INFLATION IS HERE TO STAY – IMPLICATIONS FOR THE TOY & GAMES INDUSTRY
Welcome to Episode 1 of this Newsletter (originally published on Linked In). We have been publishing an email newsletter for ten years at this point, with subscribers from across the toy & game business receiving regular updates on market trends, practical tips on various topics and any other musings we throw out there into the ether! Looking forward to sharing knowledge and toy & game related content with more people via this publication.
PLEASE NOTE: Links to our latest published podcasts and articles are listed at the end of this newsletter.
INFLATION IS HERE TO STAY – IMPLICATIONS FOR THE TOY & GAMES INDUSTRY These are crazy times for the world, and more specifically for the toy & games community. Economically major economies were already in a mess due to the pandemic. Most ‘western’ governments got through that and the heavy funding required by printing unprecedented amounts of money, which inevitably leads to high inflation. On top of that we also have significant restrictions of supply of key elements of our business including container ship capacity versus demand and even that most basic of basics – paper. This is exacerbating a high inflation situation which looks unlikely to be abated until central banks really bang up the base interest rates. The issue with that though of course is that coming out of the pandemic, governments owe massive amounts of money, so inflation is actually helping them in the sense that by effectively devaluing what they owe, they are reducing the ultimate burden to be paid. It’s a bit of a lose-lose situation now economically speaking, because western governments are major debtors themselves.
By way of illustrative example, before the pandemic the UK governments 5th biggest area of expenditure was interest payments – note that is not paying off any capital even – which means the UK was already spending more on paying interest than they spent on Policing & law and order So, the reality is that governments have limited ability to tolerate the high interest rate rises which would be required to get control of inflation. The best they seem likely to manage is a few fractional increases spread over time as a token effort. What this means for the toy & games business is that we are very likely to see ongoing and even increasing inflation in most western markets throughout 2022, into 2023 and maybe even beyond. So, get ready for an ongoing cycle of awkward and contentious conversations with retailers about price increases and shifting price points upwards. We should also be building inflation into future profitability calculations. I have argued for a long time that toy price points were artificially low anyway – purely as part of an academic study (ahem!) I tracked the price of one of my favourite consumable products – Beer - and compared it with toys over the last 20 years, and while Beer in my native UK had gone up in pricing more than 300%, toy price points had hardly changed. So, I don’t see the increase in price points as a massive risk to sales volumes – it’s proven after all that families will not cut back on buying for their children at Christmas even when times are quite tough. What we should see as a larger concern however is the rise in other living costs for consumers – heating bills, cars, pretty much everything they can buy will cost more – some households will have to adapt their lifestyles accordingly, and that might act as a brake on toy & games business growth to a greater effect than rising products in our product categories, as consumers still buy for their kids at Christmas, but maybe buy a few less toys or buy the same but at lower costs. This certainly seems like a good time for toy companies to have lower price point toys in the range as well as higher priced products.
The terrible war in Ukraine is not going to help the inflationary pressures either, primarily due to the accompanying rise in oil prices. Oil prices are forecast to remain over $100 per barrel on average for the rest of 2022. To put this in context, oil prices during the months of peak toy production in 2021 were at around $60-75. Plastic raw materials are one of the primary inputs into toy production costs, so this is not going to help at all. The reason for oil’s rise currently is due to the heavy sanctions and restrictions placed on Russia after its invasion of Ukraine & subsequent carnage. Russia is one of the major oil producers globally with 12% supply, and the oil business is heavily reactive to reduced output and exports from anywhere in the supply chain. It’s hard to predict when the oil price will shrink back again, but analysts are increasingly thinking it won’t be in 2022. So again, another major inflationary factor – raw plastic materials costs looks likely to be high throughout 2022.
This all seems very gloomy so far, and I would prefer to find the light in the dark where possible…so, if you’re looking for the silver lining in all these clouds there are two that I can think of: 1. All things pass – demand outstripping supply eventually reverses, leading to reduced prices. While this does not look likely in 2022 and maybe even 2023, it will come eventually. And perhaps we will have higher price points with a reducing cost base (might be wishful thinking, but it is a possibility!). 2. The toy business needs to shift away from oil based/non-bio-degradable plastics over the next few years due to environmental concerns and consumer backlash over ‘Green’ issues. As a result, we may see cost differentials between oil based and bioplastics diminish, while we also see increased price points which may allow for a natural shift to bioplastics, even if the process of that shift being accelerated is uncomfortable. That’s all for this edition of the newsletter, but we’d also like to share links to our other recently published content. All of the following content, which includes access to literally hundreds of articles & podcast episodes is provided for FREE to help support companies and people in the Toy & Games business:
PLAYING AT BUSINESS PODCAST This is our flagship toy & game business podcast, we have interviews with people from across the toy business, I also share my knowledge based on 20+ colourful years in the toy & game business including Consulting for hundreds of toy & games companies. We currently have 66 Episodes of this podcast live. Recent topics covered include: · Ep 66 – The 10 Biggest Changes In The Toy Business · Ep 65 – The Business Of Licensed Toys · Ep 64 – How To Approach The European Toy Market · Ep 63 – Key Elements Of Successful Collectable Toys · Etcetera! Click this link to go to the Podcast page to listen: https://playingatbusiness.libsyn.com/ Also available on leading Podcast platforms including Apple, Stitcher, Podchaser, Alexa & many others.
TOY INDUSTRY JOURNAL Our toy industry blog. Recent articles published include: · The Global Economy At Risk Due To China’s Covid Lockdown & War In Ukraine · Lego Full Year 2021 Results Analysis · Does The Impending Growth Of The Metaverse Threaten The Future Prosperity Of The Toy Business? · China’s Birth Rate Drops To A 61 Year Low – Implications For The Toy Business To read all these articles and many more for FREE, just visit this website: https://www.toyindustryjournal.com/
SPIELWARENMESSE.DE This year marks a decade since I began writing articles for the Blog of the world’s largest (and my own personal favourite) toy trade show, held annually in Nuremberg, Germany in late Jan/early Feb. You can access 17 articles published by Spielwarenmesse, written by myself about various elements of the Toy & Game business here: https://www.spielwarenmesse.de/en/author/steve-reece
THE TOY BOOK Read our latest article published by the USA’s most prominent Toy trade publication here: Why Toy Production Is Ebbing Away From China: https://toybook.com/why-toy-production-is-ebbing-away-from-china/
TOY SOURCING: THE NEXT 10 YEARS
Here's our Video presentation outlining why toy production is ebbing away from Chna & what the future of toy manufacturing looks like:
https://www.youtube.com/watch?v=IR3kBOd12ss