Toys ‘R’ Us

From the Yuan Wars to Toy Company Jobs

As November’s very heated election approaches in a continuing climate of economic malaise, desperate politicians are pointing the finger of blame anywhere and everywhere but at themselves.  The nation is rightly disgusted with its banksters but is growing immune to the long and continuous public bludgeonings of their ilk.  In search of another scapegoat the thundering congressional herd lurches eastward – “Blame the Chinese! – after all they don’t vote in our elections.”

Chinese workers have been striking (or just not showing up) and demanding higher wages.  Frankly, good for them – they were being paid a pittance and many had pretty lousy living conditions.  I’m all for an increase in the purchasing power of Chinese factory workers.  That said, a dramatic upward currency revision, as many in Washington are calling for, could have all sorts of unintended consequences.

China is NOT sucking up as many U.S. jobs as is touted by the pandering vote grubbers.  Low end (toys, sneakers, small appliances, et al.)  manufacturing left our shores long ago and is not coming back.  You can’t make these goods in the U.S. and still meet “the Wal-Mart price”.  Even in these dire economic times no one will accept a wage low enough to make widespread U.S. consumer goods production feasible.  Well, except maybe in Detroit.  “What about cars?” you ask.  “Building cars isn’t low end manufacturing.”  Yes, they are building cars in China but they are not shipping them here.  Those cars are for Asian consumption.  By the way, part of “they” is “us”.  U.S. auto manufacturers are building cars in China for Asian consumption as well.

If the U.S. political class is able to harangue China into a significant upward revision of their currency, it will cost U.S. jobs.  American companies who have their products manufactured in China will have higher costs, and because it is very difficult to budge retailer’s price points, will therefore have smaller margins.  An environment of diminishing margins is not likely to spur additional hiring.  Companies will not be looking for additional sales marketing or product development staff.  This is especially true of smaller private companies where owners tend to view the cost of each additional employee as coming straight off the bottom line – which translates to straight out of their pockets.  A rising yuan doesn’t support these small businesses which are supposed to be the engines of American job growth.

In taking a country from the 12th century to the 22nd in the span of a mere fifty years, China’s leaders have to deal with far bigger problems than the U.S. Congress.  They are going to move slowly and do what they think is right for them – whether what they think is right, actually is right or not.  Them, of course, being the Communist Party, which is committed to maintaining power whether the country is communist or not.  What we will likely see is a few small gestures such as the past two weeks 1% rise in the yuan in an attempt to mollify the situation until after the U.S. elections (now only six weeks away) when everyone’s attention will be focused elsewhere.

One of the factors that is really holding up job growth in the U.S. is uncertainty.  Business owners like predictability.  They determine what profit margin they want in order to make an enterprise worthwhile.  Then they try to project sales (always tricky) and try to set costs at a level that will give them that margin or better.  Costs are supposed to be the easy side of the equation to figure out.  Unfortunately, we are currently in a situation where no one knows what health care costs will be or what climate change legislation costs will be.  No one even knows what the tax rate will be.  The tide may turn either for or against the business community but once we know what the rules are we can decide what to do about them.  Until we know the costs we can’t even do the calculations, therefore many things are being put on hold . . . like hiring.

In the current economic climate it’s time to scrap blindly chanting ideology and focus on the pragmatic.  Just so you know where this is coming from – I consider myself socially liberal and fiscally conservative but most of all a pragmatist.  “People can believe in whatever they want, I want to do what works.”  I know, I just painted a huge target on my back and expect to be pelted from all sides by Nerf missiles when I arrive in Dallas for the Fall Toy Preview.  In any case, what seems to be pragmatic in that it would help the economy and can also actually be passed and signed into law is to extend all Bush tax cuts for a period of two years and then review them two years on.  This is not the time for a 700 billion tax increase.  I think it’s likely that is what will happen.  Obama doesn’t have the votes to do what he wants and everybody realizes it will be disastrous if taxes increase for everyone at the end of 2010.

Upcoming tax certainty isn’t the only positive as the economy continues to slowly (very slowly) improve.  There are other “reasons to be cheerful”.  Despite the hot summer doldrums, retail sales for July and August slowly but steadily increased, coming in ahead of expectations.  August saw an acceleration in manufacturing in both the U.S. and China.  Growth was slow but again it was positive.  However, we should temper our enthusiasm on this particular metric.  It is completely natural for production to ramp up in July and August as seasonal goods are manufactured for late August/September pre-holiday delivery to retailers.  While sell in is good, the ultimate question is sell through.

