As sterling continues to fall against the dollar, the knock-on effect for the UK toy market could be significant.
Despite a positive start to the year for many toy suppliers and retailers, concerns are growing that the continuing fall of sterling against the dollar will present major challenges to the UK toy community as the year progresses.
Most suppliers will have set their UK price list at the end of last year using a rate of $1.50 to the £1, only to find it losing ground quickly in the new year due to political instability and a shift towards the safe haven of the dollar. The current exchange rate is just below $1.40 – a swing of around 6.5% – but fears are growing that if the slide continues, it could easily fall to the $1.30 mark, while there have even been suggestions that it could even drop as low as $1.20 by the end of the year. If that were to happen, the 20% drop would have a major impact on profitability throughout the supply chain.
While some suppliers have mitigated the short-term effect by forward buying currency, that approach can only work for so long: one supplier told Toy World that he was covered for the first half of the year, but by the time Christmas shipments need to be paid for, that buffer will be removed.
Another supplier told Toy World: “It is making the process of quoting for autumn winter something of a lottery. Luckily for us we export and transact some direct import to customers in the UK in US$ so we can re-circulate the profits, but for those purely in the UK distribution game, the pressure to increase prices must be high.”
Suppliers have told Toy World that some multiple toy retailers have used the falling oil price and exchange rate benefits that Chinese factories are enjoying to ask for reduced prices, but those suppliers are re-iterating that it’s impossible for them to obtain reductions from the factories. One supplier commented: “First of all, there is only a very small relationship between the price of resin and the cost of a finished toy. In addition, factories refer us to the difficulties they are experiencing in keeping staff; they are having to pay higher wages and there are higher welfare costs as a result of ICTI. Personally I think that setting minimum certified standards for worker welfare is a good thing, but there is undoubtedly an ongoing cost to the implementation of this process.”
However, it isn’t just suppliers who are affected by the currency situation: even on the direct import side margins are coming under severe pressure, since retailers are faced by the same problems as suppliers.
Perhaps the most frustrating thing for all concerned is that the industry has absolutely no control over the exchange rate, and therefore can only watch and react as the situation unfurls. But expect currency to be a hot topic across the whole toy market for the foreseeable future.