#22 TOY MARKET UPDATE & OUTLOOK FOR H2 2023 (CELEBRATING 100 EPISODES OF PLAYING AT BUSINESS PODCAST)
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THE 3 MOST IMPORTANT MANAGEMENT ISSUES IN THE TOY BUSINESS: INVENTORY, INVENTORY & INVENTORY!
Q4 2022 was pretty horrible for the Toy & Game business overall, consumer sell through was really poor. The stock market listed companies reported double digit sales decreases year on year and inventory levels in warehouses and in retail soared leaving our industry with a significant inventory overhang heading into 2023.
As we’ve moved further into 2023, there are some positive signs out there in that inflation is reducing in most major Toy markets, although it is still significantly higher than we have become used to in recent years. And while discount channels are going to be overflowing with good product this peak season, most mass-market retailers have gone so conservative on their buying that they are almost inevitably creating a situation where the opposite problem to excess inventory will prevail before too long.
Anyone who has been around long enough has seen the pendulum swing that comes from too much inventory in the trade – normally retailers become so averse to ordering inventory that the overstock soon becomes an understock. Although the current inventory situation is more significant and widespread compared to nearly any other year in the 25 years I have been in this business, we could see the same retailers who are refusing to commit screaming for more stock by the time we get into Q4. Normally this kneejerk inventory conservatism therefore leads to a much cleaner market heading into the following year. Therefore, ‘normal’ would suggest that 2024 will be a much better year for the global Toy & Games business all else being equal. Although these are turbulent times, so anything could happen.
MOVIES & THE TOY BUSINESS IN 2023
The bumper movie year we thought 2023 was going to be has in reality yielded mixed results so far. We’ve had the super successful Super Mario Bros movie which grossed $1.35billion at the US box office. We’ve also had the massively publicised Barbie movie, which at the time of writing has nudged over $1billion at the box office around the world. On this later success, I think we need to give a serious hats off congratulations to team Mattel. There was a time not that distant in the past where Mattel seemed to be well behind the curve as social media gave a broad platform to the dissatisfied, there was a time where Barbie’s future was in question. The move towards more diversity, and a brand narrative which was all about empowerment saw barbie & Mattel turn the corner. The massive cultural moment of the Barbie movie release with the accompanying commercial success suggests to me that the Barbie brand is well on track to be a major iconic Fashion Doll brand for the next generation as well as the last few. I can’t remember a movie derived from a Toy brand creating so much ‘noise’ before in mainstream media, and so again we have to recognise Mattel’s success here.
At the same time as we have seen big success with some movies this year, we have also seen an unusual number of flops. Hasbro’s Dungeons & Dragons seems to have failed to meet commercial expectations despite being a critically well received movie with a good cast. 2023 has also been disappointing so far for The Walt Disney Company with more flops than we have been used to seeing. Overall though, as is usual we have had big hits AND big flops, and so from an overall Toy business perspective, the movie business has been more of a help than a hindrance for Toy companies so far in 2023.
SOURCING & SUPPLY CHAIN TRENDS
As many of you reading this will know I spend a lot of time advising Toy & Games companies on their Sourcing efforts, and especially help them review their supply chain risk diversification in these crazy times we live in right now. The good news in 2023 has been that we have seen a major reversal in the exorbitant shipping costs which affected us coming out of the pandemic.
The other major trend is the continuing ebbing away of Toy manufacturing from China. The relationship between the two great powers of the USA and China has become a dominant issue for many of my clients working in the Sourcing function. Some of the biggest mass market retailers in North America are telling my clients that they need to move at least 25% to 35% of their production out of China in the next couple of years due to the sourcing diversification strategies of these companies. Hasbro & Spin Master are already reportedly more than 50% outside of China. The challenge as ever though is that China has the world’s most efficient and (comparatively speaking!) easiest Toy factories to work with.
Capable, experienced and efficient capacity outside of China is limited and in high demand. Sourcing from new geographies inevitably comes with problems, delays, challenges and above all more management time and hassle. In some ways I guess I should be grateful as it is the difficulty of managing new geographies which provides me with a substantial supply of Consultancy gigs, but I don’t take any pleasure in things getting harder for companies in our industry.
The one thing I can guarantee though is this – acting like the proverbial ostrich with its head in the sand is not going to be a better solution going forward. In fact if I can use another analogy to illustrate how I see the current status of Toy Sourcing it’s more like the frog in a pan that doesn’t notice it is boiling until it is too late. The world has changed and will continue to change whether we like it or not, and successful companies don’t just react, they pre-empt and plan for the future.
The New York Times reported this week that China’s overall exports are down 14.5% in July versus July of 2022, and that in the first half of 2023, U.S. imports from China dropped by 25% year on year – by any standards that is dramatic. The reality here is that some manufacturing is moving away from China as the perceived geopolitical risks have risen. My clients (which include some of the biggest Toy companies in the world are now taking bold steps to set up production with factories in other geographies based on perceived risks not necessarily on the reality of what is happening.
I’m seeing a lot of emphasis on Mexico, Indonesia & India for new production as Vietnam capacity is constrained and factories there are tending to be quite full. A couple of weeks back I toured a U.S. company around Toy factories in India. The capabilities in India, along with the depth of supply chain are growing, but like with any new geography, the experience and smoothness of working has a long way to go to match what China can do currently. The new normal is going to be more Sourcing problems as companies balance out diversification with efficiency. Above all though we need compliant capacity first and foremost, with cheap labour second in priority and so we will end up going to any countries which can meet these 2 priority needs.
