Chinese inflation: Is it the end of the Wal-Mart business model?
In my last blog posting, I wrote about inflation in China and the impact it will have on the cost of producing toys. With prices going up, what can the toy industry do?
The bigger question is whether the current toy industry business model established by Wal-Mart (with a little help from China) in the 1970's can continue to function. Wal-Mart and the Chinese connection moved the toy industry from a product and innovation business to a commodity lowest price business. Gone was the concept of variety and play value as the driver and in its place was a search for the lowest price.
Now, Wal-Mart and other retailers are confronted with a drive up in prices that will limit the ability of lowest price to drive consumption. The question is what will eventually come in its place?
We know that in Europe, particularly in France and Germany, the older model still holds sway. Toy consumption is not based so much on price as it is on durability, modularity and sheer play value. Buying a toy is perceived as an investment in long term play. Unlike the US where most toy purchases are on impulse and purchase prices are low, European shoppers plan purchases and accordingly pay more.
With higher toy prices, there may be an initial contraction as consumers move away from formerly inexpensive toys that cannot justify the higher prices. On the other hand, we may see an eventual return to higher value goods that are more investment than throw away quality.
Will it happen? It's certainly something to consider. What do you think?
Ricardo Venegas commented:
I just spent 3 weeks in China on a Sourcing excursion with my local executives. Hearing the 'buzz' is one thing, but meeting and sharing with local factory owners is better. In my many exchanges the factory owners expressed the same concern about inflation as we, the product development companies, have. Couple that with the ever challenging labor shortage and you have many of them thinking that the low cost Toy industry will disappear in China within a few years. Probably an exaggeration, but at least it's demonstrative of the concerns that they have for the pressure to deliver extremely low cost goods against a back drop of ever higher environmental and product safety requirements.
That often heard phrase of 'knowing your supply chain' has never been more important than right now. Given the aforementioned, cutting corners in the development and manufacturing process is tempting. As far as costs are concern, I believe that the Mass Market retailers are well aware of this and likely to accept 'reasonable' cost increases.
'Value Added' is a concept of which I am a firm believer. In my opinion, a value added service or product is worth paying for; we, ourselves, are no different when acting as consumers. So the adage about 'Proving your Worth' is extremely important now.
I took note when WalMart recently announced a return to offering a wider assortment of products at its stores, reversing a trend to consolidate its buying procedures. Why did they do this? Simple, their customers demanded it. Therefore, it means that WalMart is just as beholden to the consumer as we are.
In closing, I say come up with the product that the consumer needs, and I believe your customers, retailers and distributors, will pay your price.
Wayne Walker commented:
Costs are costs, inflation is inflation and the Wal-Mart Model is what it is.
When a bottle of water today costs $2.00 and tomorrow costs $2.20 some people will look at this as ghastly, horrific and appalling but they will pay it if all the bottled water has gone up, as well as the expensive ones and they want bottled water.
If all the low quality, low priced toys begin to rise in price people will complain and some will even cut back a bit. However, as long as there is no other cheaper toys to be had, they will buy them because they are still cheaper then the higher quality toys that they would not have bought in the first place.
In other words, as long as all prices are rising, cheaper toys are still cheaper. Its that old phrase, "all things being relative".
If there is to be any change and profit to be made, and this goes no matter what the economic condition is, a toy company must find a way to make toys cheaper (that does not mean making quality less) and with more (unique) play value. A tall order it is, no doubt, but that is how the ball bounces.
Don't whine, make a whining toy instead and profit. :)
Designer commented:
The only people Chinese inflation will hurt is toy companies and their employees. Toy companies will spend time and recourses moving their production to other locations where labor is less expensive. Then the employees will suffer as the toy companies try to balance the books by reducing overhead. In the past this has shown itself as lay-offs, outsourcing, and longer work weeks for those that remain employed.
The U.S. toy industry has no backbone to stand-up against Walmart. To date I’ve never seen a VP or Exec that is willing to take a stand against Walmart as it would be career suicide. Historically we’ve toy companies and their management cave-in to Walmart’s demands in order to sustain sales numbers. Instead of holding their ground and demanding proper pricing, toy companies have chosen to tackle the problem within by pushing for cost reductions and reductions in over head.
But ultimately it is the U.S. consumer who is making the choice here. Walmart will maintain its choke-hold on the toy industry until consumers decide that they want quality over cost, and that is another conversation in itself.
Marjorieli commented:
I fear that Walmart et alia will just select even cheaper toys as everything (except electronics) is price driven - this is the inherent value for shoppers and it is why they steer towards the mass market ... nothing will change - except toy quality will get worse - toys will be even more disposable.
Scotts1 commented:
China's rising wages won't hurt Walmart. Walmart will just tell their suppliers to move to India where child and slave labor is still going strong.
