ToyJobs Blog

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,

Tom Keoughan

In early August US consumer sentiment jumped to its highest level since January. With unemployment continuing to head lower and a robust stock market, this is a trend that might continue. Unlike earlier in the year, consumers seem to now be putting their money where their mouth is. Consumer spending has increased rapidly and credit card debt is now at the highest level in US history.

Where is all this money going?  E-Commerce is obviously a big beneficiary while the bricks and mortar retail landscape is pretty bleak. Retail sales have been declining rapidly at department stores like Macy’s, Kohl’s, and J.C. Penney as well as sporting good chains like Dick’s Sporting Goods and Foot Locker. Kmart, which recently laid off 1500 people at its Hong Kong office, appears to be in its final death throes. Food and Drug chains have been mostly holding up but the supermarket is now under assault with “nonprofit” market share grabber Amazon slashing prices at Whole Foods. It is also pretty easy to envision a time in the not too distant future when E-Commerce will topple the pharmacy giants.

The physical retailers who have been growing sales are the low priced ones – including Wal-Mart, TJX, Ross Stores, Old Navy, Dollar General, and Best Buy. The only path to sales growth seems to be through lower prices. That creates a painful choice between growth and profits and will force retailers to reduce their cost structure at the same time they are trying to build up E-commerce.

Traditional retailers like Macy’s and Kohl’s have developed large online businesses but they are caught trying to leverage warehouses and distribution systems designed for sending big trucks full of goods to stores rather than pick and pack locations that ship stuff directly to consumers. This is one of the factors which cause their E-commerce profits to be reduced to around 4% rather than the 8%-10% they enjoy at store locations. Over time they should be able to retool, but that will cost money that will be coming from increasingly smaller margins as more of their sales dollars shift online. One can expect that they will attempt to increase margins by squeezing vendors and by treating their warehouses as profit centers – a la Target.

Toy industry hiring is following the script I envisioned earlier in the year. Hiring was extremely strong in the usually weak first quarter. But the combination of heavy inventory carry over from the holiday shopping season and weak first quarter retail sales caused retailers to pull back and their suppliers to step on the brakes. During May and June toy companies were telling me that while they needed to hire additional people they were going to hold off. By late July, the combination of heavily discounted 2017 inventory finally selling through and 2018 goods starting to ship along with consumers starting to spend, companies started to move forward with their staffing plans. Since returning from vacation in late July, Toyjobs has been starting searches at a furious pace. These searches should be concluded sometime in September. In the short run, as long as sentiment and spending hold up I expect that strong toy industry hiring will continue. The one potential problem is the poor health of traditional retail. Their problems will translate into problems for their vendors very quickly.

In the longer run, while retailers are working on developing E-commerce, vendors should be looking at new strategies as well. To be successful in the future, these strategies will have to be more comprehensive than just selling more to Amazon.

On that cheery note I look forward to seeing y’all in Dallas.

Tom Keoughan

Comey has been here and gone. Trump is still here, more or less…at least for now. Retail is still sluggish. And eTail is still growing fast. Business deregulation is proceeding quickly which is no small thing. On the other hand, legislation is at a standstill and therefore is a small thing. Business sentiment and the stock market continue to be at all-time highs. But business and consumer spending haven’t really picked up in any meaningful way. US sales and economic growth have stalled. Hard and soft data have diverged wildly. Which will come first? The chicken or the egg?

What does this mean for toy industry hiring? Companies talk about positions that they want to fill…but delay actual search starts. Companies complete the search process and find the new player that they want…but delay making actual job offers. Not much has changed in the last couple of months. American business remains in an optimistic funk.

One bit of good news: it’s summer time and the living is easy.

Keep cool,

Tom Keoughan

Both households and businesses started the year riding a wave of rising expectations for growth under a new business-friendly President but thus far the euphoria hasn’t translated into broad economic gains.

Retail spending actually declined in the first quarter and GDP growth was a paltry 0.7%. Job gains were quite disappointing in March. We’ll learn the April numbers on Friday. It’s too early to blame this on the Trump administration. Anyone who knows anything about economics knows that it generally operates with lag times. That said, there is a gap between sky high expectations and things that have actually gotten done. Both consumer and CEO confidence have been at record highs (although now are beginning to drift down) but weak retail spending tells a different tale. Both companies and consumers are saying one thing but doing something different with their wallets. Employment and wage growth should support higher consumer spending but thus far has not.

