In 2008 the toy industry and indeed everybody had to endure the worst holiday sales season since 1992. This was truly an awful year where both comparative sales and total sales were down sharply for most retailers. In some recent years we have seen weak comparative store data even though total sales were fairly strong. I’ve always argued that comp store sales is a flawed indicator because it fails to take into account the cannibalization of sales that occurs as large retailers continue to build more and more stores closer and closer together. Think Wal-Mart or Starbucks. In 2009, we may see a “reverse cannibalization effect” as retail chains shut down large numbers of stores and entire chains go out of business. It’s my feeling that total store sales is an obviously better measure of how much total “stuff” is sold by a retailer to consumers. In any case, 2008 was a horrible year for retail when measured by either yardstick. Only the deep discounters like Wal-Mart, drug chains and the dollar stores had good or even decent years. Surprisingly, even the warehouse clubs did poorly.
The combination of a terrible holiday sales season and the credit crunch economy proved too much for several weaker retailers who were forced into Chapter 11 or even liquidation. KB Toys, Circuit City, Linen & Things, Office Depot and Gottschalks all went under. The retail death watch continues with Dillards, Claire’s, Duane Reade, Talbots, Bon-Ton Stores, Pier One Imports and even Borders all rumored to be teetering close to bankruptcy. In addition to outright failures many retailers will close a significant number of stores. It is estimated that 200,000 stores will close by year end. Fewer stores means less shelf space to fill which translates to less overall sales for toy companies. As always there will be winners and losers.
Most companies are not self financing and rely on bank loans or lines of credit to finance operations. In the current financial climate where banks reticent about lending even to the strong, I would expect weak and marginal companies to struggle. Starting this past September we began to see toy companies either fail or be bought out by stronger rivals. I would look for the trend of acquisitions and company closings to continue and even accelerate.
With the news that several key retailers were not going to attend the January Hong Kong Toy and Gamers Fair, toy executives spent the month of December scrambling to get the 2009 sales season rolling with those major retailers that weren’t going to attend. Once in Hong Kong, some complained about the retailers who weren’t in attendance and some even said that the show was a waste of time. Other, more optimistic types saw it as an opportunity to really focus on second and third tier customers. It was also noted that the international retail presence was particularly strong.
I was both curious and concerned that with oil, resin and transportation prices coming down that retailers might try to claw back the already less than adequate price increases they allowed toy companies in 2008. The word back from Hong Kong was “they asked but they didn’t demand.” Toy companies were able to cite high safety testing costs as a reason why prices shouldn’t be rolled back. Also discussed, was that with so many Chinese toy factories closing (more coming after Chinese New Year?) that U.S. toy companies had little negotiating leverage left with those factories that remained. Price stability will be crucial in 2009 as both lower sales volumes AND tighter margins would be a recipe for disaster. That said, my best guess is that 2009 will be the toy industry’s most difficult year since I started out in 1981.
Toyjobs had a respectable year in 2008. After getting off to our fastest first half ever, we entered the third quarter and unfortunately, there pretty much wasn’t a third quarter. We were lucky that we had, what for us was, an average fourth quarter. That said more than half our fourth quarter placements came from a single client who was hiring due to a corporate relocation. Overall we were about 15% off of our average for the year. That’s not bad because our average is pretty good. I’m happy with our results in 2008 but I am even more happy that the year is over. The only thing that I’m not happy about is the outlook for 2009. I foresee that by the end of the year there will be fewer retailers, fewer toy factories, fewer US toy companies and yes, fewer toy recruiters. I hope that when it’s all over everybody reading this will still be standing. We, here at Toyjobs, certainly intend to be.
See y’all in New York,
Tom Keoughan
