China's Filmmakers All Want to Sell Merchandise on the Side. How Are They Doing?

Chinese studios lag in design, manufacturing, distribution and logistics, but the main reason their film merchandise flops is that the films aren't good enough.

44 billion yuan. China's box office set another record in 2015, nearly 50% above the 2014 total.

But the box office isn't what we want to talk about today. We want to talk about a new market that China's film industry hopes to open beyond the box office: merchandise.

If you have followed our "Hollywood Report" series, you may remember why all of Hollywood admires Disney's business model. The company that started with Mickey Mouse found ways to earn money from a film beyond the film itself. Through television, merchandise, theme parks, games and more, it squeezes every last cent out of fans' wallets. This extends a film's life, brings in more profit and partly offsets the risk of the film itself.

It isn't only Hollywood that admires Disney. China's film industry does too. You can see it in the industry's hottest word this year: "IP." In practice, IP means turning a film into theme parks, games and so on.

But we have to admit that China's film industry has barely begun to develop IP. If you ask which Chinese film has become an IP, we're sorry to say that so far, not one has.

There are many reasons. The characters and stories haven't taken deep enough root in people's minds; that is certainly one. Another big weakness is the lack of skill to develop IP: which Chinese film company could build an entire theme park the way Disney does, and which game company could produce a high-quality game?

So merchandise, a business with lower barriers to entry, became the first market China's film industry turned to when it began developing IP.

It's the right choice, especially given how much money merchandise can make. According to NPD Group, toys based on Hollywood films sold US$5.7 billion last year, a sum equal to 85% of China's 2015 box office.

And the market in China is growing. Jeffrey Godsick, president of 20th Century Fox Consumer Products, told QDaily: "We've noticed that China's merchandise market has been growing, both in offline merchandise stores at cinemas and in online film merchandise sales. Now is a good time to look for growth in this business."

So the question is: how are they doing?

Monkey King: Hero Is Back and Monster Hunt: the merchandise may not be very good

Let's start with Monkey King: Hero Is Back, this summer's biggest hit. As the film became the biggest dark horse of the summer season, Tmall quickly approached its producers. Less than a week after the film opened, Tmall launched an online crowdfunding campaign for its merchandise.

The campaign was a success. A range of items, including cushions, umbrellas and T-shirts, all reached their funding targets, raising more than 12 million yuan in total. One key chain alone raised 3.79 million yuan.

Once the crowdfunding frenzy was over and the goods began to ship, some of them won praise. An umbrella made with Paradise got good reviews, and a cushion made with Mengjie Home Textiles was also popular.

Not every review was kind, though. The key chain, which had raised the most money, was savaged. On Sina Weibo, a user named "Wuye" posted an article titled "A roundup of complaints about the ugly-crying Monkey King on the crowdfunded key chain Dagongbao made." It was read more than 16,000 times, and plenty of commenters agreed.

A month later, Monkey King: Hero Is Back ran a second merchandise crowdfunding campaign, this time on JD.com, and it clearly lacked the momentum of the first. Only 4 of the 21 products reached their targets. Apart from a gaming laptop made with Thunderobot, most reviews of those 4 complained about slow delivery, late progress updates and shoddy workmanship.

Monster Hunt, the summer's other blockbuster, fared little better with merchandise. On Baidu Tieba, a user called "Former Japanese-Mecha Fan" posted photos of the Monster Hunt merchandise he had received. The Huba doll is reasonably true to the character's shape, but it is white all over, including the leaves on its head and its eyes, which makes it look a little creepy.

Image from Baidu Tieba

A bigger problem than the creepy look is that the Monster Hunt team never really thought about developing merchandise. After the film's release, director Raman Hui told the media: "A lot of people are scolding us now, saying Monster Hunt is out and there's no Huba to buy. Our animators are asking me too, where's Huba? We didn't even have enough for everyone who worked on the film, so we're really sorry."

