by Sean McGowan, managing director, Gateway

As is the case every year, the U.S. toy industry entered 2019 with expectations formed, at least in part, by the results of the previous year.

In 2018, the term “pantry loading” was coined to describe the phenomenon of consumers taking advantage of low prices during the springtime liquidation of Toys “R” Us (TRU) to purchase toys they otherwise would have bought later in the year. This resulted in softer-than-expected retail toy sales during the 2018 holiday season. The combination of unusually (and “artificially”) strong retail sales in the early to middle months of 2018 and a soft 2018 holiday season set up expectations that last year would see difficult comparisons in its early months, but a reasonably strong holiday season.

Now we see that last holiday season was not, in fact, very strong, and that full-year retail toy sales last year fell 4%, according to The NPD Group.

So, what happened?

The Missing Saturday

Let’s start with the most obvious culprit: the calendar. The timing of a later Thanksgiving shortened the period between it and Christmas. Perhaps more important than the total number of days, there were only four Saturdays between Thanksgiving and Christmas, down from five in 2018, 2017, and 2016.

The last year this calendar shift happened was 2013, a year in which toy sales declined slightly. Before that was 2008, when U.S. toy sales slid 3%. The 2002 holiday season was also short, and toy sales that year were down by about 1%. The year before that was 1996, when sales rose more than 3%, but that increase was less than half the rate of increase from the previous five years. I should note that there have been plenty of years in which U.S. toy sales dropped that were not years with a shortened holiday season, but I think we can all agree: History shows that a shorter Thanksgiving-Christmas period pressures holiday sales.

Why the Rough Year?

The shortened calendar does not explain why toy sales were weak in the period prior to November. For this, we need to look at other factors.

It seems clear that the portion of TRU’s sales considered permanently lost is even greater than expected. We saw some evidence of that in 2018, but considering that we have now cycled through two relatively disappointing holiday seasons without the old TRU, it seems clear that those lost sales have not returned.

At the end of 2018, a slew of companies with low (or no) prior market share in toys — chains including Best Buy, Party City, JCPenney, Macy’s, etc. — that sought to pick up chunks of TRU’s share by aggressively expanding their toy offerings were largely unsuccessful. These retailers had much less shelf space last year compared to 2018, and, naturally, were not aggressively promoting toy sales. This may have contributed to the weaker sales we saw in the final months of the year.

Another hurdle has, once again, been the inexorable growth of online sales as a percent of total sales, and this is partly because of “buy online, pick up in store” (BOPUS). One of the reasons TRU’s demise hurt the industry was that TRU routinely provided incremental sales from customers who came to the store for one product and left with at least one other.

Similarly, the shift to online sales further eliminates in-store impulse sales. This, of course, has always been the case with Amazon’s share gains, but now we’re seeing big-box retailers, such as Walmart and Target, “winning” the battle of getting the customer to buy products on their websites, but “losing” the incremental sale because of BOPUS. Sure, some consumers go into the store to pick up what they bought online and buy something else while they are there, but the whole point of BOPUS is to get in and out as quickly as possible, sometimes without even leaving the parking lot.

How about tariffs? Did they hurt toy sales? Well, they probably didn’t help. Even though the administration ultimately did not impose tariffs, I think the threat had an impact on the timing of toy shipments — pulling them forward in some cases and pushing them to later in the year in other cases — as some retailers sought to avoid paying potential duties on direct-import sales. In theory, that wouldn’t have mattered, but anytime sales get switched from free on board (FOB) to domestic sales, the risk of cancellation increases.

Finally, maybe the weak results were due to disappointing licenses. “But surely,” you might say, “last year was a banner year for licenses!” Well, it was, in the aggregate.

The content slate for movies and television shows was truly epic. But not all of the licenses were toyetic (Game of Thrones), some of the strongest ones were skewed to the early part of the year (Avengers: Endgame, Toy Story 4), and, sadly, some did well but just didn’t live up to exceedingly high expectations (Frozen 2, Star Wars: The Rise of Skywalker). It also didn’t help holiday sales much that Frozen 2 and Star Wars merchandise was available in stores in early October, meaning it was less fresh by December, and much of the benefit to manufacturers came in the third quarter.

2020 Vision

So, where does all this leave us for this year? I think there are some pluses and minuses, and, on balance, I think the challenges will continue.

