What a difference a year makes.
In the summer of 2018, local toymakers were reeling from the loss of Toys R Us. The mega-retailer's late 2017 bankruptcy was a shock to toy vendors around the world, but in Northeast Ohio it sent a wave of uncertainly through an area where three companies — all founded by Hudson, Ohio, resident Tom Murdough — employ more than 1,000 workers who make, market, package and ship rotomolded plastic playhouses, kitchens, cars, water tables and an assortment of other home and play equipment.
Twelve months later, executives from Little Tikes Co., Step2 Co. and Simplay3 say the business slump brought on by the closing of the Toys R Us chain's 800 stores is largely a thing of the past.
In fact, Step2 and Simplay3, both based in Streetsboro, Ohio, are seeing growth in their toy revenue. Even hard-hit Little Tikes of Hudson — the largest U.S toy factory — is ramping up production lines after manufacturing capacity dipped below 25 percent last year, according to Isaac Larian, CEO of privately held MGA Entertainment, which owns Little Tikes.
And Toys R Us itself announced plans to open about a half-dozen smaller-format U.S. stores and an e-commerce site by the holiday season, Bloomberg reported last week.
"It is [slowly] coming back," Larian said. "We think we are going to get back to about 45 percent to 50 percent [capacity] by the end of year because the [Little Tikes] brand is performing so well."
The road to recovery, however, has been bumpy. Toys R Us sales accounted for 40 percent of Little Tikes' sales, Larian said, and MGA's bottom line took a 12 percent hit in 2018 as a result of the toy chain's demise. Shifting Little Tikes business to other brick-and-mortar stores was one of the biggest challenges.
"Don't forget, Toys R Us was an $11 billion business just in toys, and other retailers typically do not have the kind of space they had for these large plastic toys," he noted.
Step2 CEO Tony Ciepiel said the first half of 2018 was especially troublesome. Not only did the company lose a significant channel when the Toys R US bankruptcy hit — about 25 percent of Step2's toy sales filtered through Toys R Us — but "we literally had a couple of aisles of product at each of its stores, millions of dollars of product," he said.
"Over a four- to five-month period when they were selling their stock off, we were competing on price with them, and they were selling on discount products that they never paid us for," Ciepiel said. "It was the worst of all worlds."
Brian McDonald, vice president of sales and marketing at Simplay3, said that by virtue of its size, the 3-year-old company was less affected by the Toys R Us closure than its older, more established siblings. Still, the impact was not negligible.
"We did have a program that we had started to ship to Toys R Us, so we had product out the door and planned to ramp up our business based on the success we had seen there," McDonald said. "In the end, it was a significant six-figure loss for us."
All three executives claim growth in digital sales is filling much of the gap Toys R Us left behind. According to Ciepiel, Step2 had "spent the previous 10 years building a very strong direct-to-consumer shipping capability." Thus, he said, the company was able to quickly shift its top sellers at Toys R Us to online channels such as Amazon, as well as the online stores of popular brick-and-mortar retailers like Kohl's, Target and Wal-mart.
Today, the Ciepiel said, 75 percent of Step2 toys — of all sizes — are sold through digital channels, including its own online store. That's up from less than 60 percent two years ago and outpacing the industry average, which is more like 65 percent.
"When you consider the company does not make any product smaller than a large cooler, it is pretty amazing that 75 percent of our sales are being shipped direct to consumers," he said. "We are essentially an e-commerce company."
Largely because of those online sales, Step2's toy business is up "a couple of percent" in the first half of 2019, Ciepiel said, "while the industry is down 4 percent to 5 percent." He expects to end the year in the "high single digits" for the toy business and anticipates "double-digit growth" collectively among Step2's three business units. The company also makes children's furniture and home and garden products such as mailboxes and trash bins.
Avoiding the 'old-school' model
Simplay3's McDonald credits the Toys R Us meltdown for keeping the startup from falling into what he called the "old-school toy model," where manufacturers ramp up production and send truckloads of product to sit in retail distribution centers or on store shelves.
"It forced us to see the value in staying lean and nimble," he said. "So, nearly from the beginning we were focused on building our inventory to almost a just-in-time method of shipping out product directly to the consumer via the dot-com."
At the same time, McDonald added, Simplay3 paid special attention to servicing small mom-and-pop toy shops and midsize regional chains. The stores had previously been neglected by the big plastic toymakers, according to McDonald, because they didn't have the floor space.
Overseas sales and nontoy offerings — "home helpers" such as stepstools and wheelbarrows — also propelled Simplay3 despite the Toys R Us disruption, he said. Revenue for the 80-person company grew by 500 percent last year, and McDonald anticipates a similar return in 2019.
Larian is less bullish about Little Tikes' comeback, but far from pessimistic. Like his peers at Step2 and Simplay3, he said retailers were eager to scoop up some of the $11 billion market Toys R Us left behind, with many quickly integrating Little Tikes products online when shelf space was not available. He is particularly thankful to Target, which recently introduced mini-Little Tikes showrooms into its brick-and-mortar stores.
There were no layoffs in 2018 when the Hudson plant lost capacity, according to Larian, and he does not expect to downsize this year. MGA also is piloting production of a plastic pink carrying case for its popular L.O.L Surprise dolls at the Hudson plant. The case was previously manufactured in China, he said, and if the pilot is successful, it could usher in more L.O.L. manufacturing at Little Tikes.
In addition, he hopes to build on the plant's contract manufacturing business to help fill the gap.
"We still have a lot of room for plastic manufacturing," he said.