Piracy followed. Search "Monster Hunt" on Taobao and you'll find dolls in all sorts of shapes, all called Huba. Several of the top listings have more than a thousand buyers each, but none of them is obviously official. At promotional events, many fans brought pirated dolls for Raman Hui to sign, and he seemed resigned to it.

Black Cat Detective and Little Door Gods: the films dragged down the merchandise

Monkey King: Hero Is Back and Monster Hunt were criticized for the quality of the products themselves. Black Cat Detective and Little Door Gods ran into a different problem.

The Black Cat Detective film opened in August this year and flopped with audiences, scoring just 5.1 on Douban. The merchandise, by contrast, was a hit. The "Black Cat Detective Taobao Doll," made by Alibaba with Shanghai Animation Film Studio, was well made, and the first batch of 10,000 sold out quickly. And then... nothing. The doll soon disappeared from Tmall, and no other merchandise has been heard of since.

Little Door Gods was much the same. The merchandise crowdfunded on Taobao looked decent. But because the film's box office and reviews were both mediocre, the crowdfunding went poorly. So far, only 3 projects have reached their targets. (Update: As of January 18, all of the Little Door Gods merchandise crowdfunding projects have succeeded.)

For Black Cat Detective and Little Door Gods, the merchandise was fine but the films weren't, and the films dragged down sales.

That is easy to understand. Merchandise is ordinary goods with a film's characters added. Its extra value comes from the film. If the film is bad, that extra value falls to nearly zero, merchandise has no edge over ordinary goods, and naturally nobody wants to pay for it.

Few success stories for live-action film merchandise

The films above are all animated (Monster Hunt mixes live action and CGI). What about purely live-action films? Unfortunately, they haven't done well either.

Lost in Hong Kong, the highest-grossing purely live-action Chinese film of 2015, launched quite a lot of merchandise with Tmall. Three items crowdfunded on Taobao, a face mask, a sheet mask and a power bank, raised less than 120,000 yuan between them.

There are many reasons they flopped, and the lack of any link to the film is clearly a big one. The face mask and sheet mask simply had the character jiong, the last character of the film's Chinese title, printed on them. Jiong is internet slang for "awkward," so who would connect these products to the film Lost in Hong Kong through that one character?

Another piece of Lost in Hong Kong merchandise, a mooncake made with Zhiweiguan, did sell well at the time. Within an hour of going on sale on September 14, it had sold more than 1,000 boxes, more than any other mooncake brand on Tmall. But once the Mid-Autumn Festival passed, Zhiweiguan took it off the shelves. It seems that without the festival, the mooncake might not have been especially popular.

The Lost in Hong Kong mooncake looks pretty awkward, too

Besides the much-hyped Lost in Hong Kong, other films have put out some merchandise: a package tour of Italy for Only You, mugs and power banks for Mission: Impossible – Rogue Nation, a postcard set for Brotherhood of Blades. Most of it didn't do very well either.

Among domestic films, we found two cases that could count as successes. One is Tiny Times 4, which sold 20,000 umbrellas in 10 hours. You have to marvel at the power of Guo Jingming's fans: not only did they push the series' total box office to 1.8 billion yuan, they could move this much merchandise too.

The other is the recent Devil and Angel. An action camera crowdfunded on Taobao, which was simply a camera decorated with cartoon versions of Deng Chao and Sun Li, raised 830,000 yuan. That is a startling number, because Banlü, the seller behind the camera, has sold almost nothing in its own Taobao store over the past 30 days.

But these two are, after all, exceptions. Overall, film merchandise still doesn't sell well in China.

Merchandise is hard for film companies

In fact, it's no surprise that Chinese films do merchandise badly. One important reason is that although merchandise is based on films, the business really belongs to retail, not to film.

Traditional Chinese film and TV companies are mostly organized around production, distribution and marketing departments, none of which has much to do with retail. Because film merchandise is retail, it has to follow retail's rules, and every step from design and production to distribution channels and sales is unfamiliar to film companies. So most film companies that enter merchandise face a market they don't know, and naturally they struggle.