Average hourly earnings – which decide how much money people have available to spend – were up by 0.3 percent.  There was also a rise in temporary employment which is often a prelude to the creation of permanent jobs.  A better than expected 67,000 private sector jobs were added in August and there were upward revisions to data for the previous two months.  True, the government shed 114,000 temporary Census workers but that was expected.

The September stock market has been strong and most economists are de-emphasizing the chance of a double dip recession.  Warren Buffett last week stated:  “I am a huge bull on this country.  We will not have a double-dip recession.  I see our businesses coming back almost all across the board.”  After all the gloom and doom of the summer it seems that we find ourselves in a situation where the economy is not collapsing but rather heading in the right direction though at too slow a pace to drive unemployment down.

The toy industry has several things going for it.  Most toy companies have focused this year on producing low cost goods.  While retail sales have been creeping upward, shoppers have been hesitant to purchase big-ticket items like autos, furniture, appliances. In fact, electronics retailers are revamping their aisles to focus on handheld gadgets to try to excite consumers who have grown weary of their traditional big-sellers:  televisions and personal computers.  After all, how many big-screen TV’s do you need?  Handheld devices are still pricey compared to toys.  The toy industry may find itself in the pricing sweet spot for the 2010 holiday season.

The growth of Toys’R’Us pop up stores is also exciting.  Last year Wal-Mart only had to deal with the competitive impact of 90 somewhat hastily assembled Toys’R’Us Express locations.  This year Toys’R’Us is planning 600 express stores with 300 of the locations already up and operating.  More locations, more shelves to fill and more competition for a Wal-Mart whose toy department will be 25% smaller this year, are all positives for toy companies.

As for toy company jobs, the annual late August/September hiring bounce has been somewhat muted for a number of reasons.  Retailers continue to order late in an attempt to shift as much liability as possible onto toy manufacturers.  The trouble is that factories have been relocating inland and north.  It takes longer to get goods to the coast, there has been a shortage of shipping containers and also massive traffic jams on roads leading to the ports.  Later ordering combined with longer lead times is not a recipe for success.  Over my three decades in the business, I have noticed that toy companies feel better about themselves and start hiring once their goods hit the retailer’s loading docks.  Later shipping has caused many companies to delay pulling the trigger on hiring decisions.  Also, all of the uncertainty over government rules, regulations and taxes has been a considerable factor.  Make no mistake about it some companies have begun hiring and we have begun a number of searches, but there are also a lot of companies talking about their staffing needs but dragging their feet rather than getting going.  Like the economy, things are moving in the right direction but slowly, slowly.

Still Muddling Thru,

Tom Keoughan

P.S.  Wow, sorry about the long tirade.  There must have been some “pent up demand”.  I guess the main difference between me and the Washington gasbags is that I have not yet learned how to talk in bullet points.  See y’all in Dallas.

By | September 22nd, 2010|ToyJobs Blog|Comments Off on From the Yuan Wars to Toy Company Jobs

Toyjobs.com: Review and Forecast

Same store retail sales eventually rallied after a late December snow dump to rise about 3 percent.  Of course, this was compared to the very weak year earlier period.  It’s also difficult to discuss retail sales trends without including Wal-Mart, but Wal-Mart doesn’t report monthly sales data anymore.  As a shareholder, I like that but as a chronicler it’s a pain in the neck.  I would assume that in the current economic climate they did well but we should also keep in mind that their December ’08 numbers were better than most which will skew current comparisons downward.

During the past year retailers seemed to get it just about right.  They navigated the tough economic terrain by discounting just a few items and offering other promotions but by keeping prices relatively steady for much of their inventory.  Of course in the toy aisle, Wal-Mart did its usual October price slashing which was then followed by much of the retail community.  NPD reports that overall US toy sales were down by 2 percent.  Obviously that isn’t good but it is far from being catastrophic.

While the congress fiddled (yes, the Nero illusion is intended) with a healthcare plan that almost nobody wanted, the rest of the country focused on jobs. The economy began to grow in the second half of 2009 but the jobs market lagged behind with businesses still being reluctant to hire.  Although the December headline (U3) unemployment number was unchanged at 10% from November, the broader measure of U6 – which includes those forced to work part time or discouraged from seeking work – rose from 17.2 to 17.3 percent.

Here at Toyjobs we had our worst year ever.  The overall number of searches was way down and many of the searches that were started were canceled or put on interminable holds.  Waxing philosophically, “Some days the fish are there and some days they are not but I’m out there fishing hard in either case”.  Perhaps a quarter of all search firms went out of business last year but thanks to three decades of success Toyjobs is in strong financial shape and I will be out there fishing well into the future.

