successful with a similar strategy and its consumer products business is currently valued at over $25 billion.  In contrast, its media and studio business, which is leveraged by the consumer products, is valued at $109 billion, according to our estimates. Looking at Viacom, we value its consumer products segment at $3 billion, while its media and studio business is valued at $41 billion. If Nickelodeon is successful as Disney in its marketing and can build a $6 billion consumer products business in the coming years, it would translate into a 5% upside to our price estimate for Viacom.

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See our complete analysis for Viacom

A Store Experience For Children Could Be Meaningful For Viacom’s Retail Venture

The consumer products and other revenues in our model represents revenues from licensing of Viacom’s brands and characters for consumer products, restaurant and park themes, publishing and video games. The company has been trying to leverage its popular brands through a retail expansion and has opened retail stores in Panama, Riyadh, New York and Honduras. It recently announced its first Europe store in London and is looking to expand in Dubai, Shanghai, Paris and Milan. In order to attract customers, the company is offering localized merchandise such as a T-shirt featuring the SpongeBob crew’s version of the Beatles’ Abbey Road album cover at its London store. The company expects 20% to 25% of revenues from localized products at the store. [1]

Disney has been successful with its retail stores as it allowed children and families to connect with their favorite Disney characters in an interactive way. Disney stores offer an unmatched experience to children by hosting various events such as daily store opening rituals and children are excited about the experience they get out of it. This in turn delivers a family experience and elevates the brand.

While Nickelodeon is at early stages of its retailing experience with handful of stores opened recently, it is clear that it aims to strengthen its brand. It will be interesting to see if Nickelodeon takes a page from Disney and offers a great experience to children visiting the stores in order to elevate its brand, which in turn will be beneficial for the network in the long run.

Looking at Viacom’s consumer products segment revenues, they have grown at an average annual rate of 5% since 2010 and stood at $1.12 billion in 2014. [2] We currently estimate the revenues will grow at similar pace in the coming years but the growth rate could be much higher if Viacom is successful with its retail venture. If the company manages to double its consumer products revenues to around $2.50 billion by end of the decade, valuing the business at around $6 billion, it will translate into a 5% upside for our price estimate for Viacom. We note, however, that this is double its current valuation.

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Notes:
  1. Nickelodeon Opening Flagship Retail Store in London, The Hollywood Reporter, May 29, 2015 []
  2. Viacom’s SEC Filings []