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Toymakers to Suffer on US-China Trade Spat, Declining Demand

Rajashree Bhattacharyya
New products and strategic partnerships, major theatrical releases along with an increased focus on gaming bode well for Hasbro (HAS).

The U.S.-China trade debacle has escalated since U.S. President Donald Trump has lifted tariffs from 10% to 25% on $200 billion worth of Chinese imports. China struck back with tariff hikes on $60 billion worth of U.S. goods.

While the toy industry has so far been guarded from trade hostilities, the days ahead may not be as unchallenging, believes the Toy Association. This is because about 3 billion toys are sold in the United States each year, with 85% of those coming from China. In fact, per the U.S. International Trade Commission, toys, puzzles and more were among the major commodities imported from China in 2018.

Toymakers Have Reasons to Fret

Toymakers are apprehensive about their profit margin, given the threat of cost escalation. Since the 25% tariff covers a good range of consumer products, it is likely to impact discretionary spending and in turn affect demand for toys.

Leading U.S. toymaker Hasbro, Inc. HAS has shown serious apprehension about the tariff implementation. The company raked in significant profits from China in the first quarter of 2019. Avengers and Bumblebee have seen strong demand in China. About two-thirds of its total production originates from the mainland, which is concerning. Also, shifting the entire production base in the United States is a difficult task for the company at the moment.

However, the company has started limiting expansion in China, per Brian D Goldner, the chief executive of Hasbro. It plans to reduce Chinese manufacturing for the U.S. market to less than one-third within the next five years.

Nevertheless, given China’s solid supply chain, high-quality product and prudent pricing, Hasbro will continue to manufacture in the country. The company plans to market the products in emerging countries like India and Vietnam.

Mattel, Inc. MAT has been suffering massive losses and the situation is expected to worsen if tariffs are imposed on China-produced toys. The company relies heavily on China as up to 65% of its production is based there. Per Mattel CEO Ynon Kreiz, bumped-up costs due to tariffs will not only hurt the company but also drive away vendors, retailers and consumers.

Everything Else That’s Not Right

Apart from the trade hostility, the industry is grappling with soft consumer demand. The liquidation of Toys “R” Us, the largest retailer for traditional toys, has been weighing on companies like Hasbro, Mattel and JAKKS Pacific JAKK for long. The industry is expected to grow at a much slower pace for some time.

Meanwhile, toy manufacturers battle stiff competition from a broad array of alternative modes of entertainment including MP3 players, tablets, smartphones and other electronic devices. Video-game developers such as Electronic Arts EA also pose a threat to traditional toymakers.

Another factor affecting demand for these brands is age compression. Kids nowadays are move on much faster and get bored easily. For instance, demand for some toys that were preferred by kids aged three to nine years has narrowed down to the band of three to six.

Our Take

While the overall near-term scenario for the toy industry is not perky, the silver lining rests on the fact that these companies are trying to foray into markets beyond China and the United States. Demand for toys in the emerging markets has gone up significantly, signaling untapped opportunity for toymakers.

Moreover, most toys have been shipped before the new tariff implementation, which suggests that toymakers may not face dearth of demand this year after all.

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