Is the sky falling?

When I was starting out in business, one day I barged into my boss’s office and blurted out: “We have a problem!” His face got red and he blurted back: “What is it?”

I told him and with his face returning to a healthy pink, he responded in a quiet voice:  “That’s not a problem. That’s a concern. 

A problem is when something terrible has happened and we have to act. A concern is when something bad could happen and we need to keep an eye on it."

So, do we in Toy Nation have a problem or a concern? I think a concern.  The sky is not falling.

These are days where it would be easier not to read the newspaper. Everyday brings another dose of bad and sometimes frankly, scary economic news. We in Toy Nation have been experiencing our own little hell starting with last year’s product recalls, inflation in China and increased transportation costs.  

When I talk to people in the industry, I hear some real concern from them about this Christmas and what is going to be the aftermath. So, the question is, how worried should we be? Maybe not as much as we might think. 

On the macro level, there is still no consensus (believe it or not) that we are in a recession. The government is taking steps to make sure that Wall Street suffers but that the world economic system doesn’t go off the rails. It’s scary as hell but the system is still functioning.

On the micro level, things are looking a whole lot better. Here is why:

• Inflation in China

Though still high, inflation in China peaked in June and has fallen 15 percent to last month’s rate of 4.9%. 

• Transportation and raw material costs

The cost of oil has been the biggest inflation driver and it is now down from $147 a barrel in July of 2008 to $91 a barrel on September 16, 2008. It is, despite, the hurricanes, going to continue to move down. Why, because demand is going to continue to drop until we reach equilibrium and more planes start flying and more drivers start driving.

• Safety

It looks like the recalls are behind us and new safety legislation is in place. There have been no major recalls for some time.

• Retail sales

Well, if Toys R Us is any kind of an indicator of the health of Toy Nation then things are looking pretty decent. In their last filing Toys R Us reported  “… a profitable second quarter, helped by net sales gains at all three of its divisions, [and] an increase in gross margins…”

Finally, Christmas is going to come and parents are going to buy their children presents. We as an industry are not immune to tough economic times but are more resistant than most industries. Uncle Ned may not get a present this year (we never liked him anyway) but Bobby Jr. and little Heather will.

In addition, game night at home is less expensive than taking the whole family to the movies. Parents are going to buy games, puzzles and other low cost entertainment vehicles for their families. 

So, will sales be off this Christmas? Yes but not much more than the kind of decreases we have seen over the last five years. What decreases we do see will in part be fueled by retailers who, in a self-fulfilling prophecy,  take short inventory positions on products. 

Bottom line: Be concerned. Be vigilant. But, at least for now, don’t be worried. The sky is not falling.