It ain’t over ‘til it’s over…it’s the Friday Blog!

Published on: 30th August 2019

Another quiet summer week: just the little matter of the UK parliament being subjected to a coup, while the pound plummets even further. And we thought the US political situation was in a mess. Actually, it IS in a mess. Our most-read story of the week focused on president Trump ordering (not requesting or suggesting – ORDERING) American companies to quit China. We truly are in uncharted territory.

You may well ask yourself “what gives him the right to tell US companies where to manufacture their goods?” Unfortunately, with this president, nothing is off the table – even telling companies how they should structure their business operations. It turns out that declaring a national emergency is the way to do it. An obscure act from 1977 – originally intended to target rogue regimes, terrorists and drug traffickers – could yet become Trump’s latest weapon in the US / China trade war. According to the president, China’s theft of intellectual property and the large US trade deficit with China could be construed as such an emergency (really!).

Of course, like Johnson’s unprecedented hijacking of the UK parliament, Trump could just be raising the stakes as a negotiating tactic. If that’s true in either case, it is a high-risk strategy. The problem is that it is consumers who are most likely to bear any collateral damage. As Hasbro CEO Brian Goldner pointed out this week about the China tariffs: “Ultimately, the cost (of the tariffs) will be borne by the consumer. With time, you can redesign and redevelop your product lines with those tariffs in mind, but in the short term, you do need to pass along those costs.”

This is not rocket science. It is equally obvious that if the pound loses further ground against the dollar (almost inevitable if a No-Deal Brexit takes place), consumer goods in the UK will cost more going forward. Arguably, the last thing anyone needs right now is further pressure on consumer confidence and spending power. We have some ground to make up in Q4 and while there are some great new products around to help drive sales, a more positive attitude from consumers would certainly make a big difference.

Brian Goldner’s comments about the China tariffs came in an interview in which he spoke about Hasbro’s (largely positive) experience of moving a portion of its manufacturing base out of China. As Hasbro shows, shifting manufacturing away from China can be done….but it takes time and considerable resources. That’s fine for a company like Hasbro with deep pockets and a global reach, but not quite so straightforward for the majority of toy companies. However, if Trump has his way, a lot of other companies are going to have to start exploring their options sooner rather than later.

We found out just how deep Hasbro’s pockets were last week when it was announced that the company had made a $4b bid for eOne. The news broke after last week’s Blog had been written, so I only had time to add a few brief lines before it was posted online. I’ve had a lot of questions about the deal this week, so let me share a few thoughts: first of all, the deal is not yet ‘done’. If it progresses smoothly, it is due be signed off in Q4. This means that for now, it has to be ‘business as usual’ for eOne. Could anything derail the deal? Sure – shortly after the announcement, the shares were trading higher than the bid price, which could attract rival bids. In addition, Hasbro is a $14b capitalised company, which means it is extremely unlikely to have $4b cash sitting in the bank doing nothing. Presumably it therefore has to raise the necessary cash; I suspect lenders will be accommodating, but it is still a hurdle that needs to be cleared. And the price certainly isn’t a ‘steal’: few people expressed surprise that eOne was being acquired, but plenty admitted that the asking price came as a shock.

The other thing that surprised people was that it was Hasbro – rather than Amazon, Netflix, Disney or any one of a number of powerful media companies – that had made the bid. Because, ultimately, the general consensus is that this deal is about far more than licensed merchandise sales, and far more than Peppa Pig (as most consumer media reports assumed): it is about content. Of course, this fits perfectly with Hasbro’s strategy to transition to an entertainment / content driven business. But could one of the other global content platforms decide to pitch in with a bid of their own? As ever, it ain’t over ‘til it’s over…

As for what this might mean for existing licensees and retailers, we can only speculate until the deal is finalised: for now, I find it hard to imagine any great change before 2021 or even 2022 (factoring in Hasbro’s product development cycle timings). Retailers will be also aware that the Hasbro’s margins won’t be as generous as existing licensees, so that is another angle to keep an eye on.

Thanks to all the people who sent me a link to a Wall Street Journal article which is a brutal takedown of Amazon and its inability to avoid selling unsafe products. The whole article is well worth a read, but the headline will give you a flavour of the content: “Amazon has ceded control of its site. The result: thousands of banned, unsafe or mislabelled products. Just like tech companies that have struggled to tackle misinformation on their platforms, Amazon has proven unable or unwilling to effectively police third-party sellers on its site.” I particularly like the description of Amazon evolving “like a flea market.” As regular readers will know, this is a drum I like to keep banging. The BTHA has been ramping up the pressure here in the UK, as has The Toy Association in the US. High-profile articles like this help to draw consumers’ attention to the problem, which is a crucial step in putting pressure on Amazon to change.

Finally, here’s a sneak peek at some initial ideas for the new Hasbro Peppa Pig range (not coming to a store near you any time soon):