Tariffs, other unknowns keep toy industry on edge

Rebounding from last year's crash and burn of Toys R Us, U.S. toy sales edged up this year. But a host of challenges, led by tariff threats, continue to fret executive suites.

Sales in the first six months of the year fell 9 percent from the same period in 2018, when thrifty parents stocked toy chests with bargain-priced goods from shuttering Toys R Us stores, market research firm The NPD Group reports. But third-quarter sales edged up 3 percent to $3.69 billion.

NPD anticipates modest but steady growth is expected for the ever-critical fourth quarter, when an unusually truncated shopping season — Thanksgiving is five days later this year than last — is expected to give a boost to beleaguered brick-and-mortar stores.

"The sales trends for the first half of 2019 were distorted because of the comparisons to the first half of 2018, which is when the Toys R Us liquidation sales helped to increase toy industry growth," said Juli Lennett, vice president and industry adviser, toys, at Port Washington, N.Y.-based NPD. "Although sales were down 9 percent in the first half of this year, the gains in the back half will make up for almost all of those losses."

"If I had to make a prediction, Target and Walmart and Amazon [are] going to have a fantastic year, while Penneys, Macy's and Kohl's will struggle," said longtime industry observer Richard Gottlieb of New York's Global Toy Experts.

The fourth quarter is the industry's biggest, but the outlook after that is the most unsettled it has been in years.

"Reading the tea leaves is difficult," Gottlieb said.

The No. 1 concern is the continuing China-U.S. trade war. Despite the ardent lobbying of New York-based trade group Toy Association and toy companies big and small, the Trump administration remains poised to impose a 15 percent tariff Dec. 15 on China-made toys.

Currently, there are no tariffs on Chinese toys.

"[T]he proposed tariffs on toy imports from China will devastate the toy industry and assuredly lead to higher consumer prices," Toy Association President and CEO Steve Pasierb wrote to United States Trade Representative Robert Lighthizer in June.

Other key issues cited by Gottlieb include industry players still grappling with the Toys R Us shutdown, a rise in counterfeit goods and the accelerating growth of online sales.

The decades-long shift from brick-and-mortar to online stores continued apace this year, driven by millennials — the young adults who now drive toy sales for their own children — for whom convenience is as crucial as low price.

"This is a generation that does not have a tolerance for wasted time. They don't like to go to stores only to find something is out of stock," Gottlieb told Plastics News.

On a macro level, the possible effects of impeachment and Brexit are far from clear.

In Hong Kong, continuing unrest could stifle attendance at next month's Toys & Games Show, one of the world's biggest toy shows. Show sponsor Hong Kong Trade Development Council has announced "enhanced transport and customer support services" for wary buyers.

On a technical note, the latest updates to ASTM-F963, the voluntary standards for toy safety, are slated to be voted on by membership in early 2020. These amendments will cover phthalates — an additive that makes plastics softer — and toys that expand when placed in water, said spokesman Nathan Osburn of West Conshohocken, Pa.-based ASTM.

ASTM-F963 was last updated in 2017.

The Toy Association, the 103-year-old trade group based in New York, has spearheaded an aggressive pushback against the Trump administration's proposed tariffs on toys.

"As things stand today, barring a significant breakthrough in the trade negotiations, tariffs will take effect. No exemptions for the toy industry have been granted," association spokesperson Kristin Goldman told Plastics News in an email.

The association's key argument — reiterated by a bevy of association members in letters to Lighthizer — is that the Chinese toy manufacturing infrastructure now dwarfs anything available anywhere else, including the United States.

"Simply put, the toy industry is much more heavily dependent upon Chinese suppliers than most other U.S. Industries," Hasbro Senior Vice President Kathrin Belliveau wrote Lighthizer.

Because Chinese manufacturers have been carefully coached by U.S. companies to follow U.S. product safety standards, switching to other countries "would result in major front-end testing and certification cost increases, " Mattel Government Affairs Director Corinne Murat wrote Lighthizer.

Chinese firms could benefit greatly by shipping tariff-free goods directly to U.S. customers under an personal exemption granted to orders below $800, the association said. Scofflaw firms could ship toys that don't meet U.S. toy safety standards, the association adds.

One niche likely to be unaffected by tariffs are rotationally molded toy homes, play structures and other bulky toys that are costly to import from Asia.

