Markets

Economic factors affecting the toy business

Header Economic factors affecting the toy business

1) Long term trends in the toy industry

There are developments intensifying in the toy industry that will change the current flow of goods.

The boom & bust cycle  

The nature of economies in capitalist societies tends to be ‘boom’ followed by ‘bust’ in a repeating fashion. So, the first point to flag is that we are currently overdue a bust, this is not a positive thought, but it is reality. The last big economic crash was the global financial crisis which began about 15 years ago. For anyone younger who did not experience the global financial crisis, it was a very tough time – banks stopped granting credit, most businesses started paying more slowly to protect cashflow, and the economies in most developed countries went into recession, leading to reductions in consumer spending. Overall, the toy business did comparatively ok, as consumers tend to still buy for their children even if they are cutting back elsewhere, but even the toy business lost market size in some countries – Spain was particularly hard hit during and following the global financial crisis for example. The reality is that economic downturns are an inevitability in capitalist cycles, so while the next recession will not be pleasant, it is nevertheless normal when it comes, and that could be very soon.

Labour & general manufacturing cost increases in China

One of the great economic miracles in human history is the transition of China from a backward insular agrarian economy with great poverty and hunger to a major economic giant with vastly more affluent citizens and the world’s leading manufacturing capabilities. The fact that this extraordinary transformation has taken place in one generation is bewildering – just as an example of China’s unparalleled growth, Shenzhen is a city well known to toy people, with a population of c. 17.5m people, making it China’s 3rd biggest city. Going back 40 years in time to 1982, Shenzhen’s population was a mere 78,000 people – this shows the massive scale of China’s growth during this period, especially in areas with extensive manufacturing facilities.

The toy business has been a major beneficiary of China’s growth as a manufacturing hub, with China now having in excess of 10,000 toy factories and still manufacturing the majority of the world’s toys. The challenge for the toy business though directly results from China’s economic success story since the economic growth of China is not just stopping where it most benefits the toy business. Today China’s workforce is growing ever more expensive, as Chinese people start to enjoy higher living standards and growing consumerism. China’s economy looks set to keep growing apace, living standards, wages, and disposable income are also set to keep on rising. And this creates a major issue for the toy business. Because looking forward, China is going to have to play a much smaller part in toy manufacturing than it has done in recent decades since low cost labour has gone, and is never coming back! 

The toy business is headed back to a multi hub, multi country sourcing situation like we had before China’s rise.

Market growth in developing countries

Sticking with China, the Middle Kingdom is as good as an example of any of how markets that we once did not take very seriously in the toy business have grown substantially due to the fast-developing economies. China’s domestic toy market is now substantial and set to grow further. For those toy companies who can crack the puzzles which is toy distribution into China, the opportunities are and should continue to be significant. 

There are many other countries additionally whose economies are growing, and which will become ever larger markets for toys. Looking back 20 or even 10 years, there are countries which most toy companies ignored or paid little attention to which are now offering significant volume opportunities. As developing countries advance economically, sales growth opportunities will abound for toy companies open minded enough to visit new geographies which they previously dismissed as insignificant.

2) Current issues affecting the toy industry

Apart from some broader long-term trends, there are more obvious and immediately more painful economic challenges out there. 

The economic impact of Covid

Covid has been both good and bad for the toy business. Many companies profited from locked down consumers buying at high (counter-seasonal) levels to occupy, entertain and educate kids at home. Some companies took a hit, especially if their product lines featured movie licenses. 

Now though as we (hopefully and fingers crossed!) begin to emerge from the pandemic, we have to face the harsh economic realities of the way Western governments dealt with the crisis. Most Western governments spent huge amounts of money they didn’t have on managing the pandemic. The way this was funded mostly was by printing incredibly high amounts of new money. We can skip the hard Economics theory here, but the bottom line of printing mega amounts of money is inevitably high inflation. 

Historically, governments would deal with high inflation by increasing interest rates, but this is both not possible and also not desirable for governments in general. Governments now owe huge sums of money, and interest payments on their Covid resultant debts and those they had before are at a level where they cannot afford to raise interest rates, because it would hit them harder. By allowing inflation to continue, Western governments can devalue how much they owe so it becomes a lesser problem than it would have been otherwise, but also, they can then squeeze extra contributions from their citizens by not allowing their costs to rise by inflation. Most of this is removed from the daily realities of the toy business, but here are the inevitable consequences of inflation:

• Inflation on factory gate prices

• Inflation of consumer prices

Inflation is seriously affecting the entire toy business right now, and it is going to be very hard to get rid of inflation while governments can’t afford to increase interest rates. As such, it seems clear that we will be stuck in a cycle of inflation for at least 2022 and 2023 – this situation is not going away quickly, so we need to manage it as best as we can. Especially when we have inflation caused by other factors like the extortionate increases in shipping costs in 2021, and which have not returned to viable levels yet.

3) Geopolitical factors

The final area of economic concern for the toy business are those arising from geopolitical factors. There are too many of these factors to analyse, but two obvious and major examples follow:

EU flag as puzzle pieces, the last puzzle piece with the Great Britain flag is missing

Brexit

Brexit (the UK leaving the European Union) is likely to have a negative economic impact on the toy business. Leaving the rights and wrongs of Brexit aside, the UK is set to have the lowest growth and the highest inflation among the G7 nations in 2023. Brexit has clearly played some role in making Britain so economically uncompetitive, at least in the short-term. 

Practically speaking for toy companies, many companies who were trading reasonably seamlessly in mainland Europe and in the UK, may have had to add an additional warehouse to circumvent issues and try to financially minimise the hit from one of Europe’s big 3 nations no longer having unrestricted access to EU markets and vice versa.

Russian war of aggression on Ukraine

Aside from the terrible destruction, death and suffering this awful war is causing, the conflict started by Russia with the Ukraine will inevitably have a major economic impact on the world economy. The two combatant nations supply highly significant amounts of the world’s basic food components, which has already added further to inflation problems. The Russian market is no longer so easy to access, and many companies will cease shipping toys into the market for some period of time, leading to lost revenues. Russia is also a major oil and gas producer, and so any issues with supply will exacerbate the inflation effect (especially on plastic toys) and reduce consumer disposable spending. 

All in all, there are many economic factors currently and constantly affecting the toy business. The pressures are currently especially difficult to manage, and it seems that these economic pressures are unlikely to ease in 2022 and potentially 2023. In the meantime, the toy business may have a difficult time, but at least consumer demand for toys remains strong. One reason for the toy industry to be optimistic.

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