Recent discussions with toy execs returning from Hong Kong reveal that the mood at the Hong Kong Toy Show was mostly buoyant.  Retailers were pretty clean on inventory and were looking to buy.  That said, toy companies may want to temper their enthusiasm.  Wal-Mart and Target are cutting back on toy space, SKUs, and vendors.

In Wal-Mart’s case, toys have never been all that profitable and have primarily been used to drive foot traffic during the fourth quarter.  The “groceryization” of Wal-Mart has worked out so fantastically – with the average customer visiting the store once a week rather than once a month – that toys are 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 business anymore – no more guessing at what will be a hot seller.  They’re just going to focus on moving merchandise.  Don’t expect them to take any chances.  I’m not sure of the thinking behind Target’s strategy (no grocery to drive traffic), perhaps it’s just a case of me-tooism.

This trend will obviously benefit big toy companies who are able to make big TV advertising commitments.  It also allows other retailers to create a larger toy footprint without having to compete with Wal-Mart’s crushing margins.  Sears has been testing getting back into the business.  Barnes and Noble and Borders, two retailers who generate a lot of traffic despite Amazon, are putting a greater emphasis on toys.  I suspect that other retailers will follow suit now that they won’t have to compete with Wal-Mart’s pricing.  Not initially, but over the longer pull, toy companies should be pleased with the ability to diversify their customer base and at higher margins.

The biggest beneficiary of the Wal-Mart/Target downsizing of the toy department should be Toys ‘R’ Us.  People like to shop specialty stores because of their broader product offerings.  Toys ‘R’ Us is also taking big steps to counteract their Achilles heel – the fact that they have traditionally been standalone – separate trip stores.  During the past holiday shopping season they opened more than 80 pop-up stores in malls and shopping centers.  The concept may have been quickly conceived and erratically executed but they should have it nailed by 2010 or 2011.  Toys ‘R’ Us has also been working hard to turn itself into a destination by placing its Babies ‘R’ Us and Toys ‘R’ Us stores side by side.  Babies ‘R’ Us can function similarly to Wal-Mart’s grocery business by bringing in customers for their weekly needs (diapers, wipes, etc.) and acting as a feeder for Toys ‘R’ Us.  We should all hope that this strategy works as the toy industry surely needs a stronger Toys ‘R’ Us.

Here at Toyjobs, search starts jumped significantly in mid December as companies anticipated a new year with new budgets.  It is still too soon to tell if this improvement will be sustainable throughout the year or if it is just a new budget bump.  It is also too soon to tell if these search starts will turn into actual hires or be canceled or put on hold as so many were in 2009.  I should have a much better handle on that by the time of our post New York Toy Fair issue.  I can tell you that the air is different than it was even six months ago.  It “smells” better.  Certainly some companies are still having problems and most companies are still cautious but the palpable sense of fear is gone and has been replaced by a feeling of “we’re working through it”.  My sense is that this will be a recovery year much like 2003.  It won’t be a good year but it will be increasingly better than last.  I just hope that we only have ONE recovery year rather than two or three.

Muddling thru,

Tom Keoughan

By | January 25th, 2010|ToyJobs Blog|Comments Off on Toyjobs.com: Review and Forecast

Fall Toy Preview: A Little Grumbling Despite The Full Dance Cards

My experience at the Dallas Fall Toy Preview was that the overall mood was “workmanlike”.  While I can’t say that people were exactly upbeat, there wasn’t the pervasive sense of gloom that we’ve seen at the last few trade shows.  Most people seemed to give off more of a sense of being survivors, of being beaten up but having made it through with the knowledge that the worst is over but that there are still some tough miles ahead.

In the weeks leading up to the show there was a lot of talk that Target and Wal-Mart (both extremely early price choppers this year) were not planning to attend.  I hear that before every trade show and, as always, Target and Wal-Mart sent buyers although not their entire contingent.  Even with that I still heard a lot of grumbling at the show despite the fact that most companies had very full dance cards.  My sense is that those people and companies who were disappointed were so because they had a false set of expectations.  If you go into Dallas thinking that you are going to write a Target order, I can guarantee you that you will be disappointed.  This is a great show for getting retailer feedback about your offerings, giving you a chance to tweak product, packaging and assortments prior to the all important Hong Kong Toy and Gamers Fair in January.  It’s also a great time to focus and have some quality meetings with second and third tier retailers.  As one VP Sales said to me “even if Wal-Mart and Target weren’t here at all, I have the opportunity to meet with fifty customers in just three days.  Where else would I want to be?” 

