State of the Industry Sean McGowan
continued from cover Why is this a surprise? Because it seems in 2012 and earlier years, December was marked more by negative surprise than by positive. The mere fact that 2013 didn’t see a rash of year-end order cancellations was, in its own way, a positive simply by not being a negative. Adding to the surprise was the fact that the shortened period between Thanksgiving and Christmas was expected to result in bad news for retailers in general. However, through the joint miracles of omnichannel, guaranteed last-minute delivery (often free, but, alas, often not on time) and ubiquitous connectivity with mobile devices, the so-called shortened holiday season was, for some retailers, actually lengthened in terms of available shopping time. And let us not forget that Black Friday has now morphed into Grey Thursday, and many companies started their Black Friday sales days ahead of Thanksgiving, so the holiday shopping season wasn’t really shortened after all. (It remains to be seen whether adding extensive payroll on Thanksgiving only to shift sales from Friday to Thursday was a profitable trade, but I suspect Grey Thursday will be with us for a while.) Another factor that probably helped make the year “OK” is the fact that there was so much emphasis in late 2012 and early 2013 on reducing retail inventories. This effort, coupled with retail sales that were up modestly pretty
44 • THE TOY BOOK
much all year meant that by the time the holiday season arrived, there was less need to cut orders. Another surprise from last year? For all the talk about tablets, tech toys, and the renewed threat from new video game consoles, the hottest toy item of the year was a loom for making bracelets out of tiny rubber bands. Go figure. But maybe this isn’t so surprising after all. Surely the traditional toy industry has lost some sales to tablets and smartphones, but kids still like basic toys. As I pointed out last year, Lego makes basic plastic building blocks—a play pattern that could hardly be lower tech—and the period of strongest growth in Lego’s history has been the years that followed the introduction of the iPhone. Now, we all can see that Lego’s growth has slowed, but I doubt that has anything to do with loss of share to tech toys or tablets. As a segue into the prediction portion of this discussion, let’s mention a trend that didn’t start last year, but certainly became much more pronounced, which was the importance of emerging markets. We have been hearing for years about how the BRIC (Brazil, Russia, India, and China) countries were going to be a major source of growth for U.S. toy makers, and while this didn’t start in 2013, last year was the first year when the numbers finally got big enough to move the needle. Brazil and Russia, in particular, are now so impor-
tant to the overall sales of the two industry giants that they have a meaningful impact on the total revenues of both companies. This is likely to become much more pronounced in coming years, as India and China see growth at levels several times that of the domestic and Western European markets. An observation I made last year was that the sluggishness of the toy industry in recent years could not be blamed on the console video game business, since that industry had been in a free fall for more than two years, leading up to the September release of Grand Theft Auto V. The November launches of the PlayStation 4 and Xbox One were very strong. Sony announced global sales of 4.2 million units through December 28, and Microsoft said it sold more than 3 million units. This strong launch initiates what I believe will be a sustained period of significant improvement in video game sales. But let’s be honest, how much impact could the sale of 7 million consoles scooped up by 20-somethings to play a handful of M-rated video games have on sales of Turtles, Barbies, Ponies, and Legos? Not much—yet. I continue to believe that because of growing competition from alternative game devices (phones, tablets, and cheaper PCs), this console generation will peak lower than the last one, but not before it sucks many billions of dollars out of the entertainment budgets of
FEBRUARY 2014