No Joy in the Toy Trade as Price Cutting Persists
‘Twas the week before Christmas, and the question on Charlie Woo’s mind was: What’s happening with KB Toys?
“Have you heard anything?” he was asking as I arrived for a chat at the headquarters of his company Megatoys, a hulking gray warehouse on the edge of the downtown Los Angeles toy district. As it turned out, that very day KB had announced it was withholding December payments to suppliers. Post-Yuletide store closings look to be in the company’s future.
This wasn’t good news for Woo, who supplies KB with inexpensive toys. It wasn’t surprising, either. “This year, the issue for us is the smaller number of customers,” he says. By this he means not individual shoppers -- as we talked the retail space at the front of his building was teeming with late Christmas browsers -- but retail chains, which have been relentlessly squeezed by price cutting in a year of improving, but still lackluster, sales.
As manufacturers, the Mattel Inc.’s and Hasbro Inc.’s of the world garner the most public attention during the toy-buying season that ended with the sound of wrapping paper getting ripped to shreds this Christmas morning. But it’s in the business of manufacturers and wholesalers like Megatoys where one can best detect the trends that govern the $25-billion U.S. toy industry.
What Megatoys makes is, to be charitable, largely generic. You won’t find a lot carrying recognizable brand names, and most of it appears designed to be produced cheaply and moved fast.
“I have a lower-end market,” Woo explains. If Mattel or Hasbro is marketing an expensive toy to exacting specifications and top-quality materials, Woo’s Asian contractors can probably turn out a similar item for a fraction of the price. Maybe they’ll use recycled plastic, and less of it, so the color is a little duller and the product a little less hefty. Mattel’s products will go to Toys R Us Inc. or FAO Inc.’s FAO Schwarz (the latter corporation now operating under bankruptcy protection for the second time this year). Woo’s might go to Kmart Corp., or to a network of mom-and-pop retailers across the U.S., or to Mexico and Central America.
Woo’s family started in the business of importing and distributing toys wholesale in 1979 after immigrating from Hong Kong. Within 10 years, Megatoys had branched out into designing toys and supervising their manufacture in Asia.
In Los Angeles, the company had moved from renting warehouses for its own use to owning space and leasing it to the immigrant entrepreneurs who followed the Woos into the toy business. The process gave birth to the downtown toy district, now home to hundreds of resellers of mostly Asian-made toys and other goods racking up more than a billion dollars in annual sales.
Such critical mass hasn’t made things any easier. Ask Woo, “How’s business?” and he’ll respond with a resigned sigh, as though to say it’s always something. Last year the SARS outbreak in Asia cut down international trading for months. This year, it’s the round of price cutting initiated by Wal-Mart Stores Inc. -- an action that has come more swiftly and ferociously than anyone has seen before.
Price cutting isn’t a temporary phenomenon, Woo acknowledges. “The retail trend is not going to reverse itself,” he says. “Prices are not going to go up.”
One of the main reasons is the production capacity now available to manufacturers, mostly in China. It’s so immense that no company can tie up the supply chain, thereby snuffing out its competitors. The small factories spread along the south China coast get better every year at jumping on trends and matching anything in the market.
“In the past it would take months to develop a mold and months to copy it,” Woo told me. “Now they can do it in days. Pretty soon everyone has a version. When someone can identify a trend, someone in China can reproduce it. Everyone has access to supply.”
Woo himself is an active participant in this business. He generally visits China twice a year, carrying specifications for new toys, lining up factories and chasing the lowest labor costs as production moves inland.
“Even if prices go up on the coastal strip, you can go three hours on the freeway and get cheaper labor,” he says -- so cheap, indeed, that for many of his products labor is a vanishingly small component of his costs compared with materials. “You know how to estimate the cost of plastic toy?” Woo asks. “You put it on a scale and weigh it.”
The accessibility of manufacturing capacity is intertwined with shrinking product life cycles in the toy trade. Precious few toys can hold their appeal in the face of the inundation of spinoffs and knockoffs sure to follow the first glimmer of a hit.
“The product cycle used to last a couple of years,” Woo says. “Right now, there are very few products that last even a season. If it’s popular in June, before September it’s saturated, especially if it’s not tied to a TV show. Even products tied to movies, by the time the next movie comes out, it’s over.”
That lesson was underscored for him last year, when he brought out a line of radio-controlled microcars about the size of a person’s thumb. Led by a product marketed by RadioShack Corp. (and not made by Woo), the category had hit big in late summer 2002. By the Christmas rush, the cars were so scarce that shoppers were trolling for them on EBay; by January the fad was played out.
The only way to survive in such a world is to stay nimble. “A smaller company like mine is more flexible and resourceful at responding to pressure,” Woo says. The worst thing even a successful manufacturer can do, he contends, is to believe it has a long-running franchise.
Instead, as Woo points out, the last 20 years of toy industry history have proven that a blockbuster item can be a trap: The Chapter 11 dockets are littered with makers of must-have Christmas hits that tooled up to accommodate continued demand, only to watch it fade faster than Vin Diesel’s movie career.
There was Coleco Inc., which rode the Cabbage Patch Kids dolls to stardom with sales of $600 million in 1983. World of Wonders Inc. had Teddy Ruxpin, a singing teddy bear, which set records for new toy sales in 1985. By 1988, both companies had filed for bankruptcy.
“I don’t get into trendy items,” Woo says. “They’re too volatile.”
In fact, Woo has started expanding beyond the toy business itself. In recent years, he has put so much effort into such products as Halloween costumes and Easter baskets that both categories now outsell his Christmas toys. He has also added items such as gift baskets, which he wholesales to buyers like Wal-Mart and Kmart.
“This is how I add value,” he says, pointing to a cellophane-wrapped bamboo basket set on a conference room table in the bustling back office of Megatoys. Stuffed into the basket (made in rural China) are about a dozen items on the M&Ms; theme: packets of candy and plush dolls and plastic toys sporting the familiar “M” insignia. By assembling the package in his own plants, Woo can extract a few extra pennies of margin for the final product that he couldn’t get by distributing the individual items separately.
Still, even that margin is about to be whittled down. “Wal-Mart now wants me to give them an FOB China price,” Woo says, using a term that connotes that the giant retailer wants the products placed onboard a ship in China in shelf-ready condition.
“It might be cheaper,” Woo concedes, calculating that assembling the baskets in the Far East might just save enough in labor costs to cover the expense of shipping perishables such as chocolate from the U.S. to China in refrigerated containers. Shipping rates from American ports to Asia are a bargain, he notes, because the East-West trade imbalance means that containers that have carried imported goods to these shores often return to Asia largely empty.
And once he achieves the marginal price shaving, what next? There will be demand for further savings, Woo knows. “My customers, the discounters, they look for the best price. Eventually, everyone gets squeezed.”
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Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at golden.state@latimes.com.
