Quick. What's a hot, brand new toy you must snag for your child or yourself in 2013?
Chances are you're still searching for an answer. And that in a nutshell is the toy industry's dilemma.
As hundreds of toy industry professionals from nearly 100 countries converged in New York City this week for an annual industry trade show, innovation and how to capitalize on the explosion of digital platforms such as tablets and video game consoles has been on many minds.
"I think the toy industry suffers a bit from lack of innovation," said Phyl Georgiou, founder of Tiggly, a startup toy maker. Their toys designed for toddlers combine physical shapes, created for interaction with tablets.
To be fair, the industry can boast plenty of successes. Many children have access to tablets and green toys with a retro feel and sometimes made in the U.S., not in China, have gained traction.
Activision Blizzard's Skylanders has topped $1 billion in global retail sales in just 15 months. That franchise artfully combines video games with action figures. And you can't ignore perennial hits from Mattel Barbies toHasbro action figures tied to blockbuster franchises such as Angry Birds and Star Wars.
Flat Toy Sales
But these hits haven't been enough to reverse an overall decline in toy sales. Annual U.S. toy sales were $20.47 billion for 2012, down 3.5 percent from $21.21 billion from a year earlier, according to research compiled by the NPD Group, a consumer market research firm.
Drilling down further, toy building sets such as building blocks posted a year-over-year sales gain of 15.7 percent in 2012. But plush toys and outdoor and sports related toys dropped 20.4 percent and 10.2 percent, respectively, year over year. Sales of games and puzzles fell 8.4 percent, according to NPD.
During the 2012 holiday season, U.S. shoppers spent only 3 percent more than they did in 2011 because of concerns about the economy, the National Retail Federation said.
"You're probably going to have another down year in 2013," said Sean McGowan, a senior analyst with Needham & Company. (Read more: Dour December May Not Spell Retail Disaster This Year)
One reason why the toy industry broadly pursues incremental change is the lead time under which the sector operates. Knowing which toys will strike a chord with consumers, months in advance, is anyone's guess. "It's more profitable to make a minor change than to take a gamble on something new," said Gowan of Needham. "There hasn't been more radical innovation."
Chasing Digital Play
Startup Tiggly's toy consists of small shapes such as stars and triangles that children place on the screen of Apple iPads. Successfully matching the physical objects with tablet shapes transforms the digital shapes into animated characters.
"It's a modern-day version of a wooden shape puzzle," said Georgiou, who launched the idea and small company as part of a startup competition at Harvard Business School.
Georgiou was among roughly 1,000 exhibitors at Toy Fair which runs through Wednesday. His small company is barely 10-months-old. Georgiou decided to attend the fair last minute with his three colleagues. Their 10-foot by 10-foot booth was sandwiched in a corner of the massive Jacob Javits Convention Center, where the annual event is held.
But Tiggly's thin toy resume belies its ability to zero in on an industry pressure point — the desire to capitalize on the fast collision of physical toys with virtual experiences. "How do you maximize the physical and digital interaction? That was the challenge," said Georgiou, who is scheduled to graduate in May.
Hasbro CEO Goldner
Big toy makers, too, and retailers see growth in combining physical toys with digital experiences.
Toys "R" Us CEO Jerry Storch said the future clearly lies in the marriage of electronics and toys. "It's just a question of what form," Storch said.
Toy maker giants Hasbro and Mattel, not surprisingly, are mining the digital space for growth.
"Kids want all those kinds of experiences, where they go across all these different platforms," Hasbro CEO Brian Goldner said on CNBC on Monday.
Hasbro earlier this month reported net revenues for the full-year 2012 were $4.09 billion, down 4.7 percent compared to $4.29 billion in 2011. Among the top-line trends, revenue gains in the girls category including Furby and My Little Pony were tempered by revenue declines in the boys category, tied to the fate of franchises such as the Avengers, Amazing Spider-Man and Transformers.
Mattel CEO Stockton
Mattel CEO Bryan Stockton told CNBC last week that maximizing digital play is integral to their strategy. "We actually view digital as complementary to traditional toy play," Stockton said.
Mattel's well-known brands include Barbie and Hot Wheels. While the company this month reported full-year 2012 net sales rose 2 percent from the prior year, gross sales for Barbie declined 3 percent. Gross sales rose 11 percent for American Girl and 2 percent for Hot Wheels.
Hoping to give Barbie a digital boost, new for Mattel this year is a Barbie Digital Makeover Mirror that uses facial tracking technology to transform an iPad into a digital mirror.
Looking ahead, the toy industry's prospects may be increasingly tied to developing countries' rising middle class — and their burgeoning appetite for toys.
Rising incomes in developing markets such as Brazil, Russia, India and China (also known as the BRIC countries) have allowed the introduction of a new trend — the concept of spending money on toys. In some cases, "they've never spent money before on their kids. Now they can and they will," said Gowan of Needham. "Per capita spending on toys is rising meteorically," he said.
— Written by CNBC's Heesun Wee. Follow her on Twitter
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