With Wal-Mart de-emphasizing the toy aisle those second and third tier retailers are becoming more important.  By stepping back, Wal-Mart has allowed other retailers to see opportunity in the toy business and many of them are responding aggressively.  Toys ‘R’ Us is stepping into the malls with eighty pop-up stores.  This will be their first year of doing this so their execution is a question mark but let’s face it, anything has got to be an improvement over the mess that was the KB Toys retail experience.  Sears is testing getting back into the toy business and, if successful, will make a bigger commitment for 2010.  Barnes and Noble and Borders, two retailers that definitely still get traffic, are putting a greater emphasis on toys and providing a lot more shelf space.  I suspect that other retailers will follow suit now that they won’t have to compete with Wal-Mart pricing on as many products.  Toy companies should be happy with the increased shelf space, diversification of customers, and the likely higher margins to be had from these retailers. 

What toy companies should be complaining about is the lack of trade show support from toy behemoths Mattel, Hasbro and Lego.  This lack of support has now spread to second tier players such as Jakks Pacific, Spinmaster and MGA.  Certainly this makes business sense for larger companies as they know they will get their face time with the retailers.  Obviously, they would prefer that buyers be totally focused on their product line rather than “distracted” by a hundred smaller competitors.  Alright, I get it, but the toy industry may want to consider whether they want these large companies dominating the TIA board.  Certainly, the TIA needs their dues but one of TIA’s main functions is to organize trade shows and industry events.  In choosing not to support trade shows, these companies’ dominant place on the TIA board is a clear conflict of interest.  One of a trade organization’s most important missions is to promote and protect the interests of it’s smaller and medium sized members.  The big boys have the ability to fend for themselves. 

In our isn’t that ironic file:  Mattel has reached a settlement in twenty-two class action suits over their widespread product recalls in 2007.  The recalls resulted in over-regulation which disproportionally affects small and medium size toymakers.  While Mattel can amortize testing costs and manpower over a gazillion products sold; the smaller companies are hit much harder by testing costs, time to market and eyestrain (from having to wade through all those crazy new regs).  Creativity has also been blunted because small companies can no longer produce a new and innovative product and take a flyer to see how it sells in the marketplace.  The new rules mean that a company needs pretty large presells to be sure that a product will at least break even.  Now do I think that Mattel intended this from the beginning?  Of course not, but the fact remains that Mattel is one of the biggest beneficiaries of their own quality and product safety failures.  If the court approves this settlement – it looks to me like they got off cheap. 

Toy industry hiring continues to slowly improve.  It’s certainly not good but it’s better than it was six or even three months ago.  My continuing forecast is that hiring will continue to be weak at least until the August/September (and it may take longer) time frame.  For most of 2010 hiring will be slow although not as bad as 2009.  Some very important meetings are coming up in December and January. Those meetings are not with retailers and not in Hong Kong but with banks.  Banks slashed loans and lines of credit in 2009.  With banks still reluctant to lend, regardless of Holiday sales numbers, I can’t imagine that seasonal fashion businesses will be at the top of their lending lists. 

Muddling thru,

Tom Keoughan

By | October 30th, 2009|ToyJobs Blog|Comments Off on Fall Toy Preview: A Little Grumbling Despite The Full Dance Cards

“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.

Muddling thru,

Tom Keoughan

By | June 8th, 2009|ToyJobs Blog|Comments Off on “Less Bad” is the “New Normal”

Bleak Times: Will Walmart Steal the Silver Lining in 2009

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

By | November 9th, 2008|ToyJobs Blog|Comments Off on Bleak Times: Will Walmart Steal the Silver Lining in 2009

Fall Toy Preview: A Success…But

I always dread the Javits Center:  home of “the world’s hardest floors,” so with all of the Fall Toy Preview pre-show negativity, I started out expecting the worst–but that’s not the way it turned out.  When I arrived on Friday, everyone seemed to be having a good time.  I don’t know if it was good for business or not, but the open forum led to a clubby old home week feel with a lot of backslapping and storytelling including more than a few amusing but outrageous lies.  It was sort of like a cocktail party without the drinks; which surely came later.  That was Friday and it was a lot of fun, but by Sunday…and Monday…the whole thing was wearing a bit thin.

