Toy factories may not look as whimsical as this digital design, but they’ll be booming this year. | Source: stock.adobe.com

by STEVE REECE, Managing Director, Toy Team Asia, Kids Brand Insight

On a global scale, there is no doubt that the toy industry fared better than most industries amid the COVID-19 pandemic. Overall, our industry benefited strongly from the lockdowns, as parents desperate to occupy and entertain their offspring sought new toys and games to excite bored kids. 

Prior to last year, we saw strong momentum before we hit the headwinds of higher inflation than most of us have experienced within our working lifetimes. The accelerated rate inevitably squeezes consumers and shrinks disposable incomes. That’s a clear threat to our industry because if consumers have to choose between feeding, heating, and sheltering their kids or buying them toys, we know what will happen. Still, the toy industry tends to outperform others in the face of strong economic challenges. However, with inflation close to a rate of 8%, then “real” sales must increase by 8% in actual dollars for the market to remain flat.

At the start of 2023, it was difficult for a non-economist to predict what will happen with inflation — and it still is. But it seems likely that the rate will remain higher than we have been used to in previous decades. This likely means that some of the same challenges from last year will remain with us through the next sales cycle. That said, the other looming challenge is a potential recession, but the toy industry is famously “recession resistant.”  Of course, most of us haven’t experienced a recession combined with high inflation, but a recession affects people on an individual basis more than inflation. Inflation applies to everyone, but not everyone loses their job in a recession. So, in summary, while the macroeconomic picture is tough heading deeper into 2023, we know how resilient our industry is.

NEW PRODUCT DEVELOPMENT

As always, there is a lot going on with plenty of moving and shaking happening behind the doors of the major toy and game companies. The larger companies have an extensive range of original content due for release this year, but a strong slate of toyetic movies is on the horizon, including some from proven franchises.

Related: From the Editor: Let’s Start the Roaring ’20s

More broadly, the contacts that I speak with are discussing more focused ranges, and established industry creatives seem to be hustling harder than usual to find work. This suggests that product development budgets may have been trimmed across the board. If we look back to the global financial crisis of the late aughts/noughties, companies did cut back and focus on fewer, less risky product development initiatives. The big change since then is the breadth of product launch platforms and mediums that are now available. In the past couple of years, my company has consulted with numerous upstart companies that developed products and went direct-to-consumer (D2C) via Amazon and other platforms. These companies have sold hundreds of thousands — if not millions — of units without any traditional sales channels and needed my help to access toy distribution. These newcomers arrive in our business with no industry baggage and with all the tech savvy to exploit opportunities without a large, long-standing infrastructure. This is both a threat and an opportunity to people in our business. Companies that adapt and pivot can take advantage while those who stick with the same old ways of doing things will find it harder and harder in tough times to even tread water.  Industry newcomers can steal the lunch of slow-to-adapt established players.

A LEGO factory in China | Source: The LEGO Group

FIXING THE SUPPLY CHAIN

Another area of our business that has experienced a challenging few years is sourcing and supply chain. We are living through a period of inevitable transition in terms of toy manufacturing, and while we may be focused on the next selling cycle and where our inventory is coming from for the next round of purchase orders we have to fill, we also need to be aware of ongoing changes in manufacturing. This includes the continued shift away from China for toy production.

In short, before China’s rise to prominence, we sourced toys from a combination of places, including factories in Japan, Taiwan, Hong Kong, Haiti, Eastern Europe, etc. Then China opened up, and hundreds of millions of literally starving people with very low wage expectations became accessible to the global toy industry. From that point in the late 1970s, China began a meteoric rise in manufacturing capacity and capabilities.

Until around 10 years ago, China remained both incredibly efficient (comparatively speaking) and relatively cost-effective for toy production. A new challenge emerged as millions of people were lifted out of abject poverty and into aspirational positions where workers can find better work outside of the factories. The resulting labor shortage creates a new bottom line: The China of today is better suited to manufacture real automobiles versus toy cars. 

Related: The 2023 Edition of The BIG Toy Book is Here!

China still manufactures more than 80% of the world’s toys, but this is an increasingly challenging status quo to hold onto. We can fall into the trap of looking too far into the future when most companies are just looking at the next 12 months. But if you suddenly need to move a lot of toy production to a different geographic region, it takes work, planning, and preparation. We can see this most clearly with publicly traded toy companies – these large corporate entities have teams of people whose sole job function is to anticipate risk and reduce the chances of them materially affecting financial results. These companies also have larger amounts of manufacturing to move versus smaller companies. For example, I could help you move $1 million in toy production tomorrow, but $1 billion needs a more robust and strategic effort. Recently, several major toymakers have reported to shareholders that they are now sourcing 50% or more of their products from outside of China. If you haven’t questioned the role of China as your primary sourcing geography, shouldn’t this be some food for thought?

The biggest challenge in moving production is that worthy alternatives are limited. Vietnam is largely full and India has vast potential capacity and a cheap — and massive — labor pool, but has not yet taken advantage of the opportunities thus far. Other countries throughout Asia can pick up a bit of slack, and nearshoring is possible and therefore growing, but remains expensive. The reality is that there is no single perfect alternative to China, and as a result, toy companies will tend to need a multi-hub sourcing solution going forward versus the single-hub model most are used to.

Just as it took China decades to become the primary manufacturing hub for the industry, its status in the supply chain continues to diminish over time while other hubs rise to prominence. While the state of geopolitics is above my pay grade, clearly the relationship between the U.S. and China is not as friendly as it once was. There is much talk of decoupling and “friendshoring” should tension truly come to a boil between these two great trading partners. Should that happen, then all bets are off and we can expect a frenzied race to find production capacity outside of China.  

As ever, these are interesting times in the toy business, so here’s to hoping that 2023 pans out as well as can be expected, and let’s be thankful for the resilience of demand for great new toys and games.


A version of this article was originally published in the 2023 edition of The BIG Toy BookClick here to read the full issue! Want to receive The Toy Book in print? Click here for subscription options!

About the author

Steve Reece

Steve Reece

Steve Reece heads up Kids Brand Insight, a Europe-based toy industry consulting firm; and Toy Team Asia, a consulting firm focused on strategic toy sourcing.

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