There is nothing judgmental, negative or political about this perspective on China losing Toy production by the way, it’s just that China’s place in the world has evolved. Going forward it seems unlikely that a developed economy is going to be the right place to manufacture ALL of the world’s Toys when we rely on cheap labour in our processes. China is the world’s 2nd largest Toy market, and we're unlikely to see that changing any time soon with China having 1.4 billion increasingly wealthy people, and with a culture of having fewer children but ‘investing’ more in the development of those children than some countries. China is still manufacturing the majority of the world’s Toys today, and so I don’t see us EVER stopping from having some manufacturing in China, but going forward we will be working with a multi-hub Sourcing situation, and China will consistently lose share of global Toy manufacturing consistently over the next decade.
FIND OUT MORE ABOUT TOY SOURCING AT TOYFAIR IN NEW YORK
If you’re interested in hearing more about this topic of Sourcing and why the world is changing away from relying primarily on China as a hub for Toy production, you can hear me present on this topic at the Toy Association’s Toyfair in New York this time round. On Sept 30th 2023 at 9.30am I will be sharing my thoughts, conclusions and a whole load of data with those who turn up to listen to my presentation. https://tfny2023.mapyourshow.com/8_0/sessions/session-details.cfm?scheduleid=3
If you want to meet for coffee, tea or some other form of liquid sustenance at the New York show, please feel free to drop me a line :)
DEMOGRAPHIC CHALLENGES & SUSTAINABILITY: THE LONG-TERM THREATS TO THE TOY INDUSTRY
I’ve written previously in this newsletter series about these two topics, but while we are all focused on the considerable commercial challenges we face this year with the inventory situation and cash strapped consumers, we also need to keep an eye on longer term trends, so I’m going to reiterate:
Firstly, birth rates are falling in all major Toy markets. This is a long-term threat to the Toy business if we stay doing the same things in the same way. The ‘Kidult’ opportunity offers a significant incremental upside to the traditional Kids business. And so if I had to predict how the Toy business would look different in ten or twenty years, I think that nearly all Toy companies will need to diversify their consumer target profile to avoid fighting for scraps in an increasingly reducing pond.
Secondly, the other major risk I see for the overall Toy business from a longer-term perspective is all that comes from the need for ever greater sustainability, and the potential for consumer plastic rejection. We know that we could already make most Toys out of bio-based plastics, but we also know that retailers/consumers won’t pay (en masse) the c. 40-60% price premium for that. We also know that massive upsurge in bio plastics production could adversely affect global food production and food prices. The obvious answer here to me is that all Toy companies should have serious strategies for ‘Plan B’ which includes non-plastic, non-fossil fuel derived materials. Wood, cardboard and other sustainable materials should be an ever-increasing part of your product mix if you want to ensure you remain successful over the next decade.
PLAYING AT BUSINESS PODCAST
100 EPISODES OF ‘PLAYING AT BUSINESS’ PODCAST
Back in 2018 I started the Playing At Business podcast with the aim of sharing knowledge about the Toy & Games business. There were three motives: 1. A genuine desire to help those people and companies who were newer to the business and don't know all the answers 2. An easy reference tool I could refer people to to avoid having to answer the same questions repeatedly 3. To act as a marketing tool for my Consultancy business. And over the past 5 years, the podcast has been fairly successful in all three respects based on feedback from listeners.
So, if you've been with me from the start - many, many thanks, watch out for more episodes coming soon. And if you have yet to listen, why not join the other listeners and check it out...
Anyway, here's the latest episodes here:
EP 100 – How To Recruit Good People And Find New Job Roles In The Toy Business
Join host Steve Reece in a deep dive into the toy industry's recruitment nuances. Having helped many people to find new roles in the Toy business and having advised many Toy companies on who & how to recruit, Steve unveils key strategies for companies to recruit effectively and tips for candidates to land their ideal roles. Whether you're hiring or job-hunting, discover invaluable insights to assist your recruitment/job search process.
EP 99 – Gift & Hobby Distribution Channels (The Original Kidult Toy Business?!)
Guess what – people have been buying Toys for adults for a very long time. Even though the ‘Kidult’ thing is the big noise nowadays, hobbyists and people buying Toyetic gifts for adults have been around for a long while.
Listen in to Episode 99 as we look at these adjacent areas in more detail:
EP 98 – How The Toy Industry Clears Excess Inventory
A few episodes back we looked at why excess inventory is so dangerous - in this episode we move on to look at the practicalities of how our industry manages excess inventory, where they sell it, how it works and some major banana skins to watch out for when selling clearance stock!
AND FINALLY…
KIDS INDIA, MUMBAI - I'll be attending the Kids India show in Mumbai in a few weeks. If you will be there & want to meet, please get in touch.
And if you want to find out more about my Toy & Game business consultancy services, please just click the link below. Our company has helped hundreds of Toy & Game companies to get ahead and grow sales/make more profit. I have worked on all product categories across a 25 year career in Toys & Games, and genuinely love sharing knowledge, contacts and facilitating greater success for our clients. For more information on our services, click here:
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