“Less Bad” is the “New Normal”
Clichés spring like “green shoots” from the mouths of journalists, TV talking heads and mush mouthed politicos. The media seems to have abandoned its age old “bad news sells” model with the sudden realization that too much bad news may put them out of business. They have joined with beltway types to try to talk up consumer confidence in the hopes that a return to shopping will jump start the economy in a way that the current stimulus package will not until 2011.
In many ways it seems to be working. The rate of new layoffs is slowing even though I would like to see a couple of more months of data before declaring it a trend. The headline unemployment number is 9.4% and that is very scary but perhaps not as scary as it seems because it is a cumulative number which includes everyone who was laid off prior to the most recent month. On the other hand, the official unemployment number is not what we should be looking at in the first place.
A broader statistic which gives us a much more realistic view of the unemployment picture is U6. U6 includes people who have been looking for a job for so long that they have either given up in disgust or decided to just sit back and wait for things to get better before they even try. They are not actively looking for a job but they would take one if it was offered to them. The “regular vanilla” unemployment figure does not include these people. U6 does. It also includes people looking for full time jobs who have only been able to find part time jobs but really want full time jobs. The “regular vanilla” unemployment figure does not include these people. Huh. U6 does. U6 for May was 16.4%. Whoa! 16.4% is a HUGE number! More than one in six Americans is either unemployed or underemployed (do you want fries with that?). It suddenly becomes very clear why the government talks about the “regular vanilla” unemployment figure and why you have never heard of U6.
So, things have indeed gotten very bad although for the time being they have ceased getting worse. It has to be considered very good news that the global financial system is no longer teetering on the brink of total collapse. That said, we still have a severe recession to work through. To paraphrase Warren Buffett (I’d quote him but I can’t write that fast) “The financial climate is much improved from the October through March period which sets up the stage for the economy to grow stronger. That hasn’t happened yet but we’ve reached the point where it can.” Many are predicting a soupbowl shaped recovery. The economy came down hard and will drag along the bottom for quite a while before it starts back up the other side. That sounds just about right although I have no way of knowing. In fact, I’m still a little leery of other shoes yet to drop (commercial real estate, credit card debt, and we still haven’t exactly gotten rid of all that toxic waste yet, have we?). If I seem to be prevaricating and slowly feeling my way along like a blind man in the dark, well, I am.
This leads everybody from consumers to manufacturers to retailers to remain extremely cautious. For their part, retailers are taking longer than ever to finalize orders. Of course, they don’t see themselves as being late. They just want to push as much risk as possible onto their vendors (ahem, “partners”). With so many Chinese factories having closed, so many laid off Chinese workers, and the lengthened quality regimen, we are fast approaching the point when manufacturers will be physically unable to deliver goods by the time that retailers want them. Later commitments don’t mix well with longer cycle times. The prevailing retailer attitude seems to be “We don’t care – get it here or somebody else will fill our shelves.” But who? And with what? Why, the big boys, of course. Mattel, Hasbro and Lego (do we still consider Leapfrog a big boy?) can afford to tool up and manufacture earlier because they get to amortize costs over a gazillion units sold. They also get earlier commitments from retail than the rest of the toy industry. This means that the shelves will be filled with less variety this year.
Another onerous note is that Wal-Mart is reducing its toy space by more than half. The toy department itself has never been all that profitable for Wal-Mart. Instead it has been used as a loss leader to drive foot traffic during the last four months of the year. Over the last five or six years, Wal-Mart has committed heavily to the grocery business. Grocery is also a low margin business but one where Wal-Mart has an advantage because it is not unionized . . . . . yet. The move into grocery has worked out brilliantly as a traffic builder. The average Wal-Mart customer now visits their stores once a week rather than once a month. The toy aisle is no longer needed to drive traffic. Of course, they’ll keep their hand in and stock the obvious big company items backed by big advertising dollars but they’re not going to think too hard about the toy industry anymore – no more guessing on what will be a hot seller. They’re just going to focus on moving merchandise – like big jars of pickles. This will obviously benefit big toy companies who are able to make big TV advertising commitments. Toys ‘R’ Us also stands to benefit – if they are able to execute. It’s as if Wal-Mart is taking its foot off of TRU’s throat after nearly destroying them. It’s certainly not an act of good will, it’s just that toys aren’t that important to Wal-Mart anymore.
As for toy company hiring, we are still going through a dark period where there have been many layoffs and very little hiring. As I have said in this space before, most companies tell me that operationally they need people but their banks won’t let them hire anyone. Most companies operate on lines of credit, letters of credit and bank loans. This year many banks have said something on the order of “we’ll give you seventy percent of your usual line of credit but you’ve got to cut costs by twenty percent”. Due to the seasonal nature of the toy business this has pushed many companies to the brink of solvency. Many companies are meeting with their banks every two weeks to be told which bills they are allowed to pay. It’s almost as if the banks think we don’t know who caused the financial crisis in the first place. It would be nice to see them get their own houses in order before making judgments about others.
Toyjobs has noticed that the hiring climate has grown tricklingly better during May and early June. I would anticipate that by the end of the second quarter retailers will have mostly finalized their orders and toy companies will be able to approach the banks with a better story to tell. This leads me to believe that by late August/September toy industry hiring will have improved noticeably although it will still be a long way from good (it’s easy to improve noticeably from zero). 2010 should be better as we move along the gradually inclining slope of the soupbowl curve. Unfortunately, retailers will continue to push off purchasing commitments as long as possible. Toy companies won’t be able to breathe easier until July/August meaning that it likely won’t be until late August/September that there is a true resurgence in hiring.