About half of the companies I spoke with said that the show was an incredible waste of time and money.  The other half thought that the show was great.  I’m not sure what the “differentiator” was, but maybe it was that some companies came in with the proper expectations and knew how to work that kind of show.  Those companies with open booths did get significant walk-up trade (I asked) while those who had completely closed booths did not.  I saw more than one buyer circling those ugly white walls trying to find an entrance.  Hopefully, they didn’t just give up.  With knockoff anxieties running high in this age of cell phone cameras, a hybrid booth seemed to work out the best.  A good example was Radica which had a small open section with their well known and well liked Sr. VP of Sales standing out front attracting buyers, industry notables and others (like me) thereby generating a small crowd and a bit of a buzz and then funneling the buyers “inside” to meet with his sales troops.  Before the show, all I heard was that none of the major retailers were coming, but I saw some pretty good looking dance cards.  Walmart, Target, Toys ‘R’ Us, Meijers, Borders, Walgreen, etc.  Hey, that’s not bad business.

Toy companies who located away from the Javits Center fared less well.  The toy building was a dark, dismal, dusty, empty and echoey affair and the seven or eight companies showing there should thank Playalong for drawing buyers to the building.  From companies located in hotel rooms and other locations, I mostly heard tales of late appointments, missed appointments and a lot of time spent standing around bored.  Each company can decide for themselves if it makes sense to attend the show, but the moral of the story is “if you’re going to be there…be there!”

It was a great show for me with the open atmosphere and a lot of senior toy executives standing around without a whole helluva lot to do much of the time.  I figured that all of the curtains and doors were meant to keep me away from their Brand Managers.  Fortunately for me, that didn’t really work all that well.  So while I had a great show, I somehow suspect that the industry as a whole shouldn’t base its decisions on making me happy.

Mostly what I heard is that although this show worked out much better than expected, the Javits Center is difficult to deal with, expensive to deal with and at the end of the day if you exhibit at two shows, no cheaper than maintaining a showroom year round.  The consensus was that the TIA should commit to keeping both tradeshows in New York and should commit to the Javits Center for three or four years thereby giving the industry time to find a sound and properly priced building or group of spaces in adjacent buildings.  In Manhattan, space does become available and it makes a lot of sense to wait, watch, evaluate and then pounce on a sound, viable option rather than trying to force a bad decision down everyone’s throats due to artificially created time constraints.

The ability of the toy industry to get together and “pounce” is sure to give rise to more than a few derisive chuckles and worse (please include me as a chucklehead).  What the industry needs is leadership, and not from Mattel or Hasbro.  It is not in Mattel or Hasbro’s best interest to be part of a toy center.  Buyers are going to come and see them wherever they are and Mattel and Hasbro want to dominate those buyers’ attention and time.  Leadership needs to come from the second tier companies:  Jakks, Spinmaster, Megabloks, etc.  If they can come to a decision and commit, then all the small and medium sized companies can feel comfortable about making what would be a very productive decision to follow.

The Toy Industry…pouncing…yeah it’s pretty funny stuff.

All the best,

Tom Keoughan

By | November 15th, 2006|ToyJobs Blog|Comments Off on Fall Toy Preview: A Success…But

Torrid Toy Hiring Despite Challenges

Toy industry hiring has started off at a torrid pace.  Here at Toyjobs we are currently on track to beat our best year ever (2000).  It’s still early, and we haven’t hit the summer slowdown yet so realistically we are unlikely to eclipse the old mark.  Frankly, we don’t even want to.  Having a year like that takes a heavy physical, mental and emotional toll.  Friends and family begin to get cranky – and I begin to get cranky too.  As long as we keep raising the bar on our second (2004) and third (2005) best year’s, I’m a happy camper.  It seems quite likely that we will be able to do that despite all the continued challenges facing the toy industry. 

Oil, resin, transportation, labor and Chinese electricity costs continue to be high and this is keeping pressure on margins even as retailers continue to play hard ball on pricing while buying less goods.  Toys ‘R’ Us store closures mean less shelves to fill and Walmart is actively cutting its inventory.

The results of this can be seen at some of the larger toy companies.  At Mattel, Barbie continues in her death spiral (down 8%) while Hot Wheels and Matchbox also slowed (down 4%).  Even American Girl which had been a star performer had sales weaken by 9%.  The only bright spot was Fisher Price where sales were up 12%.  I wonder if Neil Friedman is beginning to get all misty eyed while day dreaming about Buffalo winters.  Hasbro did marginally better but still lost money in the first quarter.  It looks like Rose Art sold out just in time with 5 Magnetix lawsuits to date.  Over the years, Larry Rosen has been described using many adjectives (not all of them printable here) but to be fair; shrewd should always be counted among them.

The tough industry climate is also reflected in the fact that the toy business is now homeless.  The TIA has to be viewed as the main villain here.  They took an exorbitant amount of time to come up with a single option that was acceptable to almost no one but themselves.  It was incredible to see that a working group consisting of mostly the same people as the TIA search group was able to come up with three or four new possibilities in the blink of an eye once they were free of TIA oversight.  Unfortunately, what I’m hearing (not confirmed) is that all of those options have slipped through the industry’s fingers because it took too long for everyone to get their act together.  It’s not easy herding cats.