The retail environment is changing dramatically as online retailers, Amazon particularly, experience rapid growth. The following numbers, if correct, are astounding. Needham analyst Kerry Rice estimated that: “Amazon’s market share of the American retail sector was 34 percent based on gross merchandise volume. Ebay has a market share of 7.7 percent followed by Wal-Mart at just under 5 percent.” He anticipates Amazon to grow its U.S. market share to 50 percent over the next five years.

Those numbers make it easy to understand why approximately 3000 retail stores closed thus far this year, more than double the number from the same period in 2016. Also, 10 retailers have sought bankruptcy so far in 2017 vs. just nine for all of 2016. We should probably pencil in Sears/Kmart though I expect that they won’t file until January 2018 after they pocket the Christmas cash… and stiff their vendors. This isn’t the first time that retail has been turned upside down. Twenty-five years ago, Wal-Mart and Target killed mom and pop stores and Barnes & Noble and Toys ‘R’ Us disrupted smaller chains. Toy manufacturers should be thinking hard and thinking fast about how to meet the challenge of this massive retail transformation.

What high economic confidence with low economic performance has meant for toy industry hiring is that Toyjobs started the year off with a bang. Typically, the first quarter can be quite challenging for us. Companies load us up with searches but can’t find the time to interview and hire due to the near constant travel schedule to all of the various trade shows. From April through June we usually hit it out of the park. Thus far that seems to have been reversed this year. We experienced a very strong first quarter but have been in a lull for the last two or three weeks.

Part of this can be explained by the divergence in economic confidence and the real-world economy. I also attribute it to tight first quarter toy company cash flows. The toy industry enjoyed a robust 5 percent growth rate in sales last year but there was also a lot of inventory left on store shelves after the holiday buying season. So, there hasn’t been a real need for retailers to restock. Add to that Toys ‘R’ Us has decided to hold back payments to many of the larger manufacturers for merchandise they sold last year. Rather than getting the big check they were counting on and budgeted for in January, many manufacturers won’t be getting paid until October. If you don’t play along “we don’t have to buy your goods this year.”

I expect all of this to start to return to normal as we move through the year. Manufacturer budgets will start to loosen up and hopefully the economy begins to kick into gear once the Trump administration starts to actually accomplish things, but for now? …we are in a bit of a lull.

All the best,
Tom Keoughan

Final thought: We here at Toyjobs and indeed the entire toy industry will sadly miss Loren Taylor. He was honest, kind, and fair with everyone he ever dealt with. He was a true gentleman. We lost one of the good ones.

February’s North America International Toy Fair capped a string of toy industry trade shows which saw toy executives shuttling from Dallas to LA to Hong Kong (twice…at least) to Nuremberg and finally to New York City where, for once, there was no snow and the weather was an agreeable 65 degrees.

Friday, just before the show opened, we were hit with a surprise. Toys ‘R’ Us announced a bloodbath with 270 corporate staff employees, some of whom had been there for decades, being laid off. Rumors and whispers went zipping around the decks of the Intrepid Sea, Air, & Space Museum as the fates of both the survivors and the less fortunate slowly became known.

The Intrepid was an inspired venue choice which helped make the Toy of the Year Awards a whole lot of fun. The Toy Industry Association staff did a great job making the evening “all it could be.” As always, it was particularly satisfying to see some of the smaller companies winning TOTY’s like Thames & Kosmos for CodeGamer and Zuru, Inc. for Bunch of Balloons.

Personally, I’m always interested in stories of toy industry veterans who are inducted into the Toy Industry Hall of Fame. This year, we were treated to moving tributes to Peter Eio, Ray Larsen, and Sydney Rosen. We learned what it took for each of them to strive for and reach success, as well as a little bit about what made them tick. If I could walk away from the evening with just one word, it would be perseverance.

