In 2008 the toy industry and indeed everybody had to endure the worst holiday sales season since 1992.  This was truly an awful year where both comparative sales and total sales were down sharply for most retailers.  In some recent years we have seen weak comparative store data even though total sales were fairly strong.  I’ve always argued that comp store sales is a flawed indicator because it fails to take into account the cannibalization of sales that occurs as large retailers continue to build more and more stores closer and closer together.  Think Wal-Mart or Starbucks.  In 2009, we may see a “reverse cannibalization effect” as retail chains shut down large numbers of stores and entire chains go out of business.  It’s my feeling that total store sales is an obviously better measure of how much total “stuff” is sold by a retailer to consumers.  In any case, 2008 was a horrible year for retail when measured by either yardstick.  Only the deep discounters like Wal-Mart, drug chains and the dollar stores had good or even decent years.  Surprisingly, even the warehouse clubs did poorly.

The combination of a terrible holiday sales season and the credit crunch economy proved too much for several weaker retailers who were forced into Chapter 11 or even liquidation.  KB Toys, Circuit City, Linen & Things, Office Depot and Gottschalks all went under.  The retail death watch continues with Dillards, Claire’s, Duane Reade, Talbots, Bon-Ton Stores, Pier One Imports and even Borders all rumored to be teetering close to bankruptcy.  In addition to outright failures many retailers will close a significant number of stores.  It is estimated that 200,000 stores will close by year end.  Fewer stores means less shelf space to fill which translates to less overall sales for toy companies.  As always there will be winners and losers.                           

Most companies are not self financing and rely on bank loans or lines of credit to finance operations.  In the current financial climate where banks reticent about lending even to the strong, I would expect weak and marginal companies to struggle.  Starting this past September we began to see toy companies either fail or be bought out by stronger rivals.  I would look for the trend of acquisitions and company closings to continue and even accelerate.       

With the news that several key retailers were not going to attend the January Hong Kong Toy Show, toy executives spent the month of December scrambling to get the 2009 sales season rolling with those major retailers that weren’t going to attend.  Once in Hong Kong, some complained about the retailers who weren’t in attendance and some even said that the show was a waste of time.  Other, more optimistic types saw it as an opportunity to really focus on second and third tier customers.  It was also noted that the international retail presence was particularly strong.              

I was both curious and concerned that with oil, resin and transportation prices coming down that retailers might try to claw back the already less than adequate price increases they allowed toy companies in 2008.  The word back from Hong Kong was “they asked but they didn’t demand.”  Toy companies were able to cite high safety testing costs as a reason why prices shouldn’t be rolled back.  Also discussed, was that with so many Chinese toy factories closing (more coming after Chinese New Year?) that U.S. toy companies had little negotiating leverage left with those factories that remained.  Price stability will be crucial in 2009 as both lower sales volumes AND tighter margins would be a recipe for disaster.  That said, my best guess is that 2009 will be the toy industry’s most difficult year since I started out in 1981.                

Toyjobs had a respectable year in 2008.  After getting off to our fastest first half ever, we entered the third quarter and unfortunately, there pretty much wasn’t a third quarter.  We were lucky that we had, what for us was, an average fourth quarter.  That said more than half our fourth quarter placements came from a single client who was hiring due to a corporate relocation.  Overall we were about 15% off of our average for the year.  That’s not bad because our average is pretty good.  I’m happy with our results in 2008 but I am even more happy that the year is over.  The only thing that I’m not happy about is the outlook for 2009.  I foresee that by the end of the year there will be fewer retailers, fewer toy factories, fewer US toy companies and yes, fewer toy recruiters.  I hope that when it’s all over everybody reading this will still be standing.   We, here at Toyjobs, certainly intend to be.   

See y’all in New York, 

Tom Keoughan

The Dallas Toy Show began amidst the throes of the credit crisis.  The stock market was plunging on a daily basis while the economy was having a severe heart attack.  No wonder then, that most people’s attitude was initially, to put it mildly, trepidatious.  The Christmas sell through season was looking bleak.  Retailers had been reluctant to make large inventory bets and everyone from retailers to toy companies to Asian manufacturers were having difficulty obtaining the capital necessary to fund operations.

Many, if not most, small and medium sized toy companies are not self-financing and operate on bank loans and lines of credit.  We had just seen both Dolly Toys and Sababa Toys fold and MegaBrands was arguably (I’m sure that they would argue that they were not) teetering.  Banks were and are tightening up on business loans and reducing lines of credit.  They are also reducing credit card limits to consumers.  The scariest quote that I read comes from The Wall Street Journal on October 17, “Credit has gotten so tight in recent weeks that companies contemplating a bankruptcy filing can’t find the cash needed to go through the process.”  We can’t even afford to go bankrupt anymore.  Whew!

