Every day we are pounded by headlines about retailers closing stores. Toys ‘R’ Us leads the charge and will be closing about 180 or 20% of its locations in the US. Walgreen, Brookstone and Hallmark have also announced closures.
Sears Kmart will be closing about 165 locations. Of course, if you are still selling to Kmart you already know that you’re sitting at the blackjack table deciding whether to draw another card when your hand stands at 15. Can I get 15 day payment terms? Can I get 10?
Wal-Mart will also be closing 63 of its Sam’s Club locations, although about a dozen of those will be converted into e-commerce distribution centers. Building out their e-commerce fulfillment network should help them deliver online orders to customers faster.
All of these store closings will mean less shelf space to fill but greater predictability for the year ahead. No longer will toy manufacturers have to wonder: “Will they?”….They already have. Unfortunately, many manufacturers still have uncertainty on how much and when they will be paid by TRU for goods that they’ve already sold. That means that while the future looks brighter, many vendors still have uncertainty about their own current financial situation. It doesn’t help that Toys ‘R’ Us has secured a bankruptcy extension beyond April 6th. It is also unhelpful that throughout this whole bankruptcy process, TRU has been far from forthcoming and has not acted as a very upstanding citizen toward the toy industry community. “Not only are our payables way late but we will continue to nickel and dime you in the warehouse and any place else we can think of.”
There are, however, silver linings on the horizon. Holiday sales for 2017 posted strong gains. The National Retail Federation stated that overall sales when up 5.5% while according to data from MasterCard Spending Pulse they were up 4.9%. Target, Kohl’s and even J.C. Penney all hit it out of the park. Amazon continues to rocket forward. A study by One Click Retail said that the online juggernaut claimed 44% of all US e-commerce sales for 2017. Additionally, Amazon accounted for 4% of total retail sales for the year – approximately $200 billion.
Unfortunately, toy sales gains were much more muted. According to NPD they grew only 1% in the US and 1% globally in the 12 countries they track. Mexico and Russia were hot sales growth markets. Toys ‘R’ Us has to be one of the major causes of this. We have heard that TRU’s US sales dropped by 15% in 2017. And if those are the numbers we are hearing, the real numbers could be substantially worse.
Although we were coming off of our third best year ever, 2017 was a lousy year for Toyjobs. For the first nine months of the year our clients told us: “We need additional people but we are going to wait and see what happens with Toys ‘R’ Us.” Once the bankruptcy was announced, toy manufacturers, for the most part, pulled in their horns. TRU is everybody’s second or third biggest customer and manufacturers big and small all took a hit to their overall profit margins.
Moving forward we are cautiously optimistic on toy industry hiring for 2018. Although there will be less shelf space to fill, there should be greater predictability on 2018 sales. In addition, tax relief should mean wider profit margins for toy manufacturers. That said, I wouldn’t be surprised if retailers are unsatisfied with their own expanded profit margins and also want a piece of yours. Consumer spending was up 3.8% in the final quarter of 2017. That looks to continue due to strong employment, signs of wage gains, a galloping stock market and high consumer confidence. Spending should be boosted even further as consumers see their take home pay begin to rise. The media has 90% of the American people believing that their taxes will be going up. What a surprise it will be when 85% of them actually see their tax burdens drop and their paychecks increase. Add to that, the pent up demand when toy manufacturers who wanted to add people last year now feel comfortable enough to do so. All of this should come to pass if and when the toy industry can finally get past the Toys ‘R’ Us fiasco.
I look forward to seeing everyone in the New York February cold.
With unemployment and inflation low and consumer confidence high, the holiday shopping season started out strong as more than 174 million Americans shopped either in stores or online over the long Thanksgiving weekend. That beat National Retail Federation’s prediction that there would be about 164 million shoppers.
E-commerce continues to cannibalize in-store sales. There is a 17% increase in online sales projected. That said, bricks and mortar retail has also been strong. Retailers have fought back with special products and iterations of products that are only sold in stores and not online. And, let’s face it, some people enjoy camping on sidewalks and then wilding through the retail landscape.
I checked the online videos and violence and atrocious behavior did appear to be down considerably. Unfortunately, there were a number of deaths. In Southern New Jersey a man was fatally shot and his brother wounded in a mall parking lot. Another person was shot at a mall in Memphis. In Reno, Nevada a Wal-Mart customer was gunned down in a fight over a parking space. Several people were also killed in Chicago although that’s not so different from any other day in the Windy City.
Personally, I’m not interested in being anywhere near a retail outlet on Black Friday weekend except maybe the neighborhood wine shop. When it comes to holiday shopping, count me “all in” for e-commerce.
Happy Sell Through Season,
Let me first say that I love the Fall Toy Preview Show in Dallas. I can spend two days and meet with twenty-five toy company presidents. Toy execs have a fair amount of down time in Dallas and I’ve become pretty good at catching them standing around without a lot to do. That said, what’s good for me isn’t necessarily good for the companies who are spending a lot of money to exhibit there. Let’s face it, last year’s Fall Toy Preview was pretty abysmal, but I was pretty confident that the TIA and its board realized that. My thinking was that they would make some changes to improve it.
