Uncertainty.

I hope everyone is enjoying a strong Holiday Sell-Through Season. After the misery of 2023, current year sales seem much improved. The National Retail Federation is expecting holiday spending to reach a record high. Even though shoppers are weighed down by higher prices for necessities such as food and car insurance(!). Walmart and Amazon had record-breaking sales on Black Friday and Cyber Monday. Discount chains like T.J. Maxx are also doing well. That’s an indicator that consumers are willing to spend when they see the right products at reasonable prices. If you are a higher priced retailer then times are tough. If you are Target, you just have to hope that people are picking out something extra when they come in to buy their Taylor Swift Sparkling Typo Dream Book. It appears that while not “great” this year will turn out much better than last. Some companies will break through and have very good years but most will at least be able to breathe a sigh of relief.

That leaves us thinking about next year and if there is a single word that captures the year to come it is – Uncertainty. The incoming Trump administration has been threatening tariffs – “Big, Byootiful Tariffs.” Of course, there is a difference between “campaign speech” and governing action.

Trump has been known to bluster and blow only to partially dial things back later. I’ve always seen him as a guy who won’t split the sandwich with you. Rather, he’ll loudly demand three quarters of it in the hopes that he’ll get two thirds. Putting tariffs in place won’t be his goal but rather will be a negotiating tool used in order to achieve certain trade and foreign policy objectives. That may be alright in the long run but what does it mean for us in 2025? Trump is not even in office yet and we have already seen Canada and Mexico start to fold to his demands. China, on the other hand, is likely to take a much harder line. China has a range of measures it can use if it decides to retaliate. It can restrict exports of critical minerals or pharmaceutical precursors. It can punish U.S. multinationals’ Chinese operations, sell off U.S. Treasury bonds or devalue their own currency. That said, they are also vulnerable due to what is currently a very weak domestic economy, which has been caused by the bursting of an enormous real estate bubble.

What will Trump do? Early on in his campaign he talked about 60% tariffs on China which would be catastrophic to both the U.S. and Chinese economies. He seems to have dialed that back and is now talking about an additional 10% tariff on Chinese imports. Something like that could probably be partially distributed throughout the supply chain…partially. We should also note that tariff threats are likely to be rolled in slowly. If we look at the last Trump administration, tariff threats were made along with a target date leaving time to negotiate. Last time we also saw target dates repeatedly postponed. Will that happen this time? Who knows? Last time around the toy industry was able to duck tariffs altogether for several years. Will we be able to do the same on this go ‘round? Who knows?

The third leg of the uncertainty stool is the big retailers. Will tariffs be passed on to the consumer? Or will retailers hold their price points firm? How firm will they hold those price points? How much will they be willing to participate in the distributing tariff costs through the supply chain? I expect not much.

Toy companies are left waiting for three actors to make decisions before we can react. What will Trump do? We know that Trump likes to be unpredictable. How will the Chinese respond? Probably in a more incremental way but with a hard line approach. How will the major retailers respond to the whole mess? Probably, they are the easiest to predict. Each actor has multiple choices and when we multiply that by three we get a large number of possibly permutations. It’s sort of like a game of four-dimensional chess. Uncertainty.

Stay nimble, my friends.

Happy Holidays!

Tom Keoughan