through GERRICK JOHNSON, Senior Analyst, BMO Capital Markets
Although a lot of people in the toy industry know who I am, few know what I actually do. I’m an equity research analyst for BMO Capital Markets and, in a nutshell, I make equity recommendations to institutional investors (mutuals, hedge funds and pension funds).
My area of expertise and inventory coverage is in the toy, video game and hobby industries. I just call it “The Fun Space”. However, analysis of the toy industry and publicly traded companies has been difficult due to the lack of face-to-face events in the industry for nearly two years. Having covered toys for 20 years, I’ve developed many great relationships, and it’s always nice to walk the floor at Toy Fair New York, the Toy Insider’s Sweet Suite (Editor’s note: Adventure Media & Events, parent company of the toy book, Sweet Suite product), or Toy Fair Dallas and meet friends and acquaintances, and get introduced to new ones. And, of course, I love to see the toys! Not being able to talk to so many toy friends, or seeing so many toy lines, means that I don’t have the insight I would normally have on innovation or trends. Instead, this analyst spends more time looking at macroeconomic factors. As I write this, I’m afraid I’m going over many of the same themes as others.
Clearly, the effects of the COVID-19 pandemic are still in the foreground. We are well aware that the surge in demand for toys was caused by parents who wanted to keep their children occupied while they came home from school, camp, sports and games. Although this demand factor has dissipated due to the “grand reopening”, new factors are helping to support demand. The reappearance of the in-person birthday party – replacing the driving horn – probably had the biggest positive impact, especially during the off-season. We’re also seeing playdates and other gatherings recurring, and this network effect is helping to drive demand. I call it “the playground factor”.
Last year I was expecting a good holiday season as parents looked to give their kids a fantastic and bountiful vacation as a way to make up for the really crappy year they had to endure. The lack of in-person events meant 2020 would be the best Christmas or Hanukkah ever!
“Obviously, the effects of the COVID-19 pandemic are still in the foreground. “
Parents’ purchases also got off to an early start, given the uncertainty surrounding store closures and openings. And many have embraced online shopping, including those who may have hesitated before.
This year that holiday comparison will be tough, especially with some parents perhaps feeling a little guilty about spoiling their kids a little too much in the past year and a half (as I look around the cluttered bedroom of my 5 year old).
This year, I expect buying to pick up early given the high level of uncertainty surrounding the rise of the COVID-19 delta variant. I also expect early buying to happen because parents hear of looming product shortages due to supply and distribution bottlenecks. Adults have encountered these issues in other areas of life before, from patio furniture that has been out of stock for eight months to empty shelves where basic household cleaning supplies should be. Early purchases always lead to more purchases. There will always be new toys that grab parent’s attention or new and unexpected gift requests. The current pandemic and uncertainties in availability could work in favor of the toy industry, at least from a demand perspective.
However, I believe that the fiscal stimulus from the federal government will play the biggest role in terms of increasing demand. The Child Tax Credit covers more than about 85% of families in the United States and is quite generous: $ 300 per child under 6 and $ 250 per child 6 to 17, although the payment is gradually reduced above certain income levels. This increased income, coming in each month for the rest of the year, is expected to have a significant stimulating effect on toy purchases. Families have their regular monthly payments, such as mortgage or rent, car payments and utilities, and then what’s left goes to the weekly budget, which is basically food and gas. Anything that is left at this point usually goes to the children. This season there should (hopefully) be a lot more left for the kids.
While there is a lot of visibility on demand, the supply is on the other hand more uncertain. I have spoken to many players in the toy industry – as well as adjacent consumer product industries – who are very concerned, not only about the cost of goods this season, but also their ability to deliver them. I hear panic in the voices of some industry contacts. In my leisure coverage, boat, all-terrain vehicle, and RV dealers are experiencing inventory levels 30-80% below normal levels. As the saying goes, “you can’t sell what you don’t have”, and recent retail sales have fallen sharply because of it. Publicly traded toy companies, however, seem much more confident that they will be able to meet the demand they see, and do so in a profitable, margin-generating manner. Greater scale, better availability of resources, geographic diversity of manufacturing and strong relationships with retailers give them confidence.
Prices are definitely increasing to offset some of the costs, and a prime example is that Monopoly’s retail price is 10% higher on Amazon this year compared to last year. And it looks like with high demand and limited supply, promotions, markdowns, and allowances are expected to be minimal. Nonetheless, I have been and remain concerned about the ability of state-owned toy companies to meet their reduction targets due to distribution bottlenecks. Shipping becomes much more difficult as toys rival holiday shipments of iPhones, clothing, and electronics. I have been following the work of our transport analyst closely and the cost of freight – whether air, sea or land – continues to rise. Never lower. Always higher.
As for the numbers, my guess is that the US toy industry, as reported by The NPD Group, will be down 8% for the second half and up 1% for the full year, from year after year. This is based on NPD’s report of 16% growth last year and 19% growth for the first half of this year. A 1% increase for the year would put the industry up 17% from 2019. For the second half, although I predict an 8% drop from 2020, that would put the period up by 4%. % compared to 2019.
“I have been following the work of our transport analyst closely and the cost of freight – whether air, sea or land – continues to rise. Never lower. Always higher.”
When it comes to trends, I think toys that rely on collaborative play will benefit from the ability for kids to come together. Spin Master, for example, commented on Bakugan’s strength for this reason on their second quarter earnings conference call. Role-playing toys should benefit from play dates where house play, cops and thieves, or snack time is, at least, more palatable than last year.
Collectibles could also continue to do well, as the return to work seems to be pushed back and those still at home seek to surround themselves with comfort and collections. The action category looks tough again, with no tentpole movies to generate the hype. I do not see Black Widow, Shang-Chi and the Legend of the Ten Rings, or even Snake Eyes: GI Joe Origins creating a lot of excitement in the driveway. I also predict board games to underperform, as most families are well stocked at this point.
Finally, there is a rush to digitize children’s play experiences. These products are high margin and do not depend on shipping from Asia. With distance learning, parents have become accustomed or more accepting of the learning potential of tablets or laptops.
Multiplayer video games have become an acceptable way for kids to connect and interact with their friends. However, it can be difficult to get started with gaming, especially on mobile, as there are literally tens of thousands of games out there for parents and kids. Existing games have the first player advantage (candy Crush has been in the top 10 mobile games for six years). However, games based on strong underlying intellectual property can break through the clutter. And one thing the toy industry has going for it is a plethora of strong, well-known and trusted brands.
This article was originally published in October edition of the toy book. Click here to read the full issue!