Even from the front porch of his Malibu home, toy manager Isaac Larian can’t escape this holiday season’s biggest business challenge. He sees a long line of container ships idle in the Port of Los Angeles, about 70 miles away.
MGA Entertainment CEO Larian said the congested harbor has been a persistent sight off the California coast since at least May. As he tries to relax and watch the sunset, it’s a constant reminder of the many toys to come.
The delay in unloading the ships could jeopardize whether parents can buy the toys in time to pack them up and hide them under the Christmas tree. If they miss the opportunity, toys can hang on shelves with clearance stickers well into winter.
“I see an ocean full of containers,” he said. “Ship after ship after ship full of containers waiting to unload.”
He said the company, maker of LOL Surprise, Rainbow High and Little Tikes, currently has enough inventory to meet about 65% of its outstanding orders. He said MGA Entertainment had expected revenue growth of 50% this year, but now expects it to grow by 18% to 20%. He did not share specific sales figures because the company is privately owned.
Larian is just one of many toy makers struggling with a massive bottleneck in the global transportation pipeline, caused by the coronavirus pandemic and exacerbated by the blockade of the Suez Canal in March. Shipping containers that once cost $3,200 are now selling for more than $20,000, Larian said. And even when containers are unloaded, there aren’t enough truck drivers to deliver those shipments.
Power cuts in China, a resin shortage and higher labor costs have also put pressure on the supply of goods and increased prices.
“It’s a very, very complex set of problems that have a chain effect, and I’m afraid this will continue for a long time to come,” Larian said.
No company is immune. Larger ones have more resources. Home Depot and Costco have even gone so far as to contract special container ships to expedite their orders. Larger companies also have the money to place orders well before the items are needed. Hasbro and Mattel have not responded to a request for comment for this story, but executives have emphasized that the major toy companies are better equipped to meet these challenges.
At a Goldman Sachs conference in late September, Hasbro CEO Brian Goldner said his company uses “all kinds of tactics and techniques to make sure we have the product we need.” That includes nearly doubling the number of ports it uses in the US and adding some new ports in Asia, he said.
Hasbro expects some toys to be delayed and arrive at the beginning of the fourth quarter rather than the end of the third quarter, but toys will hit shelves in time for the peak season, he said.
“We think we’ll have all the products, although we might want to have a little more product in certain categories, but we’ll have the product for the holidays,” he said.
Those products will be more expensive. At the same investor conference, Mattel CEO Ynon Kreiz said his company is raising toy prices to meet higher costs, but he doesn’t expect it to dampen demand.
“We believe the toy industry as a whole will continue to be a strategic category for retailers,” said Kreiz. “Items aren’t expensive. And parents will always prioritize spending money on their kids, especially when it comes to quality products and trusted brands.”
Market researcher NPD Group estimates that total holiday spending in November and December will increase by 3% from last year, and 5% if the season is extended to October and early January. Meanwhile, consultants Bain and Deloitte each estimate vacation sales will grow at least 7%, reaching about $800 billion.
Less variety and limited offer
Industry analysts said there are no unique toys for the holiday season this year. Instead, they envision consumers being drawn to items most loved during the lockdown.
“There are a few character-driven [toys], with Batman, Grogu, Paw Patrol and Frozen out there,” said Nikki Baird, vice president of retail innovation at Aptos, a retail technology company. “But more emphasis [is] on sensory play such as kinetic sand, water toys, legos, fidget toys. And also toys that promote exploratory play.”
Parents who normally wait to shop in late November and December want to get their hands on their kids’ wish lists earlier this year.
“If your child is in the mood for something, buy it now,” said Steve Pasierb, CEO of the Toy Association. “Do not wait.”
Last year, retailers encouraged shoppers to grab gifts early because of the pandemic. Amazon, Target, and Walmart, among others, began holding holiday sales events in October. But even then, the bulk of the sale took place in December, although a small portion did shift forward, according to NPD.
About 16% of fourth-quarter toy sales occurred in October, up 3% from 2019, according to NPD. The increase in toy sales in December represented 55% of total appetite in the fourth quarter, down 3% from the year before.
That 3% swing means that about $400 million worth of toys were sold earlier in the season last year, as the toy industry soared $11.5 billion during the holiday quarter.
To cope with tight stocks, retailers are putting bigger bets on fewer items, according to Pasierb. It was a strategy that was also used in the back-to-school season, and it will likely mean fewer choices for consumers.
Toys that were popular during the pandemic may also be hard to find. Neil Saunders, director of GlobalData Retail, said he notices that stocks are running out and that there are fewer craft and to-do toys that parents used to use to keep kids entertained. He has also noticed holes on fidget toys, stuffed animals and dolls.
Larian said for MGA that items like the LOL Surprise OMG House of Surprises playset – which is on Walmart’s top toy list – and the LOL Surprise Movie Magic Studios box set – which is on Target’s list – will be harder to find.
“The LOL house — that item is over $200, and it’s big,” Larian said. “You can only put 150 to 200 in a container. You can’t air freight.”
On the other hand, he said, countless LOL Surprise blind bags — wrapped packages with small collectible toys hidden inside — can fit into a 40-foot container or be transported on an airplane.
The company’s fashion dolls, which are labor-intensive to manufacture, will also be in short supply. Larian said MGA’s average cost of producing toys is 22% higher than last year.
Larian said the supply chain has many broken links, not only in China but also in the US. For example, he said there are not enough truck drivers to move containers once they reach the coast or enough workers for domestic production facilities.
He said wages at Ohio-based MGA’s Little Tikes are up 60% as it struggles to fill manufacturing jobs.
Walmart and Target are both hiring additional supply chain workers to keep goods moving through the holiday season and beyond. Walmart, which has about 1.6 million employees in the US, hires 20,000 people for positions as order-fillers and freight handlers. Target, which has approximately 350,000 employees, will hire 30,000 supply chain employees.
Target said it will also emphasize its toy division this holiday season by roughly tripling the number of Disney stores in Target locations and partnering with FAO Schwarz on a limited-time collection.
Higher labor and transportation costs will also have a ripple effect for customers. A recent Salesforce report estimated that prices could rise as much as 20% this holiday season.
“There will be some deals, but supplies are scarce and retailers won’t want to make massive deals on toys,” Saunders said. “It’s going to be a more expensive holiday.”
A new report from The NPD Group indicates that 29% of consumers in the US plan to spend more on holiday purchases this year than they did last year.
While prices may be higher this year, they will be presented as a discount, Aptos’ Baird said.
“Retailers know they are competing with other retailers for a limited share of consumer portfolios — a one-time, seasonal expense,” she said. “As retailers compete for this portion of the spend, I expect promos to still be offered even if there is limited supply.”
If retailers don’t have the toys shoppers want, stores could miss out on sales in other merchandise categories, Larian said, explaining that retailers often use toys as a “loss leader” to lure customers.
“Toys are an emotional purchase,” he said. “Toys bring foot traffic to stores because as a mom or grandmother or grandfather, if you go to a Target or a Walmart or even go to Amazon to buy toys, you end up putting more things in the basket than just those toys.”
Larian said retailers will suffer this holiday if merchandise doesn’t hit shelves in time. Then, he said, toy companies will suffer in the following quarters as retailers try to sell the products in warehouses rather than place more orders.
“Christmas is December 25,” Larian said. “If we don’t get the merchandise on the shelves before then, then sales drop significantly after that. These toys are already made. The stock hangover will go to January, February, March, April, if not longer. The warehouses will be full of merchandise. “