ments for November. Whatever the reason, the shift didn’t happen as expected—and there’s not much reason to think that it’s all coming back in 2019. THERE’S A NEW TARIFF IN TOWN Our president imposed a series of tariffs on imports from China and threatened to expand the range of tariffed products to everything made in China if the country didn’t meet his demands. But tariffs did not specifically target the vast majority of toys, and let’s face it: If everything made in China gets hit with a tariff, toys will only be one of a huge amount of products affected, so this is hardly an industry-specific concern. But even so, you think of China when you hear “toys,” so the concern has been center-of-mind for everyone in the toy industry. SLOW BOAT FROM CHINA In a not-unrelated development, we are finally seeing the long-anticipated largescale “de-Chinafication” of toy manufacturing. Tariffs—even those not yet imposed— are not the primary catalyst. The move to find manufacturing capacity outside of China has been underway for a long time, intensifying with each double-digit annual increase in the wages of workers in toy factories in Shenzhen and elsewhere, stoked by the desire of China’s leaders to move up the economic food chain by expanding production of higher-value products and moving away from low-value products, such as toys. Many U.S. companies found that countries such as Vietnam have adequate, modern factories and access to transportation infrastructure. The workers in these factories also typically don’t have to travel hundreds of miles to go back home for Lunar New Year celebrations, so there is less disruption in January. There is no way that Vietnam, Thailand, Cambodia, and other countries can absorb all the manufacturing capacity in Southern China overnight, but the move out of China is underway, much like the move out of Japan and Hong Kong began a generation ago. GO BIG OR GO HOME In the immediate wake of TRU’s demise,
there was a prediction (which I agreed with) that the industry would see a massive wave of consolidation as larger companies swallowed smaller ones. The theory was that smaller companies were over-indexed to TRU, would find it much harder to replace those lost sales, and would be hurt much more by unpaid receivables. Well, the massive wave of post-TRU consolidation didn’t crest... yet. We still expect to see many smaller companies get acquired (or go under), but the buyers may not be the largest companies in the industry. Instead, private equity bottom-feeders may do the buying, or mid-sized players that are nimble enough to avoid getting burnt by the TRU bankruptcy, but are large enough to absorb other companies or product lines.
“My forecast for the industry this year is that it will be a good year.” CRUDE TO BE KIND The sharp drop in the price of crude oil over the course of 2018 would normally be a significant potential tailwind for toy makers looking to cut costs. And that may very well turn out to be the case. The price of crude oil ended 2018 roughly a third less than its peak in October, and more than 20 percent below where it was at the end of 2017. Often oil prices are a proxy for expectations of future economic activity—and if the drop in crude is driven more by diminished demand than by surging supply—it could be a harbinger for a recession, which is nobody’s idea of a tailwind. CRAZY RICH LICENSES By just about any measure, 2019 is shaping up to be an insane year for toyetic entertainment licenses, with movies such as Toy Story 4, Frozen 2, multiple Marvel and DC Comics features, Star Wars: Episode IX, live-action remakes of Disney classics, and more. History not only says that consumers’ appetites can have limits, but also that some of these properties have showed a bit of fatigue at retail lately. We like the
position a company, like Funko finds itself in: It will have products tied to just about all of the major toyetic content this year, in addition to some TV content not likely to generate sales of traditional toys, such as Game of Thrones and Stranger Things. (More disclosure: I handle investor relations for Funko.) OVERALL PREDICTION My forecast for the industry this year is that it will be a good year. Retail inventories are lean, there are many toy drivers, the economy remains relatively robust, manufacturing costs should be manageable, and the comparisons in the second half look pretty easy. In addition, for the first time in many years, the talk at Toy Fair won’t be, “So, what do you think will happen with TRU this year?” This is the first time in about 10 years that manufacturers won’t have to worry about the credit worthiness of one of their largest customers. If there is talk about “What will happen with TRU?,” it will center on whether the brand can successfully and sustainably revive in a new retail structure, and/or whether its various private label product lines can be successfully marketed under the Geoffrey LLC brand. Both of these are happier things to speculate about than whether or not a retailer accounting for a large share of industry sales will survive. I wish you all a successful Toy Fair, and a prosperous 2019. »
Sean McGowan is a managing director on the consumer team of the Liolios Group, which provides capital market navigation and advisory services. He has been closely following the toy industry for more than 30 years, analyzing product trends, cost changes, marketing practices, and other aspects of how products and companies succeed (or don’t). In addition to toy companies, his clients include companies in the sporting goods, video game, eSports, and consumer packaged goods businesses. He is also on the board of advisors of the Toy Industry Foundation.
toybook.com | FEBRUARY 2019 | THE TOY BOOK
59