Early Tuesday I noticed that cosmetically it was a better show. Overall space was reduced and the booths were configured in such a way as to make it “feel more full.” That didn’t really hide the fact that the aisles had a number of blind alleys with no exhibitors in them. It also didn’t hide the fact that key toy manufacturers continued to pull out. There were a bunch of new companies up on the 13th floor but a lot of those were one trick ponies rather than companies with full product lines. I’m not sure how much buyer attention they really got. It seemed as it the TIA did a really good job of selling them.
I’ve always felt that Trade Shows were most productive when manufacturers primarily focus on working the mid-tier accounts. While it’s nice to get a little face time with buyers from Wal-Mart, Target and Toys R’ Us, generally speaking you are not going to accomplish a lot with them at a show. It’s preferable to travel to their headquarters and spend some focused quality time. At a show, mid-tier accounts are more likely to move the ball meaningfully forward. By having them in one place at one time you can also potentially cut costs by reducing visits to headquarters. Unfortunately, half of the mid-tier did not show up. Kohl’s Meijer, Shopko, Walgreen’s and others were nowhere to be seen. You’ll still have to go to Grand Rapids. You’ll still have to go to Green Bay.
Those are the criticisms and mid-day on a Tuesday a lot of the toy execs that I spoke with were a little bit grumbly. However, by the end of the show the negative perceptions had radically changed. By Wednesday afternoon, literally everyone I spoke with said they were having a great show. The comment I heard the most was: “We had less meetings but they were really productive meetings.” And, while a bunch of the Midwest Mid-Tier accounts didn’t attend, Amazon, Family Dollar, CVS, Michael’s, Hobby Lobby and others were there and open for business.
One often mentioned major disappointment was that Toys R’Us didn’t send any senior executives. The Buyers were there but the senior team that had been planning to attend cancelled at the last minute. Certainly they would have been besieged by questions but the proper thing to do was send a team to deliver a consistent, coherent message as a balm to the vendors they had just recently stung.
Perhaps the TRU no show was due to the basic unfairness of the US bankruptcy code. Under the law, Toys R’Us will get to choose a list of “critical vendors” which it says are “critical” to its ongoing business. If you are a large toy company like Mattel, Hasbro, Lego, Spin Master, Jakks or MGA you may receive 90% of the monies that you are owed by Toys R’Us while the smaller fry may only get a nickel on the dollar. If you’re a small toy company and you object too much well then your products need not grace our shelves going forward. Even if you’re a large company and you are negotiating too hard you can find yourself dropped from critical vendor status. It appears that during the Chapter 11 workout, Toys R’Us has a pretty strong hand.
Of course, everybody wants Toys R’Us to survive. Aside from Amazon it buys the broadest range of toys on the planet. Eliminating their debt will allow them to operate at a profit but they will need to make some sweeping changes going forward. Lifting the debt load from their backs should give them ample money to make those changes, but first they need a strategy. They need to shutter unprofitable stores and clean up the ones they keep open. They should broaden their product selection and become a destination. Unfortunately, they have to become a destination because most of their stores stand alone. They are a separate trip. Roll with that and go BIG! Become a kid’s destination with play zones, food, PIZZA!, host birthday parties and hook up with movie theatres. Of course, these changes may risk lowering their dollars per foot of shelf space. Maybe it’s worth it? Also, Toys R’Us had an early advantage in e-commerce sales but their performance has been quite poor. They should bring someone in from the outside to fix it.
All of that is way above my pay grade but what I do know is that now that TRU is in Chapter 11 they have to pay their vendors going forward. It’s time to fill the pipe. Toys R’Us has a period of time to adapt to the ongoing American Retail Transformation (ART…yeah, I made that up). They need to bring in the people to formulate a prescient and winning strategy and then they need to execute. If they don’t it may be five years it may be ten but they could find themselves going from Chapter 11 to “Chapter 22.”
The Toys R’Us bankruptcy has meant uncertainty for toy manufacturers. The current turmoil and transformation going on in retail has meant even more uncertainty. When confronted by uncertainty most companies cut spending which means reduced hiring. Even with unemployment returning to its pre-economic crisis lows, toy companies have been slow to hire.
Early in the year Toy Executives were telling me that they needed to add people but didn’t want to start searches yet. That changed in early August and they were having Toyjobs start searches in droves. As recently as the Dallas Fall Toy Preview, I was telling people that “we have done all these searches where companies have picked their person but haven’t pulled the trigger.” Fortunately, we successfully concluded three searches in the last week. I also expect to close two or three more in the next week and a half. What does that mean going forward? Uncertainty. It’s hard to say.
I’d like to close with an ancient Chinese curse: “May you live in interesting times.” And follow it with another quote of a more recent vintage: “We spent the second thirty five years trying to figure out how the first thirty five could have been so easy.” –Mick Jagger
All the Best,
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.
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.
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,
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.