Tepid demand, ocean capacity shortfalls, and tougher product safety rules have set up the toy business for a lump of coal this season.
By Mark B. Solomon
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It's not every day that trade association executives talk candidly about the economic pressures facing the industries whose interests they are paid, often handsomely, to represent. But Jeff Bergmann, chief operating officer of the Cincinnati-based Toy Shippers Association (TOYSA), could not sugarcoat his response to a query about the outlook for toy sales this winter.
"It's not going to be a very good holiday season for our members," he said in a late October interview. Bergmann has valid reason for concern. According to a mid-October survey from the National Retail Federation (NRF), the typical U.S. consumer will spend $682 on holiday items this year, down 3.2 percent from 2008 and the lowest level since 2003. (The survey didn't solicit responses specific to purchases of toys.)
Not surprisingly, a separate NRF paper that tracks U.S. containerized ocean traffic entering U.S. ports has reported the weakest activity since 2003, as worried retailers pare back new orders in response to tepid end demand.
"We see stock levels (at retailers) that are significantly lower than in previous years," Eric Levin, executive vice president of Techno Source, a Hong Kong-based toy and game manufacturer, said in late October.
Levin said the financial crisis stands to reshape the entire supply chain landscape for the toy business. Traditionally, retailers placed their orders early in the year and suppliers shipped holiday stock throughout the summer for delivery to stores by early September. This year, retailers concerned about buying too much too soon spread their orders over a five- to six-month period that began in July and ran through November, Levin said. This has wreaked havoc on many supply chains, which were ill-prepared to make the adjustment, he said.
The executive said it's too early to tell if the shifts in order patterns are a one-time event in response to the downturn, or the start of a long-term trend. If it's the latter, "it will change a lot of the business flow in Chinese factories going forward," he said.
The retailers' cautious stance is not new. In 2008, toy import tonnage from China—by far the main source for U.S.-sold toy and game products—declined 8 percent over 2007 levels, according to consultancy IHS Global Insight. By contrast, import tonnage from China in 2007 rose 14 percent over 2006 levels, the firm said. It has not made projections for 2009's import activity.
Tight capacity
Weak demand is not the only challenge facing the toy industry. Another is a shortage of ocean liner capacity. In response to the global downturn and a non-compensatory pricing climate, a number of ocean carriers have taken ships out of service, leaving toy shippers and importers hard pressed to secure cargo space when they need it. TOYSA's Bergmann lauded the steamship lines for being flexible and accommodating to his industry's needs, but acknowledged the group has fielded "a few calls" from members looking for capacity during peak season and not finding it.
Should the space become available—and steamship lines can quickly get mothballed vessels back in the water if demand warrants—it will likely cost more to procure. Or at least it will if the carriers have their way. In August, the toy supply chain was hit with a $500 rate increase per forty-foot equivalent unit container (FEU); most of that increase has stuck. That increase was followed by a peak-season surcharge and "equipment repositioning" charges, as carriers look to shore up their bottom lines any way they can.
The third-party logistics service providers (3PLs) have been the main targets of the carriers' rate hikes. That's because so-called beneficial cargo owners—typically manufacturers or retailers—had language in their contracts barring rate increases or absorption of peak-season surcharges.
Bergmann noted that 3PLs are absorbing the increases or trying to pass them on to their customers. Some shippers have accepted relatively small increases from the 3PLs, he added.
Bergmann said TOYSA believes carriers just want to return to some level of pricing normalcy and are not looking to gouge his members. But that's little solace to an industry already facing sluggish demand during its most important selling period. "It's quite a conundrum for us," he said.
Get in gear!
The toy industry's challenges won't stop when Santa Claus packs it in for another season. In August 2008, President Bush signed legislation requiring that by this February, manufacturers and importers must certify that their toys have been tested and are in compliance with mandatory safety standards. Importers are required to have compliance certifications available to inspectors at the time the products are examined.
The legislation arose from several incidents in recent years involving the safety of U.S. toy imports, notably a 2007 incident when Mattel Inc. had to recall nearly 1 million Fisher-Price toys after discovering its supplier had coated their surfaces with lead paint.
David J. Evan, a New York-based attorney who advises companies on the new law, said the testing process and the potential for negative test results could disrupt the supply chain at any point. If inspectors snag a non-compliant product or product component, the goods can't be distributed until the affected item is removed or replaced. This could result in shipment delays, product recalls, and stockouts, Evan warned.
The New York-based Toy Industry Association has developed what it calls an industrywide process—which includes extensive product testing—to ensure compliance. In October, the group announced that manufacturers could start applying for certification under its new "Toy Safety Certification Program." Toys certified under the program are expected to appear on store shelves in 2010, the association said.
Amy Magnus, district manager at A.N. Deringer Inc., a St. Albans, Vt.-based customs broker, freight forwarder, and 3PL, said manufacturers and importers should expect government inspectors to be aggressive in enforcing the law. Magnus added that other agencies aside from the Consumer Product Safety Commission (CPSC) now have the power to place manifest holds on cargo to satisfy their own requirements. She suggested that companies seek the help of a broker or an import specialist to avoid stiff fines for non-compliance.
Evan said the CPSC is adding staff at U.S. ports, which will result in more inspections. If a product is stopped at a port due to compliance issues, the CPSC and the U.S. Bureau of Customs and Border Protection will conduct a field test and send samples to CPSC facilities, where examiners can place a hold on the goods until they determine if the product is in compliance. Goods that fail the compliance test will not be released into U.S. commerce.
Levin of Techno Source said toy manufacturers must balance the ability to test thoroughly with the need to quickly move products through the process so they can hit store shelves on schedule. They must also convince retailers to accept testing reports that manufacturers already have on file so they can avoid paying for the same tests to be re-run for each retailer, he added.
"If every retailer begins to require tests be re-done just for them, it will create significant unwarranted expenses and delays," Levin warned.
Regardless of the different issues that could potentially fracture industry interests, Levin said all the players are on the same page as to the overriding priority.
"We as an industry are all aligned in wanting to ensure that toys are safe for kids," he said.
