by Sean McGowan, managing director, Gateway Investor Relations
At Toy Fair New York last year, we all knew something strange was going on in the world, and that 2020 was bound to be a challenging year.
We were already hearing about COVID-19 problems in China and Europe, and many of us were wondering how good of an idea it was to be gathering in close quarters with so many people who might have just traveled from both of those areas. Plus, we knew it was going to be an election year full of intense political clashes. But the economy was strong, and business and consumer confidence indices were healthy. There wasn’t any reason to think that whatever disruption this flu-like thing would cause wouldn’t be brief.
The predictions I made in this column last year went to press in mid-January, so I didn’t even have the benefit of knowing enough about the coronavirus to have mentioned it. Reviewing the predictions I made under those circumstances seems almost ludicrous, but I actually think reviewing them gives us an opportunity to see just how much has changed.
THINGS WE GOT WRONG
In my State of the Industry column from last year, I pointed out that 2020 would benefit from not having the shortened calendar between Thanksgiving and Christmas. Well, little did any of us know that COVID-19 would so thoroughly blow up not only Black Friday, but also the very idea that holiday promotions could be run only between Turkey Day and Noel. Indeed, by mid-year, we kind of wondered if the whole concept of a “calendar” was a relic, as days blended into each other and weekends were obsolete when so many of us were suddenly working all day, every day.
I noted last year that the economy was likely to be strong and that consumer spending would benefit from a prolonged “wealth effect.” Well, the economy tanked of course, but the toy industry thrived, as kids stuck at home needed to be entertained. In fact, the stock market plunged, but recovered remarkably quickly, fueling the wealth effect for those with stock holdings. That created a weird situation in which millions of people were out of work, but even those people (as well as the many more millions who were not out of work) were able to spend money on toys because they weren’t spending much on other things. The so-called “K-shaped” recovery saw some sectors plunge and others thrive.
I said last year that tariffs were uncertain, but hadn’t mattered much so far. Oh, how much I miss the days when tariffs were high on our list of concerns.
THINGS WE GOT RIGHT
Taking no risk at all, I predicted that toy sales would continue to shift online. That, of course, was an epic understatement. Not only did Amazon pick up a massive share of total retail sales (not just related to toys), but the fact that many manufacturers established new online accounts at multiple retailers (and food delivery services) has also significantly accelerated the pace of online adoption, probably getting online penetration in 2021 to a point we might not have gotten to for several more years under normal circumstances. And online retailers have stepped up their game. There was a significant concern in late summer and early fall that the rapid shift to online sales would crash the whole system. There certainly were delivery problems — and shipping hurdles — but, for the most part, the system held up.
During this time last year, I stated the obvious that the entertainment content slate was not favorable compared to 2019. That was true, but the real takeaway was that it didn’t matter for the reasons we thought it would. With film releases delayed and movie theaters closed, consumers sheltering in place turned to streaming. This, as we will discuss below, was another example of an acceleration in an existing trend.
I said last year that environment, sustainability, and governance (ESG) would be a growing factor among investors in public companies. That was true, especially for European investors. In fact, I don’t think COVID-19 did much to accelerate or retard this trend.
WELL … NOW WHAT?
So, what are my predictions for this year? Let’s start with the shift in how entertainment content is delivered. Obviously, COVID-19 devastated theaters and other venues delivering live entertainment content — but it didn’t diminish demand for content. In fact, the reduction in time spent commuting, dining out, and traveling caused a surge in hours available for entertainment viewing. How else could we explain Tiger King?
The fact that the nation’s broadband backbone has turned out to be amazingly robust, streaming and downloading have become an even greater channel for entertainment consumption. So much so that Warner Bros. announced that all of its films in 2021 would be released on streaming platforms concurrent with their theatrical releases. Is this good? Well, again, not for theaters — and maybe not for the artistic sensibilities of filmmakers. But considering how much more accessible this makes new entertainment content to consumers, this is likely going to be a big plus for toymakers that are dependent on new entertainment content. I would add that the surge in subscribers at Disney+ is a big positive for Disney’s licensing partners. All that older, back-catalog content is now back in play.
With regard to online sales, as consumer behavior gets less constrained by pandemic-related closures or capacity limits, some e-commerce retailers are likely to see a bit of an ebb in traffic. But in the aggregate, I believe online sales have permanently leapfrogged to levels well ahead of where they would have been just following existing trends. And in order to optimize their own opportunities, e-commerce retailers will have to make themselves as accessible as possible to as many suppliers as possible.
In 2020, with kids not gathering in classrooms and schoolyards to chatter about new toys, parents who were desperately seeking diversions became reengaged in the process of choosing toys for their kids. Obviously, kids are still the main drivers for selecting toys, but I believe with parents more involved, this could be a boost (perhaps temporary) for classic/retro brands.
As the winter months set in, the question arose (naturally) of whether or not “snow days” would still happen for schools. Are they out altogether? Does the fact that many kids are falling behind in their learning put even more pressure on schools not only to phase out snow days, but also to reduce the number of holidays in general? I doubt any reduction in holidays would wind up being permanent, but the idea that learning is not limited to traditional time and place could affect the amount of non-school time kids have.
Predicting the timing and pace of a broad economic recovery is always difficult, especially in a year when it is going to depend so heavily on the rate of immunization and how long it will take to get to herd immunity. There will be a stimulus, but what about the economy itself? It could post record growth and still be way behind where it was before.
Some of the damage done by the economic collapse of the last year will be long-lasting, especially the impact of massive increases in debt at the federal, state, and local levels. It’s way beyond the purview of my paragraphs here, but I think it’s safe to say there’s bound to be some impact on the toy industry. But will it be another year of toy sales benefitting from reduced spending in other areas? Or will difficult comparisons against last year’s pandemic-driven surge in toy sales be the main driver of year-over-year change in the industry’s sales?
My best guess, frankly, is that the health of the overall U.S. economy isn’t going to be the most important determinant of toy demand. You know why? Because it almost never is.
This article was originally published in the February 2021 edition of the Toy Book. Click here to read the full issue!