Fortunately as the show went on the mood visibly improved.  Most of the important retailers were there (with the conspicuous exception of Costco).  The majors (Wal-Mart, Target) may have only been making short, almost social, stops but toy company executives were telling me that they were having very productive meetings with second tier retailers.  This should inform toy companies how to approach the show in the future.  Wal-Mart, Target and Toys ‘R’ Us aren’t going to give you much more than a little face time here.  Accept that and be prepared to make the most of it.  This isn’t the time to sell them, but rather, know in advance what questions you want to ask and what answers you need to positively affect your business.  As for second and third tier retailers; this is the time to sell the hell out of Walgreen, Shopko and Books-A-Million.

The general mood improved as companies realized that either sitting around moaning or being paralyzed by fear was a sure road to ruin.  The only way to survive, and that survival is not guaranteed, is to go out and do business – so get to it.

Speaking of sitting around moaning; the one very justified gripe that I heard over and over again concerned the new product quality regime.  It seems like no one with any real industry experience had anything to do with developing it.  While its final goals are admirable, it is not physically or financially feasible.  Also, the smaller and medium sized firms are hit disproportionately as they have to amortize the costs over a fewer number of goods sold.  The unasked question in the room is this: What portion of everybody’s testing bill should the main offender, Mattel, pay?  It’s appalling that this works in their favor by putting undue pressure on smaller companies, mainly due to Mattel’s many screw ups.

In other news of big bullies acting to the detriment of the entire toy industry: Wal-Mart launched all of retail into a toy discounting spiral on the spectacularly early date of October 1st.  What’s next?  Christmas in July?!  This, even though it conflicts with consumer behavior which shows that shoppers are purchasing closer to the time of need.  For all the hoopla over Black Friday and the Saturday after Thanksgiving, in recent years the biggest shopping spike has been the weekend before Christmas.  Wal-Mart’s annual attempt to push the Christmas shopping season ever earlier fails with consumers but the discounts can be viewed as a very effective kill the competition strategy.  Those discounts have got to hurt seasonal retailers like Toys ‘R’ Us and KB Toys.  KB has been tottering for years and with the economy in shambles one has got to wonder whether they’ll make it through this time.

Wal-Mart is also hitting Chinese suppliers with a slate of stringent environmental and safety mandates, just as manufacturers are facing rising costs and dwindling demand for their products.  Thousands of factories in southern China have closed this year due to soaring costs and tougher environmental and labor standards.  We’re all for safe products, fair labor practices and a cleaner environment; the problem is when the big bully, whether it’s Wal-Mart or the federal government, mandates costly procedures and then doesn’t help pay for them but rather just pushes the costs onto others.

In 2008, toy manufacturers’ costs soared 25-30% but retailers led by Wal-Mart only allowed price increases of 5-8%.  2009 promises to be an even more difficult year in terms of sales volume.  The potential silver lining is that lower oil prices should translate into lower resin prices and transportation costs and thus higher margins.  Unfortunately, I heard at the Dallas show that Wal-Mart is already angling to grab back those margin increases from toy manufacturers.  In a recessionary environment, Wal-Mart is going to want to set very low prices and they are NOT going to want to pay for it.  They will want to take it out of the hides of their already margin squeezed suppliers.  In order for other retailers to compete they will need to mimic the practices of the sales volume and low price leader.  I’m afraid it’s going to feel like they’re kicking you in the ribs while standing on your throat.  Sorry to be so “cheery” but I calls ‘em like I sees ‘em.

Trepidatiously yours,

Tom

The February Toy Fair seemed to go pretty well. The Javits Center maintained its world record of having the hardest floors on the planet. I did notice that several mass market companies were not “showing” although some had representatives lurking in the aisles. Mass market companies that grumbled beforehand that this would be their last one all seemed satisfied and said that they would be back. Specialty toy companies were having a field day and seemed to be a much more jovial group. I think a company’s sense of success at the show was very much driven by their expectations coming into it. It’s an excellent show for specialty manufacturers but also a very good place for mass market companies to focus on second and third tier retailers. Over the last couple of years, most of the toy company executives I have spoken to at Toy Fair have been cautiously optimistic but this year I would characterize their mood as just – cautious.

Of course, there is good reason to be cautious with big recession thunderclouds on the horizon. I don’t get the sense that recession has hit yet. Despite anecdotal evidence of empty store aisles, retail sales were strong in February. Wal-Mart’s total sales were up 8.9%, Target up 5.9% and Costco up 11%. That said, everyone from businesses to consumers seems to be standing around very quietly wondering why they’re still on their feet. It’s like waiting for a tornado. The press may not be talking us into a recession but they are certainly hastening its arrival. It’s also a little unnerving that the balance sheet of a single company could throw us all into crisis. If MBIA receives a ratings downgrade all hell is going to break loose. I suspect there would have to be some sort of government intervention.

Add to economic backdrops the particular challenges that the toy industry is facing now – rising costs, the rising Yuan and stingy retailers only allowing prices to rise 5-8% – and you have the making of thinner margins and a very difficult year.

Because of the string of January and February Trade shows it is always difficult to get a read on toy company hiring at this time of year as companies are typically too busy to “pull the trigger.” I can say that search starts have been strong during the period and I have every indication that many of these will close during the coming month. I should be able to pass on a more definite outlook on the subject in my next communiqué. I just hope that it’s not coming from a bunker.

All the best,

Tom Keoughan