Date February 2019
- Annual toy sales dropped 2% in 2018; the first decline in four years following the closure of Toys “R” Us
- Competition has intensified among remaining industry retailers since the liquidation of Toys “R” Us, even reaching to less traditional toy outlets like craft and party stores
- Pricing competition remains fierce in the face of Amazon
- The Consumer Price Index (CPI) for Toys was -9.0% (unadjusted) for the year ended December 2018, indicating a period of lower demand for the industry
- Industry revenue is expected to decline at an annualized rate of 1.1% through 2023
approximate net recovery on cost
By the Numbers - Y/Y Consumer price index
Competition heats up in the wake of Toys ”R” Us liquidation: When a major industry competitor falls, who picks up the slack? Annual toy sales dropped 2 percent in 2018, representing the first decline in four years following the closure of industry leader Toys “R” Us. Prior to the closure of its last group of stores in the summer of 2018, Toys “R” Us controlled over 13 percent of the global toy market and 24 percent of the U.S. market. Although it has generally been a challenging year for U.S. toy and hobby stores with the CPI at negative 9.0 for the year ended December 2018, the rush to acquire market share and take a piece of the $11.3 billion dollars in global sales up for grabs after the liquidation of Toys “R” Us has created more fragmentation in an already fragmented industry. Those who benefit most significantly are the big-box stores Target and Walmart that already lead the industry, as well as Amazon.com. Having said that, specialty retailer FAO Schwarz re-entered the market in New York City after closing its stores in 2015, Party City opened “Toy City” pop-up stores for the holiday period, and dollar, department, and specialty stores increased their product selections leading up to the holidays to take advantage of discount and mall-based shoppers.
Virtually all major players (and even some minor ones) across the industry made aggressive strategy changes to grab market share leading up to the critical holiday season. In particular, Target almost doubled its assortment of toys over 2017, while expanding 500 stores by a total of 250,000 square feet, Amazon published and shipped millions of its 68-page toy catalogs ahead of the season, and Walmart opened its “America’s Best Toy Shop” concept online and expanded its toy selection by 30 percent in stores and by 40 percent online. Additionally, JCPenney, Kohl’s, Michaels, and Barnes & Noble all added or expanded toy assortments for the holiday season.
As of the date of this publication, a new company, Tru Kids, Inc. had recently emerged from the remains of Toys “R” Us, led by its former global chief merchandising officer Richard Barry. It remains to be seen what the new company’s strategy will be or how it will impact the toy industry moving forward.
Demand is highly seasonal: The toy industry relies heavily on holiday sales, up to 50 percent of which typically occur in the fourth quarter. For toy retailers, annual inventory levels and operational decisions must be managed accordingly. As evidenced by the success of Amazon.com, discounts and incentives resonate with consumers, as well as paying close attention to consumer preference. As each generation becomes increasingly more technology-savvy, electronic toys remain popular. Additionally, educational toys are known to have longer life cycles, and are easier to justify selling at higher prices. Even though the industry hits its peak during the fourth quarter, companies can manage through the offseason by keeping up with consumer trends and rewarding customers with promotional pricing and other incentives.
With a significant percentage of total annual revenue generated in the months of November and December, clients lending on toy inventory should understand the impact of seasonal values on their collateral. Seasonality coupled with the obsolescence risk related to often fickle consumer purchasing trends in individual categories are primary drivers of gross recovery values for toys. Inventory mix drives changes in gross recovery as higher recovering categories, such as licensed action figures, games, and bicycles, must be managed in conjunction with lower recovering categories including plush and seasonal toys. Miscalculations in purchasing, supply chain shortages in popular items or vendor fulfillment issues can quickly derail a retailer’s holiday season sales momentum, resulting in stock-to-sales ratio imbalances by category that can impact sales capacity for months. In turn, normal course overstock and sales capacity issues may severely impact appraisal sell-throughs by category, and overall sales capacity, ultimately taking a toll on already highly seasonal Net Orderly Liquidation Values.
Retailers stocking deep assortments of toys must carefully manage inventory levels to sales volumes to maximize value, especially given the brevity of the “traditional” holiday season and its potential impact on annual sales. To the extent that seasonal or slower-moving inventory is not managed effectively as part of normal-course business, it may become challenging to sell through in an off-season liquidation event, resulting in lower gross recovery values in certain categories. Gordon Brothers recommends that lenders partner with appraisers in requesting annual seasonal models to address large swings in net recovery values and their potential impact on availability.
Changing influences: The evolving tastes of toy consumers have forced companies to change their products to better suit customer demands; one such change being a recent push towards tech-based toys. Of rising popularity in the toy market are YouTube-based influencers. Ryan’s World, Dude Perfect, and Guava Juice are among the toy brands recently founded by YouTubers and promoted on the social media video site. These products are driving children and teens into stores, including Walmart, to purchase tie-in items including games, crafts, figures and vehicles, slime, and plush toys. Over time, online personalities driving product sales may prove to be transient as the world of influencers impacts primarily younger consumers.
Children and teen smartphone users are less likely to purchase and play with toys and more likely to play app-based games on their phones. As children continue to receive smartphones at younger ages, the toy market’s target consumer is skewing younger than in the past. Children with a computer at home are also more likely to play online games rather than playing with toys. Based on data from the Pew Research Center, 45 percent of children surveyed received a mobile phone between the ages of 10 and 12. Market research firm The NPD Group notes that children aged eight and under are responsible for nearly 70 percent of U.S. retail toy sales. Girls in particular have been shown to grow out of toys at a younger age, and instead are turning to social media, beauty products, and technology for entertainment. These changing preferences and demographics will continue to shape the profile of toy retailers in the near-term.