The always opportunistic TIA in its seeming role as a for-profit trade show management firm, rather than that of the toy industry advocate that it should be is now charging an arm and a leg for Javits space that was made necessary by their own incompetence in finding a new home for the toy industry.  Also keep in mind that there will be additional costs of building an appealing and closed trade show booth unless you want to get knocked off by everyone with a cell phone camera and an Asian connection.  Once you have spent the money on that sleek new booth it will be easier for the TIA to overcharge you for space again next year…and the year after that…and the year after that…

Finally, we get to Walmart.  It’s always fun to throw a few rocks at the big bully as long as you can run away and hide before he beats you up.  According to CEO Lee Scott, “Walmart is making real changes.”  Let’s look at them in order:

  1. Walmart will increase surprise inspections at foreign factories in an effort to make sure that its suppliers uphold labor and environmental standards.  Gee, this is almost too easy.  Apparently, Walmart will NOT be conducting any inspections of its own stores which have been under severe publicity pressure due to its poor treatment of store employees and weak environmental record.
  2. Walmart will increase diversity in its workforce.  Yes, Walmart will constantly be on the lookout for any group of people it can employ at lower wages and with fewer benefits. 
  3. Walmart will expand its share of the Hispanic market.  Duh, Walmart will try to sell more goods to more people.  It will also try to employ more Hispanics at lower wages and then sell products to them at “everyday low prices.” 
  4. Walmart will sell more environmentally friendly products.  Apparently Walmart believes that gasoline price squeezed consumers will be more anxious to spend $2 on an energy efficient light bulb than 19 cents on a standard one. 
  5. Walmart will help competing local companies stay in business.  Uh-huh…and pigs will fly.

The only “real change” that I see at Walmart is that CEO Lee Scott is heading off on a one month paid vacation.  I would like to see any of Walmart’s store employees try to do that.  In a related (?) story, a Walmart customer who was experiencing difficulties with a self-checkout system not working properly was arrested for allegedly punching it out.  Always remember that a weaker Walmart, which still sells tons of goods but is less able to bully its suppliers, is not such a bad thing for the toy business.

All the best,

Tom Keoughan

By | May 2nd, 2006|ToyJobs Blog|Comments Off on Torrid Toy Hiring Despite Challenges

TRU Future: It Pays To Know Who The Owners Are

The purchase of Toys ‘R’ Us by a combination of two private equity firms and a big realty trust has lead to speculation on what the future of the unit might be.  The best speculation has to begin with identifying exactly who the buyers are.

Vornado Realty is obviously interested in the real estate sitting under the 150 to 200 money-losing and marginal stores which TRU is likely to close in order to boost profitability.  Most of these locations will likely be leased at high prices to fast-growing retailers like Lowe’s, Bed Bath & Beyond, Linens ‘n Things, etc.  In addition, realty trusts (REIT’s) must pay almost all of their earnings out to shareholders in order to qualify for their tax-free status. This means that it is difficult for them to use retained earnings in order to purchase new properties.  Some of the TRU stores that are in very bad locations, and there are many, will likely be sold outright to fuel Vornado’s war chest.

Private equity firms generally like to get their money out in a four to six year time frame.  As a growth vehicle, Babies ‘R’ Us will likely be taken public in three or four years at a high multiple to earnings.  Keep in mind that infant supplies are a high traffic driver and no one likes to drive traffic like Walmart.  They could decide to seriously enter the baby business at any time and a repeat of TRU’s toy business saga could easily follow.  The envisioned Babies ‘R’ Us offering to investors is likely to be a big windfall for KKR and Bain Capital, but a big mistake for investors.

Before discussing the toy division, it is time to give credit where credit is due.  Here at Toyjobs Monthly, we have frequently lambasted The Dude for his ineffectual management of TRU’s business.  While we still feel that this has been the case, he should be applauded for getting top dollar for TRU shareholders (including himself of course).  His legacy is likely to be that he was more successful at selling the company than he was at selling toys.  It is now time for him to ride into the sunset with saddlebags full and leave the business of management in more capable hands. 

We are hoping that those hands will continue to be those of John Barbour.  John has been successful at every job he’s ever had.  Of those, this will be the toughest.  Mr. Barbour has voiced a desire to see a return to innovation in the toy business.  He also has spent most of his career on the manufacturer’s side of the table and it is hoped that he will partner with, rather than pound, on his vendors.

