Despite the giddy pronouncements of some in the trade press I would sum up the New York Toy Fair with one word – subdued. It was better than I thought it would be. It seemed like people were just too tired of complaining to complain anymore. There was a realization that the only way to stay in business was to just go out and work it, even if business stinks. A lot of the people walking the aisles were “consultants” which in this case was code for “looking for a job”. There was pretty good foot traffic on Sunday. The rest of the time things seemed fairly slow except for a sudden surge on Monday from 2 p.m. to 4 p.m. Where did they come from? Where did they go? As for final attendance numbers, it’s all a bit uncertain. Asking a trade show promoter (TIA) about attendance numbers is a little like asking the barber if you need a haircut.

Most mass marketers that I spoke with had their dance cards pretty full with retail appointments but reminded me that this is the “Happy Talk” season and that little was actually being accomplished. Specialty manufacturers fared better, in that, although less of their smaller retail customers were in attendance, those that were there were in an order-writing mood. The grumpiest group was anybody who had paid good money to try to peddle their wares in the “Basement of Gloom”. No traffic, no happy faces.

In many of my discussions, senior toy industry executives are telling me that they need to add people from an operating perspective. However, most companies are not self-financing and rely on bank loans and lines of credit to finance operations. In the current financial climate (which was caused by banks) banks are cutting loans and credit lines and, in some cases, even eliminating them altogether. They are telling companies that if they want financing they will have to cut expenses by 15-20%. The quickest way to do that is through a reduction in headcount. Some companies are laying people off of their own volition while others are being forced to by their banking “partners”.

It’s not like there is any less work to be done and in the toy industry, people weren’t exactly slacking off to begin with. This means that there is a lot of opportunity for consulting work out there. Banks tend to focus on fixed costs (like employees) but if an expense can be shifted to the variable cost part of the ledger (like consulting) it’s much more likely to pass muster. So for all you newly minted “consultants” out there: Work Your Network! It may not be optimal but it can pay the bills until the economy recovers. When will that be? I have no way of knowing, nobody does. My best guess is not before August – October 2010. It won’t happen sooner but it certainly could take longer.

The severe tightening of credit supply means that if you’re in the market to buy a couple of toy companies, you’re in luck. When the economy is in the tank, owners of marginal companies often want to sell their businesses. This is, of course, exactly the wrong time to sell your devalued asset. During these periods there are typically lots of talks but few actual deals. That’s because business owners typically try to price their companies at a multiple of “good times” earnings when they are, in fact, trying to sell because they are barely squeaking through bad times. This time it’s different (I never like saying that). This time banks are choking off credit so that there will likely be a lot of forced sellers. Some companies will have to sell even at a low price or just shut their doors.

Last Friday’s headlines shouted “Retail Sales Show Signs of Life” and “The Consumer Returns” but it was a really a false dawn and not much of one at that. The entirety of the same store sales increase was attributable to the super discounters: Walmart, Costco, BJ’s, Big Lots and the Dollar Stores. Outside of those few, the numbers were negative. Let’s not forget that 40% of Walmart’s sales are from the low margin grocery business. Costco’s grocery percentage is even higher. “People gotta eat! Now they’re eating cheaper!” That’s not exactly a rallying cry for a stronger retail sector.

Open and Shut

Muddling thru,
Tom Keoughan


Open and Shut