On the plus side, we don’t have to contend with a shortened calendar. Toy sales have risen in four of the past five years that followed a year with a shortened holiday season. Part of this may be that the comparison is easier, and the extra Saturday also helps.

Another plus may be the fact that stronger retailers have continued to accrue market share, but it’s not like that helped very much last year.

Something that would seem to be a plus is the fact that the U.S. economy continues to be relatively strong, with rising wages and the wealth effect making many consumers feel flush. But that also didn’t help very much last year.

In fact, we might even wonder if consumers feel so flush that they’re putting their money into bigger-ticket items. Just as we have comforted ourselves for so long with the notion that consumers don’t cut back on toy sales as much as they cut back on other discretionary expenditures in economically challenging times — and may, in fact, divert money that would otherwise have gone into bigger purchases or vacations into toy sales — we may be seeing the opposite now.

Another plus is that tariffs seem to be off the table. But if we have the same administration in place next holiday season, we may continue to face frustrating uncertainty about tariffs.

Then, there are the potential minuses. If shifts in retail dynamics disrupted the industry, they aren’t getting fixed any time soon. Business will continue to shift to online sales, consumers will continue to wait until the last minute to make purchases, and getting in front of modern shoppers will continue to require marketing tricks and changes.

A big potential challenge is that this year’s licensing content slate is not likely to be as favorable. If last year was an epic year, this year was always going to face that challenge, particularly in its first half.

Another challenge that is not inherently a plus or a minus, but that could become a negative, is the issue of sustainability. In the professional investment world, “ESG” has become a big buzzword. It stands for “environment, sustainability, and governance.” The sustainability part of this is probably going to be the one the toy industry will have to contend with most in the coming years.

Not only is packaging shockingly wasteful (especially if goods are delivered to consumers in multiple cardboard boxes), but the whole idea of plastic objects that kids lose interest in rather quickly is getting the attention of environmental activists.

We’ve already seen major apparel brands facing backlash about a culture of disposability, and I’ve seen some major institutional investors — or the consultants who advise them — turn their attention to toy manufacturers. This could, and arguably should, lead to more efficient toy packaging, production materials, and shipping methods, but I doubt that is going to make the issue go away completely.

TRU Take Two

Before I simply conclude on a downbeat note, I want to mention one of the few bright spots (depending on your perspective) of the past holiday season: the return of Toys “R” Us. Putting aside all of the history of the prior years (and I know that’s a big ask), you have to be a regular grinch not to be heartened by the advent of this new format for the old brand.

There are only two stores in this new format, and the current plan is to have as many as eight by the end of the year, so obviously the actual sales done through these stores is minimal. But what I find very interesting is the idea of a retail brand embracing the role of a showroom, rather than trying to eschew that role.

These 6,000- to 10,000-square-foot stores only feature about 1,500 SKUs from highly curated, prominent toy brands that are merchandised in an interactive, immersive environment. There are no private-label products, despite the fact that the old TRU used to sell around two dozen private-label brands. The products in the new TRU are sold at full price, not discounted, and the retail margin is actually returned to the manufacturer. These stores will serve as merchandising laboratories for the brand owners.

This is pretty revolutionary, in my view. Chains such as Best Buy, Dick’s Sporting Goods, or any of a number of department stores have long struggled with the idea that consumers would come in, check out the products, and buy somewhere else — probably online. They hated being a showroom. The new Toys “R” Us is a showroom. Consumers can purchase 10 times as many SKUs at, which is presently a joint venture with Rather than offering this innovative sales setting and trying to keep other retailers from copying it, Toys “R” Us is actively promoting the idea that brand owners can learn from these stores and employ the effective techniques with other retailers.

Giant brands (such as LEGO in the toy industry or Nike in footwear, for example) have often operated their own stores, not only for the sales they can get within those walls, but as a way to showcase their brands in ways that other retailers can observe, learn from, and implement. But not many brands can afford to have their own stores. This new setting allows toy brand owners to get some of those learnings with less risk. They pay to be in the new TRU stores, but nowhere near what it would cost to have their own stores. I’m looking forward to seeing what impact this new concept can have on the industry.

I hope you all have a great Toy Fair and a successful year.

This article originally appeared in the February 2020 issue of the Toy Book. Click here to read more!