Under private equity ownership, success is likely to be measured differently.  Walmart and Target are not going away.  But a leaner TRU, after shedding its weaker stores and with a sound retail strategy, should be able to become a cash cow.  As a public company, success was all about growth and growth is difficult in a mature business.  Under private equity ownership, the spinning off of large amounts of cash would be a very good thing indeed.  After the cash machine is streamlined in five or six years it could be either sold off to a major (foreign?)  retailer (not likely) or another private equity group (more likely) or even kept (less likely).  In any case, we envision current ownership and hopefully management being in place for five or six years. 

In other major retail news, Walmart critics are having a field day.  Did Tom Coughlin simply steal $500,000 from Big W or, as he claims, was the money used in a secret anti-union slush fund reminiscent of the Nixon era?  My take is that this is not necessarily an either/or situation and that it is quite possible that both are true.  We note with interest that Walmart froze approximately 30 million worth of Coughlin’s retirement benefits but only after he publicly stated that his defense would be that the bogus expenses and gift cards were reimbursement for Walmart’s secret anti-union campaign.  Is this an attempt to pressure Coughlin to take the hit to his reputation in order to regain what is likely the bulk of his fortune?

Walmart says that its internal review turned up no evidence that Coughlin had used the money in anti-union activities.  Well, duh, wasn’t that the point?  Coughlin used to be Walmart’s Chief of Security and it wouldn’t surprise me if he had documentation buried under a rock somewhere as an insurance policy.  I also find it deeply suspicious that a company famous for its systems and controls on everything let a half million dollars just walk out the door.  On the other hand, it is a little difficult to believe that Walmart and Coughlin paid off union spies with hunting rifles, dog fences on Coughlin’s property and cowboy boots custom made for Coughlin’s feet.  He will undoubtedly claim that this was part of some reimbursement scheme but it sounds a bit fishy to me.  At this point we are anxious to hear Coughlin’s defense and open to see if he has compelling evidence that he was doing black bag work at Walmart’s behest. 

As for Coughlin, in the end he will likely be viewed as a powerful person run amok for what, in the context of his position and net worth, was chump change.  It never ceases to amaze me how cheaply some people are willing to sell their integrity.  It can take twenty years to build a reputation and only a week or two to tear one down.  As this story unfolds, there are likely to be no winners and two losers. 

Most toy manufacturers that we have been talking to have voiced frustration (and worse) to retailers’ refusal to let them push through price increases despite higher costs for oil, resin, transportation, electricity in China, etc.  The retail attitude seems to be “We want OUR prices and OUR margins – take it out of your end!”  Charming.  This has lead manufacturers to take plastic and features out of products which curbs innovation, jeopardizes product quality and consumer safety.  Some have even cancelled orders as they have become unprofitable.

Here at Toyjobs Monthly, we may have stumbled onto a solution.  Walmart’s earnings have been increasing an average of 17% annually over the last five years and are forecasted to grow an annual average of 15% over the next five.  However, the company’s share price is actually less than it was in 2000.  For the last five years the company’s P/E ratio has been in the mid thirties but now stands at 18X 2005 estimated earnings.

Walmart’s stock is cheap and not likely to remain so over the long haul.  Our proposed solution is to take the nickels and dimes that you’re able to squeeze out of Big W and invest them in the company’s shares.  That may be the best way to make money from Walmart.

In this issue, we have provided comprehensive prognostication on the future of China’s economy and a Readers’ Digest version of what Sergio Zyman is likely to say at the coming Kid Power Conference for anyone who either won’t be in attendance or is looking for a way to slip out early for a round of golf.

All the best,

Tom Keoughan

By | April 27th, 2005|ToyJobs Blog|Comments Off on TRU Future: It Pays To Know Who The Owners Are

A Tale of Two Toy Fairs

Two toy fairs occurred in February of 2005.  At the Javits Toy Fair, most of the specialty manufacturers were very upbeat as some long absent retailers returned to sacrifice their feet to the world’s hardest floors.  Just as importantly, manufacturers were writing orders.  The majority of company presidents that I spoke with wrote enough business to more than pay for the show.

Back at the Toy Building (for now) there was mostly grousing along the lines of “what are we even doing here.  None of the majors are here.”  Upon closer questioning, however, it did turn out that most companies’ schedules were pretty full.  I don’t know about you, but with such a large percentage of the business being done by three or four majors at low profit margins, I’d be trying like hell to diversify my account base.  A company can live by Walmart one year but die by them the next.   With a well diversified account base (re: small, pesky accounts with higher margins) especially if you can sell them enough to cover your company SG&A, you can live to fight another day.  Also, although Walmart wasn’t at the show, some of the more aggressive manufacturers did make inroads by selling to Walmart.com.

