This was supposed to be the year in which everything got easier.
While the U.S. toy industry continues to post record sales numbers despite the emergence of new and unexpected events, the next 6-18 months are a complete wild card. And, while double-digit sales increases at the register make for great headlines, they may only be telling part of the story.
In February, The NPD Group revealed that the three-year compound annual growth rate for the U.S. toy industry between 2018-2021 reflected an 8% spike in total dollars that matched an 8% increase in average selling price (ASP). But looking closer, unit sales only grew 1% during the period. That means the real growth is coming from the increase in ASP; in other words, fewer toys are being sold for more money. As the stock market constantly reminds us, gains can only occur for so long before they start to take a dip. Companies will need to be proactive in mitigating sales losses due to external factors — and these looming threats are larger than ever.
ECHOES OF THE COLD WAR ERA
As the second quarter of 2022 begins, the toy industry is faced with the reality that last year’s issues are far from over. Inflation in the U.S. is at a 40-year high, according to the U.S. Bureau of Labor Statistics; fuel prices in February jumped 38% over the same period last year; and the global supply chain crisis continues. Now, a new variable is in the mix: war.
The Russian invasion of Ukraine began on Feb. 24 and immediately created a new ripple effect in the supply chain that will extend beyond Europe for years to come.
“It’s like adding gas to the dumpster fire,” says Bill Thayer, CEO of Fillogic, a logistics platform for retailers, logistics providers, and mall owners.
Products already sold to retailers in Ukraine now must be diverted into other markets while sanctions against Russia, including an immediate halt to orders and deliveries to retailers in the country, is quickly creating a surplus of product on top of lost sales.
“Russia was our eighth largest market and filled with important customers,” says Isaac Larian, CEO and founder of MGA Entertainment. “That business is now gone and it hurts.”
The LEGO Group and Horst Brandstätter Group — parent company of Playmobil and Lechuza — swiftly moved to shift their focus from selling toys to providing support for humanitarian aid in the region, leading a charge that kicked off a global movement.
“If [Vladimir] Putin and [Volodymyr] Zelenskyy can settle their differences in the next few weeks and end this war, things could turn back to somewhat ‘normal’ and we can hopefully restore some of the economic damage and consumer trust in the second half of this year,” says Nico Blauw, CEO of BOTI, a European importer and distributor of toys. “If not, I am afraid we will see darkest days ahead of us that will make the financial crisis of 2008 look like dust in the wind.”
As the situation in Ukraine continues to unfold, the supply chain challenges of the past year rage on. Freight issues are still top of mind on a global scale, while raw material costs are inconsistent, with forecasts showing further inflation through the end of the year.
“Thus far, we’re hearing that plastic resin costs are increasing 15-20%. Paper, chipboard, and corrugate materials are stable,” says Michael Fisher, president of logistics company GPI. “The Russian invasion of Ukraine and the global surge in oil prices will likely reverberate in China as well, potentially further driving plastic resin pricing upward,” he says.
Russia’s influence on energy has been a focus due to its vast exports of oil and natural gas, but some crucial components in “sustainable” products are also sourced from the country. Russia itself banned exports of certain products — most notably, wood — to more than 200 countries, and it is a leading exporter of nickel that is used to produce rechargeable batteries.
CONTINUING COVID-19 CONCERNS
Still, the big elephant in the room is the most omnipresent issue of the past two years; the COVID-19 pandemic isn’t over. Although the world is learning to adapt to new variants, the global manufacturing hubs throughout Asia are at risk, particularly in China where a government-mandated “COVID-zero” lockdown policy is in place. In March, the port city of Shenzhen, Dongguan, and the province of Jilin were placed into lockdown as China responded to its worst COVID-19 outbreak since the disease first surfaced in Wuhan.
“As we thought the worst of COVID-19 was over, it hit Hong Kong and China hard,” Larian says, noting that last year’s issues with container availability, ocean vessels, and logjams at the ports delayed product, and in some cases derailed release plans. Now, he says that the industry should be bracing for additional issues in the U.S. this summer.
“We had to push Mermaze, Shadow High, and the new Dream Ella and Bratz [doll] lines back a few months,” he says. “Now, the fuel prices have gone through the roof, which means that product cost will continue to get higher and higher. Add to that the upcoming negotiations with the longshoremen that will come in peak season — June and July — and you have another perfect storm as we also face labor shortages.”
Last month, an outbreak in Shanghai led to more lockdowns that created a new ripple effect. On an April 21 earnings call, JB Hunt Chief Commercial Officer Shelley Simpson said that the trucking firm expects impact to hit the U.S. in July.
PLANNING FOR ADDITIONAL SHIPPING DELAYS
If another major breakdown in the U.S. supply chain arose, it would no doubt happen on the West Coast. The current contract between the Pacific Maritime Association and the International Longshore and Warehouse Union expires on June 30. Following a plea in February by the National Retail Federation’s Matthew Shay to begin negotiations early, a group of Republican senators delivered a letter to President Biden on March 17, urging his administration to use whatever tools it has to ensure striking a new deal happens before the clock runs out.
“The West Coast ports account for more than 44% of our nation’s port traffic. … Any delays caused by failed negotiations will have a drastic cost and impact on our nation’s supply chain,” the senators wrote. “This cost will be felt by not only retailers and others that rely on ports for their business, but also by millions of American workers.”
Over the past year, some companies have made moves to cut travel time for products by nearshoring production so that the final delivery to the intended market can be handled on land without needing ocean vessels or air freight.
Mattel consolidated its North American manufacturing efforts to a single, expanded Montoi facility in Nuevo Leon, Mexico. The company said that the factory has diversified its production to optimize nearshoring. Large items that are expensive to ship, such as Barbie Dreamhouses and Fisher-Price Power Wheels, are being manufactured alongside MEGA Bloks. In Ohio, W. Britain Toy Co. added manufacturing capabilities to its headquarters.
Looking ahead, reimagining the global supply chain will occur in tandem with a big shift in the global toy industry trade show calendar led by Toy Fair being shifted from February to the fall. The industry is seemingly fracturing as strong opinions emerge regarding the ordering cycle, location, and quantity of in-person trade shows on top of a divide between mass and specialty retailers.
Perhaps the most important piece of advice on all fronts is to be prepared for new and unexpected factors that can emerge from out of nowhere.
“We need to plan even further ahead now that we are living in these unusual times,” Blauw says. “With production and delivery timelines being affected by global incidents — COVID-19, absurd logistics costs, and now the war in Ukraine — we are now living day by day. The industry needs to plan further ahead and produce earlier just to avoid possible delays. And even then we still don’t know if we can supply in time, let alone at what cost.”
This article was originally published in the May 2022 edition of the Toy Book. Click here to read the full issue!
