Supply and demand… it’s the Friday Blog!

Published on: 7th May 2021

Good old ‘supply and demand’ – the basic premise on which so many businesses are predicated. The past year has seen so many business models flounder because either supply or demand were cut off. Thankfully, the toy market wasn’t affected on either count: demand for toys actually rose during the pandemic, while the ever creative and resilient toy community found ways to maintain supply during the most challenging of times.

Demand continues to remain high this year: as revealed in last week’s Blog, toy sales across the globe have grown rapidly in Q1, while the first week’s trading numbers after stores re-opened here in England and Wales were extremely encouraging. I took a trip into Watford on Bank Holiday Monday and was delighted to see long queues outside both The Entertainer and the Lego Store, with families eager to part with their cash. A few days later, Spin Master became the latest toy company to report stellar Q1 sales. As far as the ‘demand’ part of the equation is concerned, there is nothing to suggest it will do anything other than remain high for the rest of the year.

But what of the other part of the equation…supply? Sadly, that is a whole other story. We’ve written several articles recently about the ongoing challenges with shipping and containers. Toy companies have been banking on this being a short-term issue, but further investigation suggests it may be with us for some time. Shipping companies are making an absolute fortune – Maersk’s Q1 ‘21profits were pretty much the same as its whole year profits in ’20 – so I think we can safely assume they will continue making hay while the sun shines. Good old ‘supply and demand’, eh? As one supplier told me: “This time a year ago it was $1,900 to ship a 40ft high cube container from China to Felixstowe – today it’s $14,500 for the same journey.” The only people making a bigger killing right now are the Downing Street decorators (£200m…for that eyesore…really?).

Quite apart from the eye-watering shipping costs, there is the issue of container capacity – basically, there aren’t enough of them to go round, and lots of them are in the wrong places. The companies which make the containers are in no hurry to increase supply, to keep prices high on the containers they are making.

Some might feel that suppliers are exaggerating the extent of the problem, but I promise you it is very real: when the shipping cost as a proportion of the overall cost price of a toy goes from 3% to potentially over 20%, in many cases it’s just not cost effective to ship a line – and that is assuming you can get a spot and a container in the first place.

Mind you, I feel for one toy company which actually had a 40ft container stolen from a compound at the UK docks over the Bank Holiday weekend. You hear of cartons going missing or even the occasional lorry being stolen, but an entire container filled with over 8,000 cartons of toys?! That is one heck of a heist. Indeed, it may not be entirely straightforward to shift that volume of product – it’s not as easy as it used to be to re-export goods to Europe, while there aren’t exactly many car boot sales going on right now. If you’re a clearance company or even a retailer offered a large volume of branded toys at what may appear to ‘too good to be true’ prices, it might be worth stopping to consider where they may have come from.

And it’s not just shipping issues which are causing suppliers a few sleepless nights – a worldwide shortage of computer chips is also likely to result in significant delays and rising prices, affecting those toys with chips in them (which is possibly more than you might think…even basic ‘lights and sounds’ toys are chip-dependent). I’ve already heard of some toy products which have had to be modified to remove chips, after concerns over delays of anything up to 20 weeks. Unfortunately, it seems likely that toy companies will be at the back of the queue for chips, behind tech giants like Apple and Samsung and car manufacturers – partly because we can’t compete on price and partly because we lack their collective clout when it comes to securing supplies.

With the bulk of chip production concentrated in a handful of suppliers, it has been suggested that that the shortage is likely to last throughout 2021. 91% of chip manufacturing is based in Asia, mostly in Taiwan and South Korea, and expanding production capacity can take over a year of tooling up and testing. To make matters worse, I gather China is not allowing Taiwanese chips into the country for political reasons – basically, it appears they may be trying to apply pressure on Taiwan to re-join China. It’s not just the forces of supply and demand the toy industry is being buffeted by – geo-political posturing has now been thrown into the mix. Marvellous.

So, what is the upshot of all this disruption? The obvious conclusion to draw is that there is likely to be a shortage of product as the year draws on. If I were a retailer – major or independent, specialist or multi-channel – I think I would be looking to place my festive orders sooner rather than later. Some years, it feels like a game between suppliers and retailers as to who will blink first: this year, I don’t think any supplier will be crying wolf when it comes to product availability, or more pertinently the lack of it. In many cases, stocks were run down last year, both by suppliers and retailers: there may have been some residual post-Christmas stock in the market, but that should move through relatively quickly.

Looking towards Q4, stock is likely to be king – the forces of supply and demand really will kick in with a vengeance as we head into peak season. But as the old toy community adage goes, “no-one ever went bust selling everything they had in their warehouse.” Expect plenty of empty warehouses in the coming months… but as long as that’s because goods have flown out to retailers, rather than never having got there in the first place, it will all be fine.

Maybe toy manufacturers should start a side-line making their own containers – I suggested it to one supplier, whose response was: “I’ve got a shed and a screwdriver…let’s do it!” And if we brand them as well, they’d be a lot easier to spot if they were nicked. Just sayin’…