What will become of the October and February Toy Fairs in the future?  There is so much rumor, insider gossip and white noise out there that at least at this point it’s safe to say that nobody really knows.  One thing we can all hope for is that we won’t have to schlep to Orlando – a completely artificial land made up entirely of bad food, plastic and foam.  I’ve lived my entire life without ever setting foot in Orlando and am not anxious to start now.  As for maintaining trade shows in Manhattan, I’m all for it – but it seems a shame that so much time and effort is being spent on a glimmer of a hope for a Toy Building over on the West Side which may be built by 2012, if New York gets the Olympics, or if there’s a new football stadium that no one needs, if, if, if…Such things are pipedreams and fiascos made of.  Manhattan supporters and the toy industry as a whole would be better supported by focusing this energy on finding a building that actually exists and isn’t in the middle of nowhere. 

Two of the major toy retailers had pretty good fourth quarters in 2004.  Target had strong same store sales growth while Walmart had 9% overall sales growth and a 16% profit surge.  Walmart’s same store sales were hurt by continuing to cannibalize their own sales by opening a flurry of new stores in the quarter.  Interestingly, Walmart’s CFO has at long last finally stated that the company should be judged by total sales and profits rather than same store comparisons.  Toys ‘R’ Us muddled along with a year that can best be described as “less bad.”  As for KB – gee, do we really still count KB?

In WALMART UNIONIZATION news it should come as no surprise that Walmart closed the Quebec store which had voted to unionize.  Walmart Canada spokesthingie Andrew Pelletier stated “we have been unable to reach an agreement with the union that in our view would allow the store to operate efficiently and profitably.”  No mention was made of how much Mr. Pelletier’s salary has cost the company or of how many productive employees might have been retained had Mr. Pelletier’s labors been judged on efficiency and profitability.  With regard to a second Quebec store whose employees are considering UNIONIZATION; the Quebec Government Labor Relations Board told Walmart Canada to stop intimidating employees who wished to unionize.  The Quebec Board apparently carries little weight in the great state of Colorado where Walmart successfully intimidated employees who had called for election into then voting down their opportunity to unionize. 

At Toys ‘R’ Us, The Dude and the board continue in their bungling ways.  It’s almost too incredible to believe that they thought they could sell off the sagging domestic toy division and then sneak off with the good stuff.  Apparently, they never considered that a sophisticated buyer might want to buy and hold Babies ‘R’ Us while disposing of the toy group and real estate to finance the deal.  This type of thing happens when you hire a very pretty tropical fish who believes, and then convinces you, that he can swim with the sharks.  Then again, the TRU share price has just about doubled so maybe he’s sharkier than he appears.

We applaud recent comments made by TRU toy group president John Barbour in which he calls for both greater innovation and less commodization in the toy business.  One can’t help but hope that he’s able to shake himself loose of The Dude and then walk the walk as well as get his computer jockeys (buyers) to do the same.  If he can pull it off, TRU and the toy industry as a whole just might stand a chance.

All the best,

Tom Keoughan

By | March 15th, 2005|ToyJobs Blog|Comments Off on A Tale of Two Toy Fairs

Turmoil in Toyland…So What Else is New?

Toy industry turmoil continues with KB Toys preparing to close over 200 stores.  The toy division of Toys R’ Us is up for sale and any buyer’s also likely to close somewhere near 200 stores.  Walmart had a Thanksgiving weekend mini-stumble, but lets not shed too many tears, they were quickly back with a vengeance.  Actually, it’s sort of nice to see that they’re not completely infallible.

On a brighter note, the Kmart-Sears tie up should create a stronger although still weak competitor and there is a very good possibility of much increased toy inventory on all those Sears shelves.  We can argue all night about geopolitics (come to think of it, we probably have) but in the retail space, anything that leads to a more multipolar world is good for everyone.

It seems likely that toy manufacturers will be able to push through some moderate price hikes for 2005.  That even as we can envision manufacturing costs coming down somewhat due to lower oil, resin and transportation prices.  This seems to add up to lower sales volume but wider margins for the coming year. 

Through all this, toy industry hiring has continued unabated.  Here at Toyjobs, we are in the process of posting our second best year out of twenty-three.  Going forward, successful companies will have to be nimble, smart and retain the very best people.

Here’s to a happy and profitable Holiday Season,

Tom Keoughan

By | December 15th, 2004|ToyJobs Blog|Comments Off on Turmoil in Toyland…So What Else is New?