On Sunday night, the toy industry gathered for the Wonder Women Awards Gala eager to see who would walk away with a coveted pink cape. I think everyone was pleased to see the event return to The Lighthouse at Chelsea Piers. Genna Rosenburg, Ashley Mady, Janice Ross, Mary Kay Russell, and their team have this thing down pat. As always, they throw a fantastic event while gliding around serene as swans although I am quite sure that underneath they have been paddling like crazy.

This year was highlighted by a Lifetime Achievement Award for former Mattel Chairman and CEO, Jill Barad, as well as a Gamechanger Award for Hollywood’s Geena Davis. Congratulations to all Wonder Women nominees and Award winners!

Meanwhile, back at the Javits Center, Toy Fair was chugging right along. The atmosphere was upbeat, even buoyant. Over the last three years, toy industry sales in the U.S. have grown between 4.5 and 6.7% annually. That will put toy company executives in a good mood. The crowd on Saturday was a bit subdued as if often the case on the first day of the show, but Sunday and Monday were busy and bustling even in what I unfairly call “the basement of gloom.” I will have to admit that this year the basement was buzzing and not gloomy in the least.
Kudos to TIA President Steve Pasierb, SVP Global Events Marian Bossard and the whole TIA staff for doing a fantastic job. My only possible complaint has to do with the interaction between the floors of the Javits Center and my large and bony feet. If my feet weren’t so big, there wouldn’t be so much of them to hurt.

Kudos to TIA President Steve Pasierb, SVP Global Events Marian Bossard and the whole TIA staff for doing a fantastic job. My only possible complaint has to do with the interaction between the floors of the Javits Center and my large and bony feet. If my feet weren’t so big, there wouldn’t be so much of them to hurt.

Life at Toyjobs is often slow during the first quarter as toy companies are too busy traveling from show to show to be able to even think about or doing. That said, this year we have been quite busy to date with strong numbers of search starts and completions. Three consecutive years of strong sales growth has put toy companies into an optimistic mood. Optimistic companies try new things and add new people. I expect that to continue with a lone caveat.

Republican lawmakers have been kicking around the idea of a “border adjustment tax.” That sort of thing would be temporarily devastating for the toy business, although over a year or two we would learn to adjust. Republicans aren’t fully aligned in support of it and the Trump Administration seems to be dancing around the edges but leaning against it. There is also LOTS of business pressure against this proposal. While it seems that everybody’s fingers are crossed, I guess most of us are thinking that a border tax knuckleball isn’t going to happen, if only because it would be so stupid. I am comfortable with that – but I am also mindful…stupider things have happened….and recently.

“May you live in interesting times.”

Tom Keoughan

The toy industry had a strong year with sales growth of about 5%. While that is down from 2015, it’s really pretty good. Despite strong annual sales, it looks like growth in the fourth quarter slowed from 2015 even though in the final week before Christmas goods were literally blowing off the shelves. Fourth quarter weakness mirrored the economy as a whole as GDP growth dropped from 3.5% in the third quarter down to 1.9%

The big winner was interactive sales. While brick and mortar growth was only up 1.6%, online sales grew a whopping 12%. That brought web sales to 21% of all holiday spending up from 15.4% last year. In other news; Edward Lampert sold of Craftsman Tools and pumped an additional $1 billion into his company. It looks like toy manufacturers will be able to sell to Sears-Kmart for at least one more year. Lastly, toy industry’s strong 2016 helped to propel Toyjobs to its third best year on record.

The future, however, is full of uncertainty. We have a new and very different Presidential administration. Emotions are running high and flying in all directions. I will try to put my comments in context by telling you that I could not bring myself to vote for either Trump of Clinton and only voted down ballot. And before my inbox explodes, this is a business publication so I will examine this from a purely business perspective.

As pragmatic business people, now that Trump is here, it is not our job to support or condemn but to adapt. That has been made difficult because for the first twelve days things have been moving incredibly fast. That said, our ability to try and interpret and predict Trump are enhanced by the fact that thus far he has been very predictable in pushing forward watered down versions of things he promised on the campaign trail. Every politician does this but usually to a less (hmm) Trumpian degree.

Much of Trump’s behavior is right out of The Art of the Deal. Make incredible demands and then negotiate back to what you really want.  Behave outrageously to throw your opponents off balance and confound them on how to strategize against you. This is pure Art of the Deal. I recommend you read it. Not because it’s the greatest book of all time on sales and negotiation techniques. It’s not. But it does give you a pretty clear picture into the Trump playbook.

