Supply chain shortages may cut into holiday wish lists

When Jay Foreman, CEO of toy company Basic Fun, wants to market a hot new product, he usually sends it to 50 to 150 influencers for promotion. But this holiday season, Basic Fun's new Tiny TV Classics line of collectibles will go out to just 20.

At a time when the global supply chain is getting squeezed and delaying merchandise, Foreman simply can't spare the inventory. He also doesn't want to advertise what he might not have. The collectibles are miniature plastic TVs loaded with clips from popular TV shows.

"We're holding the rest — I don't want to get the influencers going and the merchandise is not in store yet," says Foreman, whose Boca Raton, Fla.-based company is behind other popular toys such as K'Nex, Lite-Brite, Care Bears, Lincoln Logs and Cutetitos. "The consumer views that [influencer] unboxing and they're like, 'Cool, let's buy it now,' and if it's not there, they're not going to look at that unboxing video again."

Basic Fun, which purchased the K'Nex brand in 2018, is one of a host of companies struggling with COVID-related supply issues, shipping cost increases and labor shortages. The problems — which one expert describes as having been snowballing since COVID-19 first struck in early 2020 — are creating a perfect storm ahead of the 2021 holiday season, affecting brands in a range of industries, including automakers, skincare companies, bag purveyors, home goods sellers and more.

The supply crunch is complicating advertising plans. Some brands are slashing their ad budgets as a way of mitigating increased shipping prices while others are relying more on digital marketing than TV so they can be more flexible as inventory arrives from overseas. Many are also adjusting marketing calendars — running holiday-related website refreshes earlier than ever to beat out the competition and encourage spending on what they do have in stock.

"If you were shipping $30 million of a line and you're now shipping $25 million, you adjust [advertising]," says Jim Silver, CEO and editor in chief at TTPM, a toy and pet product-focused publication. "Budgets are going to be cut accordingly to amounts being shipped, but not eliminated."

Many of the supply chain issues have been 18 months in the making. Early on in the pandemic, factory closures in China created the first production disruptions. Then, as the coronavirus moved east, any ships that were on the water were held in ports due to lockdowns.

When stores shut down in the spring of 2020, brands cut production, thinking that demand would soften. But online shopping — coupled with the fact that consumers had excess money from not spending on things like travel — created demand that outstripped supply.

Now, marketers are scrambling to ship goods back to the U.S., but container space is at a premium — larger items related to COVID, such as air purifiers and PPE, and even popular items like stationary bikes and treadmills, take up more room. Container prices have increased by 600 percent, moving from $3,000 to $20,000 in some cases, according to brand executives.

"Money that could go to advertising now goes to freight companies," Foreman said.

In addition, labor shortages in the U.S. have made it difficult to move goods once they arrive from ports. Many companies are looking for truckers to operate flatbeds to move items to warehouses and retailers.

"When you get an actual trucker to work and bring it to the warehouse, it could be weeks, the lines are insane," said Jacq Tatelman, co-founder, CEO and creative director at popular backpack seller State Bags, on a recent episode of Advertising Age's "Marketer's Brief" podcast. "It's so challenging — it's the one thing that has consistently kept me up at night for months now."

Basic Fun had initially forecast that its holiday sales would be 30 percent higher than the 2020 season; now Foreman says that forecast is halved to a 15 percent uptick based on supply issues.

"The demand is outstripping the supply which means the merchandise will sell through and we don't have to spend as much," he says. "Our advertising budget will be half of what it was forecasted to be."

National Tree Co., a Cranford, N.J.-based importer and seller of artificial Christmas trees and holiday decor, is dealing with similar woes. Chris Butler, the 60-year-old company's CEO, says that despite strong demand for his products, his actual inventory will be down 10 percent this year compared with what the company had planned.

While National Tree sells online at retailers like Wayfair and Amazon, Butler is now fielding calls from brick-and-mortar chains asking to buy items for wholesale since their own stock is depleted. Normally, National Tree spends "millions" on online advertising during the holiday season, but this year the brand will spend 75 percent less, according to Butler, who adds that the bulk of the advertising the company does will be online search with a little social media mixed in.

"We are going to end up spending money on products that we don't have," Butler says. "Those products are already in such high demand that you just don't need to promote those."

Yet even as brands save money on ad spending, increased shipping costs are still forcing some brands to raise their own prices in order to stay in business. For example, National Tree raised its prices by 25 percent this year.

State also raised prices on adult backpacks ahead of its back-to-school season this year to offset the shipping costs, Tatelman says, noting that the increase was done on a product-by-product basis and ranged from 5 percent to 12 percent. She expects to have to raise prices for kids' products as well, even as State begins selling new adult products like fanny packs and diaper bags this holiday season.

"I'm going to be selective on what we raise prices on," she says. "We're being very strategic on that, but we do have to pass some of the costs on. We won't survive if we don't."

With delays, State already had to offer some back-to-school items for "presale," which meant focusing more on customer service for potentially angry customers wondering when to expect their purchases. It's a process Tatelman doesn't want to repeat for holiday and next year, so she is adjusting her calendar to account for delays by ordering merchandise earlier, yet that means marketing needs to be ahead as well.

"We have to make sure we have the money to pay for those things," she says.

Some marketers are moving into more flexible forms of advertising in order to have better control if inventory is late. Spin Master, the Toronto-based toy company behind hits like Hatchimals and Kinetic Sand, is currently working with logistics carriers to try to move goods earlier and get them onto store shelves, according to executives speaking on the company's most recent earnings call.

The pandemic taught the company to be digital-first with marketing, and Spin Master has spent the time building in-house capabilities to "enable insight, speed and agility," says Laura Henderson, executive VP, marketing. "This transformation has prepared us well to be nimble in our response and adapt our marketing to the changing retail dynamics and preferences of our core consumer, reaching them with the right message, at the right moment, in the right medium."

Elaine Kwon, a former Amazon executive who co-founded e-commerce firm Kwontified, says there are a lot of "competitive conversations" happening regarding holiday marketing right now, which will result in earlier advertising as brands try to convince customers to buy now or risk losing out on out-of-stock products. Holiday refreshes, which involve a holiday-themed makeover with specific banners and images on websites and social media accounts, are occurring as early as September for some brands hoping to get the consumers in a holiday-buying state of mind. Such refreshes usually take place in November, Kwon says, but are earlier because of the inventory shortage. Brands are trying to sell what they have to avoid losing out to rivals.

"They're trying to target and get consumers to think about things before the holiday period truly begins," she says. "They fear that if they do not do this they'll fall behind."

Many toy and holiday retailers are focusing on a "See now, buy now" marketing message to encourage customers to shop early or risk empty shelves. National Tree's Butler says his customers usually purchase products right after Thanksgiving or in early December.

"It will be slim pickings at that point," he says. "We're using PR to urge customers to buy now, buy as early as you can."

TTPM's Jim Silver says consumers should not wait to buy items they see now for holiday, particularly parents seeking must-have toys. He also says most of the supply chain issues are affecting smaller companies vs. larger brands such as Mattel or Hasbro that own their own factories, manufacture domestically, or command a larger share of the production chain.

"Smaller, mid-sized companies are feeling it more," he said. "You always take care of your larger customers first. Larger retailers will have bigger in-stocks than smaller retailers." Silver estimates that the disruptions will affect only 4 percent of inventory for some larger companies vs. 40 percent for smaller businesses.