The toy industry had a strong year with sales growth of about 5%. While that is down from 2015, it’s really pretty good. Despite strong annual sales, it looks like growth in the fourth quarter slowed from 2015 even though in the final week before Christmas goods were literally blowing off the shelves. Fourth quarter weakness mirrored the economy as a whole as GDP growth dropped from 3.5% in the third quarter down to 1.9%
The big winner was interactive sales. While brick and mortar growth was only up 1.6%, online sales grew a whopping 12%. That brought web sales to 21% of all holiday spending up from 15.4% last year. In other news; Edward Lampert sold of Craftsman Tools and pumped an additional $1 billion into his company. It looks like toy manufacturers will be able to sell to Sears-Kmart for at least one more year. Lastly, toy industry’s strong 2016 helped to propel Toyjobs to its third best year on record.
The future, however, is full of uncertainty. We have a new and very different Presidential administration. Emotions are running high and flying in all directions. I will try to put my comments in context by telling you that I could not bring myself to vote for either Trump of Clinton and only voted down ballot. And before my inbox explodes, this is a business publication so I will examine this from a purely business perspective.
As pragmatic business people, now that Trump is here, it is not our job to support or condemn but to adapt. That has been made difficult because for the first twelve days things have been moving incredibly fast. That said, our ability to try and interpret and predict Trump are enhanced by the fact that thus far he has been very predictable in pushing forward watered down versions of things he promised on the campaign trail. Every politician does this but usually to a less (hmm) Trumpian degree.
Much of Trump’s behavior is right out of The Art of the Deal. Make incredible demands and then negotiate back to what you really want. Behave outrageously to throw your opponents off balance and confound them on how to strategize against you. This is pure Art of the Deal. I recommend you read it. Not because it’s the greatest book of all time on sales and negotiation techniques. It’s not. But it does give you a pretty clear picture into the Trump playbook.
Recent headlines suggest negotiations of a new trade deal with Mexico and…the Wall. Trump has floated a 20% “border tax” to pay for his behemoth. That would hurt both American consumers and American businesses who already manufacture goods in Mexico. Trump doesn’t want to hurt American consumers. Not if he wanted to protect his majorities in the House and Senate. Not if he wants to get re-elected in 2020. Trump is also very much pro-business (although not as much as he is pro-Trump).
Mexico is in a very weak position. Their economy is based on exporting to the US. In a “Mexican Standoff” (sorry) their economy would crater…and fast. Could they redirect and rebuild? Sure, but that would take a lot of time, money and most importantly pain. That said, Mr. Pena Nieto isn’t about to commit political suicide by just writing a check. Trump holds a much stronger hand and he needs to build The Wall and appear to make Mexico pay for it. I would expect that some mechanism in the renegotiated NAFTA agreement will allow both men to declare victory to their constituencies. I also expect the US to end up with a better deal than it had previously. For Trump this is an easy win against a weak and dependent opponent.
Moving on to the TPP. I didn’t like Obama’s version of the potential trade deal nor am I happy with Trump just ripping it up. China isn’t going anywhere. They are only going to get stronger. Obama sought to negotiate a multilateral trade deal with everyone in China’s neighborhood while at the same time skirting the elephant in the room. When you look at the region, China is big and has a large and strong economy. Their ability to either seduce or bully their neighbors is only going to increase. In fact, it has already. China continues to sign up partners in the Asian Infrastructure Investment Bank left and right. The sensible thing is to sign a big multilateral deal which includes China now. In the future they will only be stronger and be more closely tied to the rest of the region’s economies. If we wait, they will have much more leverage.
I understand Trump’s wanting to retreat from multilateral trade deals and replace them with bilateral ones. The US has the largest economy in the world. We are the 500lb gorilla. If we are negotiating with, say, Belgium; we are going to have much more leverage and get a much better deal than if we are negotiating with Europe as a whole. It also allows us to better pinpoint actions, either positive or negative, in the future. That makes perfect sense in the short term. I don’t know if it works in the long run. Frankly, it’s above my pay grade.
Negotiating trade with China is a completely different story. China is ascendant. It has a big powerful economy, the second largest in the world. It has numerous trading partners. It has choices. I expect Trump will bluster and blow. China is a convenient political whipping boy. He will tirade about currency manipulation – although the reality of that ended about ten years ago. While Trump rails about “America First” we need to remember that “China First” has always been China’s policy. I’m sure that both sides of this imbroglio realize that a trade war serves nobody’s interests.
After the fireworks, I expect that Trump will walk away with very positive optics and a marginally better deal but the Chinese will be able to bring home some face saving measures. Chinese negotiators have a history of taking a longer view. They have always been good at postponing their concessions to sometime down the road. Sometime down the road could mean post-Trump and a new round of negotiations.
The danger is that when two Big Brutes play a high stakes game of chicken (especially with an audience) they often have to get hit in the head a couple of times. Therein lies the potential for disruption…and broken bar room furniture. It’s entirely possible that this scenario doesn’t play out. Maybe cooler heads will prevail and realize “everybody gets hurt.” Things may not slide in this direction…but they could.
I’m approaching the next two years with an attitude of optimistic caution. I am naturally optimistic but cautious because the rules are changing and the game board may be altered. Business has been good and Trump plans on instituting some very business-friendly measures in tax reform, deregulation and overseas profits repatriation but his public stance on international trade hangs over our heads.
I expect Trump’s trade negotiations to work out as a marginal net positive in the end. The question is when will that end be? With Mexico, I expect things to come together quickly and easily. China, on the other, could be a long and rocky road
…on the other hand I could be completely wrong about all of this. I am reminded of the traditional Chinese Curse, “May you live in interesting times.”
See you all in New York,
P.S. Please direct all complaints to:
The White House
1600 Pennsylvania Avenue NW
Washington DC 20500
Let’s at least keep that guy busily distracted.