"Tariffs are almost a nonevent for us," said Jim Miller, CEO of Kent, Ohio-based The Simplay3 Co., rotomolders of play homes and play structures. "We really don't source anything out of this country."

For big toy companies, U.S. sales were up slightly, but the real jump came in overseas sales, especially in the burgeoning Asian markets.

At Mattel Inc., the El Segundo, Calif., home of Hot Wheels and Barbie, net sales for the quarter that ended Sept. 30 rose 3 percent to $1.48 billion from the year before period. While North American sales were flat, international sales jumped a healthy 10 percent.

Pawtucket, R.I.-based Hasbro Inc. saw global sales for the third quarter edge up to $1.58 billion from $1.57 billion in the same quarter in 2018. U.S. and Canadian sales fell 2 percent to $893.3 million but international sales held steady at $561.1 million, boosted by 7 percent growth in the Asian sales.

Santa Monica, Calif.-based JAKKS Pacific Inc. reported that third-quarter net sales jumped 18 percent to $280.1 million, up 18 percent compared to last year's third quarter.

JAKKS Pacific's bottom line was bolstered by strong demand for Disney Frozen 2, Toy Story 4 and Nintendo-licensed products.

Toronto-based Spin Master saw its gross third-quarter sales slump 11.4 percent to US$583.3 million. The company cited falling demand for its once-hot Hatchimals robotic toys. Sales edged up 1.6 percent in Europe and declined 15.3 percent in North America and 12.1 percent in the rest of the world.

Last year, the U.S. toy market was an estimated $28 billion, according to the Toy Association. Americans buy about 3 billion toys every year at an average price of $10.

Global toy sales reached $90.4 billion in 2018, posting a 1 percent growth over 2017 but off from the 3.2 percent growth from 2016 to 2017, according to NPD.

Beneath the numbers, subtle changes are afoot in the way this tradition-bound industry does business.

"[R]etailers are tightening their inventory commitments and are relying more on domestic shipments than direct import," JAKKS Pacific Chairman, CEO, President and Secretary Stephen Berman told analysts in the company's third-quarter earnings call.

That's another way of saying that retailers are playing matters close to the vest. Rather than ordering deep-discounted product in bulk from overseas factories, retailers want suppliers to ship and warehouse product domestically. It's a pricier strategy but one that minimizes the risk of getting stuck with uncool — in the minds of kids, that is — merchandise.

"Retailers are becoming more conservative," Gottlieb said.

The year has been good for savvy small players. Strong sales at SimPlay3, founded just three years ago, is prompting the company to add a rotomolding machine next year to its roster of four and increase headcount, currently about 60.

"We've had nice growth this year, and we're seeing a strong fourth quarter," said CEO Jim Miller.

Image and reputation are everything to the very front-facing toy industry. In November, the Boston-based activist group World Against Toys Causing Harm Inc., which goes by the clever acronym W.A.T.C.H., released its annual list of the 10 most dangerous toys.

Meanwhile, growing protests against plastic waste in toys have made headlines in the U.S. and the United Kingdom.

Greenpeace USA plastics campaigner Kate Melges said: "There is no doubt that toy manufacturers use unnecessary packaging that puts our environment at risk."

Two events stand out this year.

In September, Burger King UK announced that it would phase out plastic toys from children's meals and start accepting plastic toys for recycling.

The move was spurred by a petition by two elementary school sisters that received more than 300,000 signatures.

In November, Chatsworth, Calif.-based MGA Entertainment Inc. said that it is working on biodegradable plastics. CEO Isaac Larian at privately held MGA also announced plans to replace plastic with paper for the inner packaging in the company's smash-hit L.O.L. Surprise dolls.

While the announcements leave wiggle room — Burger King UK said it won't complete the plastic phaseout until 2025 — they foretell a tectonic shift in the plastics-intensive industry.

"It's a big issue that won't go away," Gottlieb said.

For those with no elementary school-age kids in the house, L.O.L. Surprise has been one of the industry's best-selling brands since their introduction three years ago. Kids unwrap plastic-wrapped shoes, stickers and accessories inside a shrink-wrapped plastic ball before reaching the collectible big-eyed doll in the middle.

Sales have been turbocharged by the "unboxing" craze that has launched million-view YouTube videos.

Unboxing is a trend that doesn't look to go away anytime soon.

"Unboxing will stay popular as kids love anything that involves opening and surprise," Gottlieb said.