Toys Under Tree?

 As Christmas and other year-end gift-giving holidays approach, Isaac Larian, chief executive of toy manufacturer MGA Entertainment, is preparing for a shopping season where his company can only fill about 70 percent of its orders. Despite ongoing concerns with the supply chain which will prevent some of his toys from hitting shelves on time, Larian said sales are up as demand for toys remains high. “We knew this was going to happen since January, but nobody paid attention until it is too late. Really, too little too late. And if you talk to the Port of L.A. or Port of Long Beach, they will tell you there are 475,000 containers sitting at the port or they’re anchored at the Pacific Ocean. This merchandise will never make it to stores in time for Christmas — there’s no way,” Larian said. “Unfortunately, when it comes to our business, we are really not able to fulfill hundreds of millions of dollars of orders that we have because they’re sitting at the ports.”

Chatsworth-based MGA makes some of the biggest toys on the market, including L.O.L. Surprise!, Bratz dolls, Rainbow High and Little Tikes. Like many other toy sellers, MGA has tried to navigate supply chain issues in preparation for the narrow shopping window to meet annual sales goals.

Rising costs

As the number of container ships waiting to enter the ports of Los Angeles and Long Beach hit a new record over Thanksgiving weekend, the result will be limited selection and higher prices for consumers.

“Christmas is always on December 25, you cannot extend it. And the merchandise retailers will cancel orders because they can’t get them on time. So it’s a disaster for, not only MGA, but for all the toy companies,” Larian said. “Really I worry more about the smaller toy companies because they are not going to have the financial ability to withstand. MGA can.”    

The costs to produce MGA’s award-winning toys, such as LOL Surprise! Tween dolls and Bratz 20th anniversary dolls, are up more than 22 percent, according to Larian. Expenses have steadily increased across the board for the company, from manufacturing costs to fees to procure transportation and delivery. Most of MGA’s products are manufactured in China, resulting in further delays as they travel to the U.S.

“Manufacturing is only one element,” Larian explained. “Then there’s the price and inflation. The cost of product manufacturing has gone through the roof. But then the issue is the lack of containers, then it’s lack of trucks and then, the most important thing, is lack of labor. … We can’t pass all of that down to the customer or the product becomes unreachable for certain customers. So we take some of that pain ourselves, which means lower profits. But the consumers, they’re not going to get as much bang for the dollar.” 

Major toy companies such as MGA, as well as competitors such as Mattel Inc. in El Segundo, Hasbro Inc. and Lego System, can more readily navigate the supply chain concerns. It involves a strategy of preserving profits, rather than an existential risk. But the uneven impact on the industry has resulted in smaller manufacturers and retailers bearing the brunt of the burden.

 

Holiday recovery?

“MGA is a good example of the larger companies in our industry that are finding ways to manage around and manage with the supply chain challenges. But if you look at the overall U.S. toy industry, 95 percent of the toy companies in America, which is about 1,000, are considered small businesses,” Steve Pasierb, chief executive of the Toy Association, a trade association, said. “So when you get beyond MGA, and Hasbro, Mattel, Lego and a few others, they become very small pretty quickly and they’re the ones that are having the biggest challenges. They’ve had a problem throughout the pandemic in many cases and they were looking to the holidays as their chance to recover.”

The supply chain issues, Paiserb said, will result in selection shortages, as limited color and sizing options may be available — even from the large manufacturers. Big box stores such as Target Corp. and Walmart Inc. may see some impact to how much product is on shelves but independent toy sellers and small businesses will likely see extremely low inventory through the holiday season, leading to price increases for consumers. 

“We’re seeing the independent neighborhood toy stores having to fill gaps in their shelves with products they may not normally carry,” Paiserb said. “So they’re looking for alternative suppliers just to keep the store shelves full. They’re ordering more than they need, knowing they’re not going to receive it all, almost as a defensive technique. So it hurts the small toy companies, and that hurts the small independent toy stores which are a big part of the ecosystem.” 

The U.S. market size for the total toy industry in 2020 was about $32.6 billion, representing a 16.7 percent increase over 2019, according to the NPD Group/Consumer Tracking Service. Demand for toys and children’s entertainment products has remained high through the pandemic, but the possibility of having excessive inventory after the holiday season has Larian concerned about sales for next year and beyond.

”Fortunately, the demand for toys is still very strong. Our sales are up double digits. So hopefully (the impact of the supply chain disruptions) is less than we anticipated,” Larian said. “But the unknown is: What’s going to happen in 2022? What happens after Christmas? That’s really the unknown.”

As for the future of the toy industry, Paiserb predicted more mergers and acquisitions. 

“Some of those small toy companies combine when they get bought up by the larger ones,” he noted.