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
