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The toy industry dodged a bullet, at least temporarily, as President Trump postponed his on again off again tariffs until December 15th… probably. Strangely, he can now take credit for “Saving Christmas” which is a bit like taking your foot off someone’s neck and claiming that you “saved their life”. Christmas was likely to come anyway but, at least for now, toy manufacturers profit margins seem to be safe and secure.
If Trump’s current stance holds, the toy industry could have quite a lot of breathing room. Not only will we have until the end of the year for US/China trade negotiations to hopefully reach some sort of conclusion but toys for the 2020 holiday sales season won’t begin to ship until next summer. Of course, the smaller volume of spring and summer goods may still be affected. Also, first quarter restocking may be quite tricky for retailers. It’s difficult to know what to reorder before your current inventory gets sold.
As if the trade negotiations themselves weren’t hard enough we have a major wild card situation in Hong Kong. Xi Jinping appears to know that a Tiananmen Square style crack down will globally damage his own reputation as well as that of China and of Hong Kong as a top tier business hub. That said, the Chinese military is sitting in Shenzen and the protestors don’t appear to be backing down. For both the trade negotiations and the fragile stand off in Hong Kong the concept of Saving Face-for Xi, Trump and the protestors turn an already volatile situation into a multi-dimensional chess match where if anyone appears to lose then everyone loses. This is complicated even further by the 2020 U.S Presidential election.
All of the geopolitical uncertainty has caused Wall Street jitters and oversized swings in the stock market. Also weighing on market sentiment is an inversion in the yield curve which has historically been one indicator of an upcoming recession. While some pundits have been out there banging on pots and pans-I can only imagine as part of their never-ending battle for additional eyeballs- this indicator doesn’t really become viable until the yield curve is inverted for a far longer period than a couple of days. Even then a yield curve inversion is a forward looking signal which traditionally has predicted that a recession will happen in a year and a half or so.
Meanwhile the economy, at least in the U.S., while advancing more slowly than it was continues to exhibit solid growth. The employment picture continues to be strong, wages are rising and consumer spending has been growing nicely. Wal-Mart hit it out of the park last week. Yes, Macy’s did issue a profit warning but Marcy’s has it’s own company and channel specific problems. At this time holiday spending appears as if it will be solid.
That said, our ability to predict the future with confidence has shortened up considerably. Part of this is due to technology and the internet. Information is now shot around the world instantly and that is causing people to be hyperreactive. Some of this is also caused by President Trump. It wasn’t so very long ago that there wouldn’t be anything in the news that you had to pay attention to for weeks on end. Trump has driven the news cycle to the point where you need to pay attention each and every day. It’s like a pilot who has so many gauges, lights, and switches in front of him that it distracts him from what’s coming up ahead. It will likely take us humans quite a while to adapt to the point where we can consistently differentiate the accelerating blizzard of signal and noise.
Here at Toyjobs we have rebounded from two difficult years which were caused by the Toys ‘R’ Us debacle. After a strong start the only hiccup was quite recent. Search starts usually surge in early August as companies look to solidify their lineups for the next year’s sales cycle. This year as that was starting to happen, President Trump made his initial tariff call and companies pumped the brakes. We are just now finding out how companies will react to last week’s reversal. I’m optimistic but: “We’ll see what happens.”
Speaking of Toys ‘R’ US- it appears that their Zombie Walk will continue at least a while longer. The new scheme is sort of a Flea Market Model. Toys ‘R’ Us will rent store space that they will then rent to toy manufacturers at a profit and then toy manufacturers can sell their wares directly to consumers. Presumably, they will also rent space that they will then rent to you at a profit to store replenishment goods. The Flea Markets will also provide “rich data analytics”- the sort of thing that you can already got from Wal-Mart, Target, Amazon and NPD. They are currently interviewing to hire “Relationship Managers” to be front men because the company’s leadership has historically proven itself to be less than trustworthy. Pay no attention to the man behind the curtain-the man who makes the decisions.
This sounds like the strategy of a company that doesn’t have any money and doesn’t want to spend any money but is looking for a way to justify why you should pay them money. They seem to have a “Field of Dreams” mentality. If we build it, toy manufacturers will come. The equation has shifted through. I wonder if the old Toys ‘R’ Us hands have figured out that now they need you more than you need them. If I ran a toy manufacturer, I wouldn’t be so fast to jump at this “opportunity”. Let them run their store test on somebody else’s dime.
Hope for the Best but Prepare for the Worst,