Recent headlines suggest negotiations of a new trade deal with Mexico and…the Wall. Trump has floated a 20% “border tax” to pay for his behemoth. That would hurt both American consumers and American businesses who already manufacture goods in Mexico. Trump doesn’t want to hurt American consumers. Not if he wanted to protect his majorities in the House and Senate. Not if he wants to get re-elected in 2020. Trump is also very much pro-business (although not as much as he is pro-Trump).

Mexico is in a very weak position. Their economy is based on exporting to the US. In a “Mexican Standoff” (sorry) their economy would crater…and fast. Could they redirect and rebuild? Sure, but that would take a lot of time, money and most importantly pain. That said, Mr. Pena Nieto isn’t about to commit political suicide by just writing a check. Trump holds a much stronger hand and he needs to build The Wall and appear to make Mexico pay for it. I would expect that some mechanism in the renegotiated NAFTA agreement will allow both men to declare victory to their constituencies. I also expect the US to end up with a better deal than it had previously. For Trump this is an easy win against a weak and dependent opponent.

Moving on to the TPP. I didn’t like Obama’s version of the potential trade deal nor am I happy with Trump just ripping it up. China isn’t going anywhere. They are only going to get stronger. Obama sought to negotiate a multilateral trade deal with everyone in China’s neighborhood while at the same time skirting the elephant in the room. When you look at the region, China is big and has a large and strong economy. Their ability to either seduce or bully their neighbors is only going to increase. In fact, it has already. China continues to sign up partners in the Asian Infrastructure Investment Bank left and right. The sensible thing is to sign a big multilateral deal which includes China now. In the future they will only be stronger and be more closely tied to the rest of the region’s economies. If we wait, they will have much more leverage.

I understand Trump’s wanting to retreat from multilateral trade deals and replace them with bilateral ones. The US has the largest economy in the world. We are the 500lb gorilla. If we are negotiating with, say, Belgium; we are going to have much more leverage and get a much better deal than if we are negotiating with Europe as a whole. It also allows us to better pinpoint actions, either positive or negative, in the future. That makes perfect sense in the short term. I don’t know if it works in the long run. Frankly, it’s above my pay grade.

Negotiating trade with China is a completely different story. China is ascendant. It has a big powerful economy, the second largest in the world. It has numerous trading partners. It has choices. I expect Trump will bluster and blow. China is a convenient political whipping boy. He will tirade about currency manipulation – although the reality of that ended about ten years ago. While Trump rails about “America First” we need to remember that “China First” has always been China’s policy. I’m sure that both sides of this imbroglio realize that a trade war serves nobody’s interests.

After the fireworks, I expect that Trump will walk away with very positive optics and a marginally better deal but the Chinese will be able to bring home some face saving measures. Chinese negotiators have a history of taking a longer view. They have always been good at postponing their concessions to sometime down the road. Sometime down the road could mean post-Trump and a new round of negotiations.

The danger is that when two Big Brutes play a high stakes game of chicken (especially with an audience) they often have to get hit in the head a couple of times. Therein lies the potential for disruption…and broken bar room furniture. It’s entirely possible that this scenario doesn’t play out. Maybe cooler heads will prevail and realize “everybody gets hurt.” Things may not slide in this direction…but they could.

I’m approaching the next two years with an attitude of optimistic caution. I am naturally optimistic but cautious because the rules are changing and the game board may be altered. Business has been good and Trump plans on instituting some very business-friendly measures in tax reform, deregulation and overseas profits repatriation but his public stance on international trade hangs over our heads.

I expect Trump’s trade negotiations to work out as a marginal net positive in the end. The question is when will that end be? With Mexico, I expect things to come together quickly and easily. China, on the other, could be a long and rocky road

…on the other hand I could be completely wrong about all of this. I am reminded of the traditional Chinese Curse, “May you live in interesting times.”

See you all in New York,
Tom Keoughan

P.S. Please direct all complaints to:

Steve Bannon
The White House
1600 Pennsylvania Avenue NW
Washington DC 20500

Let’s at least keep that guy busily distracted.