Monkey King: Hero Is Back and Monster Hunt stumbled in exactly this way. Edko Films, the company behind Monster Hunt, is certainly good at making films. But in merchandise it is clearly a novice. The company that made the merchandise for Monkey King: Hero Is Back is called Yumao, and the key chain mocked as "ugly" was its work. The company was founded only recently, and neither its manufacturing nor its logistics is mature.

Even Disney, considered the most experienced IP developer, stumbled in building its own merchandise sales system. Although Disney runs its own stores, it switched from running them directly to licensing them out, and then back again.

Disney's stores finally succeeded because, in November 2009, Disney took Steve Jobs's advice and borrowed the key to the Apple Store's success: turning the store into a space that offers an experience and a highly recognizable symbol of the brand.

If it took even Disney ten years to build its merchandise sales channels, how can Chinese film companies do it in a single year?

Teaming up with e-commerce companies is one way out

Fortunately, there is a ready-made answer. In many of the cases above, two names keep coming up: Alibaba and JD.com. They really can help in the merchandise market. Alibaba in particular has already worked out a complete method and process for developing merchandise.

Alibaba's advantage is that it is already a mature e-commerce platform, and many brands already sell on Tmall. Alibaba also owns Taobao Movies, a platform that deals directly with film companies. So through Tmall and Taobao Movies, Alibaba can bring film companies and brands together.

In this process, Alibaba acts as a go-between: by connecting film companies with brands, it can develop merchandise through licensing. The brands know production and design, the film companies supply the characters and the license, and Alibaba itself is the sales channel, the logistics network and the marketing platform. In effect, this takes film companies straight into retail and helps them develop merchandise.

The model is in fact quite powerful. Good brands solve the problem of product quality, and Alibaba solves the problems of logistics and sales channels. Together, they make up for what traditional film companies lack when they move into merchandise.

That's why even a giant like Disney is willing to work with Alibaba. In May this year, when Avengers: Age of Ultron opened in China, Disney released Avengers 2 merchandise on Tmall from more than 40 brands, including Audi, Lego, Ecovacs, Hasbro, Li-Ning and Yili.

Some of the merchandise from Tmall's partnership with Disney

This is something peculiar to China's film merchandise market. In Hollywood, the studios lead on film merchandise. In China, e-commerce companies are playing a bigger and bigger role.

More and more e-commerce companies are joining in, especially those that sell movie tickets. Weiying Technology set up its own merchandise team this year. Mtime launched its own film merchandise store. Baidu Nuomi has also begun to talk up film merchandise.

But the most basic problem is still making good films

E-commerce can solve many of the problems film companies face in developing merchandise. But it clearly can't solve them all, and the poor sales of the Lost in Hong Kong merchandise made with Tmall are a living example.

Some people may think China's film merchandise market is still small because Chinese consumers aren't in the habit of buying merchandise. That view is a little hasty. Monkey King: Hero Is Back and Monster Hunt showed Chinese filmmakers that fans are in fact eager to buy merchandise.

What Monkey King: Hero Is Back and Monster Hunt show is simple: if the film is good enough, fans will want to buy the merchandise. And that is exactly the biggest obstacle China's film market faces in developing merchandise today.

Monkey King: Hero Is Back stirred people's blood, so they bought Monkey King figures. Huba in Monster Hunt is cute, so they bought Huba dolls. A bad film like Switch may earn a big box office, but people who went to see it out of morbid curiosity won't spend money to keep the film alive outside the cinema.

Look back at China's 44 billion yuan box office. The number is striking, but behind it we see cinemas built in a rush to grab territory, ticket subsidies burned through by ticketing apps, and a growing but somewhat undiscriminating appetite for entertainment as the economy has developed.

These things can produce a 44-billion-yuan box office, but they cannot build a market for film merchandise. Merchandise is only one link in the chain of businesses a film creates, and the film itself is at the heart of that chain. Only a good story can build that chain, and with it a huge merchandise market.

So although every film company now has its eye on merchandise, the film itself still matters more. Given the overall standard of Chinese films today, it is still too early to expect them to move the merchandise market.