TOY FAIR NEW YORK 2019
CHINA, ACQUISITIONS, AND A POST-TRU WORLD Factors That Will Impact the Toy Industry in 2019 by SEAN MCGOWAN, managing director, Liolios Group TOY FAIR: IT’S THE ANNUAL DEEP DIVE into Toyland, a time when we can all focus on the joy that new toys will bring to kids over the course of the next year, and maybe think a little less about Crazyland, where we adults get the joy sucked out of our lives. We’re coming off a year that was strange in so many ways, including the first holiday season in more than 40 years without Toys “R” Us (TRU). The retailer’s departure not only figured prominently in the outcome of holiday sales last year, but is also a central discussion point in this column. Here, I will consider what to expect in 2019 in light of what we’re leaving behind in 2018. TRU-ISMS One of the biggest surprises of the first half of 2018 was the speed at which TRU went from bankruptcy to liquidation. The bankruptcy was not that shocking: It was a bit like finding out your uncle who smoked three packs a day was diagnosed with emphysema. The shocking part was not that the patient was sick, but how quickly the patient lost the fight. From the moment TRU announced its liquidation, the big question facing toy makers became, “How much of the sales I expected to make to TRU will shift to other retailers, and how quickly will that shift happen?” Clouding this analysis was the uncertainty over the degree to which heavy retail toy sales rung up during the liquidation constituted “pantry loading,” whereby parents would simply spend their toy budgets in April rather than in November in hopes of getting a better deal during the “every58
THE TOY BOOK | FEBRUARY 2019 | toybook.com
thing must go” sales. Plus, it wasn’t clear how much impact the extra shelf space allocated to toys at other retailers would have on total demand. There was a four-part argument for why the industry would enjoy strong toy sales last holiday season:
1. There was strong evidence and spec-
ulation that the pantry-loading effect would not be that significant, with some estimates suggesting that the vast majority of the toys purchased during the liquidation were not hidden in the back of the closet, but were, in fact, consumed shortly after purchase, which paved the way for a healthy holiday season.
2. Competitors such as Walmart, Target,
and Amazon stepped up their efforts to capture the lost TRU sales, either through extra shelf space (in the case of the brick-and-mortar retailers) and/ or extra and earlier toy promotions.
3. The absence of TRU brought a dra-
matic increase in shelf space from retailers not accustomed to doing brisk business in toys, such as Best Buy, GameStop, and Barnes & Noble. This would lead to consumers making greater impulse purchases when they visited those stores, and would create a fatter pipeline to which manufacturers could ship.
4. Finally, at least from the vantage point of mid-year, the economy and stock market were both booming, suggest-
ing consumers would not hold back on spending during the holiday season. In fact, pantry loading appeared to actually happen last year. Competitors did expand their toy offerings, but were not as profligate with their purchasing, leading to shortages. The lesser-retailers clearly wanted to be out of stock on December 26—and mission accomplished. The stock market also had its worst fourth quarter since the Great Recession, dealing a damaging blow to the wealth effect. My guess is that the percentage of toy sales that TRU lost and other retailers recaptured in 2018 was much less than the 80 percent-plus estimate that some put out there. And, of the portion that other retailers did not recapture, a significant part of it may be gone forever. (A quick shout out to Jakks Pacific, which was pretty much alone among major public toy companies last fall saying that other retailers would not pick up the lost TRU sales right away. Not that it was “good news,” but it just turned out to be more correct than the prediction that 80 percent or more of those sales could be made up in 2018. Full disclosure: I handle investor relations for Jakks Pacific.) Why did this happen? Even if those toys bought at half price in April were, in fact, consumed right away, it appears that parents found other things to spend their money on later in the year. Or, maybe they got distracted by the bi-annual “MostImportant-Election-Of-Your-Life.” Or they felt a little less like St. Nick and a little more like Ebenezer Scrooge when they opened their brokerage account state-
