Richard Derr: History Says a lot about the Future - tBR Person of the Week

Think back to the first week in March 2020. Just after New York Toy Fair and pumped up for another year in the Toy Biz. Then……Covd-19 came and a global pandemic. Now what? It was so new and confusing at the time for all of us. I took a stab at writing the following March 12, 2020 to our 100+ Learning Express Toy stores in hopes to prepare them what “might” come based on history. My experiences. Here is what was written. “What we could expect……..in the toy industry.

History says a lot about times like these. I put on my Nielsen research hat from 25 years ago to look at what happens in times of much uncertainty as we're seeing with the spread of the coronavirus and the disease it causes, COVID-19. Customers are spooked at the prospect of financial distress as events are canceled, shelves at grocery stores are picked bare, and a 24-hour news cycle pounds us about an illness we don't yet fully understand. The current climate mirrors a lot of what happened following 9/11. Over the past 20 years, two major disruptions have taken place that can provide insight into what is happening now and how it could play out based on historical data. Sept. 11, 2001 In a pre-Amazon era, the toy industry was trending downward on a slight 3% decline during the 12-month period leading to 9/11. Overall, 2000 was a very strong year with Pokémon and Razor scooters dominating sales, which carried into what was shaping up to be a very solid year until 9/11 changed the world. Sales in September 2001 declined 30% versus the same period a year earlier, followed by a 28% decrease in October, a 15% decrease in November, and an 8% decrease in December. Yes, Christmas still came. The following year, sales dipped 19%. Based on comparisons to 9/11, COVID-19 could cause sales declines between 20%-25%. The Global Financial Crisis of 2007-2008 The toy industry was lucky during this period. Following a nearly six-year dry spell without a truly hot toy on a national level, Webkinz became a hit.

My Learning Express Toys Lake Zurich location first carried the line in the summer of 2006 with no success. I was ready to discontinue the rack and then — POW! Webkinz became a national phenomenon. The toy world survived the financial downturn as sales hit a new high and stayed there through 2010 when Webkinz had finally run its course and foot traffic fell back. Data shows that if we — the toy industry — discover a truly hot toy, it can help us rebound or can insulate us against a major slowdown. Right now this is not the case. Today: COVID-19 The spread of the coronavirus is the first comparable crisis to take place in the years since Amazon took its place as the major player in toy retail. Learning Express sales through the first week of March are down slightly — a 3% decline reflecting the decrease in foot traffic that most independent toy stores have experienced. The real decline began on Monday, March 9 amid a global explosion of the disease and growing concerns in the U.S. Again, plan on at least a 20%+ decline. How to Plan and React: ● Inventory: Know your inventory levels and current payables and plan to reduce it appropriately — at least 20% to 30% — while maintaining stock in higher value items, such as Kelly Toy's Squishmallows, LEGO sets, Toysmith products, and MGA Entertainment's L.O.L. Surprise! ● Labor: Adjust your labor schedule and potentially store hours while retaining the core team members as best as you can. We issued a memo telling associates to stay home if they are feeling ill and that they will still get paid. ● Marketing: Use social media and email to share store updates and stay connected with your local community. Utilize signage and cross-promote with other local businesses that are all in the same boat. Offer phone orders, drive-up pick-up, or delivery. Emphasize services such as free gift wrapping. ● Events: We have canceled all in-store events except for Pokémon Saturdays. Ultimately, parents make the call. ● Try New Things: Place small bets on some new toys! Who knows? Something may connect with customers. ● Landlords: At the appropriate time — not now — we will need to approach landlords about working with our stores through this period. Any relief will be welcome. ● Vendors: Our vendors are concerned as well. Many are willing to adjust order size, delivery dates, and special requests. Reach out to them ahead of time, not after the fact. As I write this, I am developing my own game plan, but having been through several ups and downs, I know that all things work out with information (not emotion), good decisions, and an eye to the future. Finally, it is important to note that different trends will be felt at different times in markets across the U.S. The impact may or may not be as severe in some locations, but good planning now will allow for rapid upward movement once clarity sets in. Parties will likely be down, but birthdays are still here and we will be ready to support kids and parents in celebration — however big or small.” Best Regards, Rick So, where are “we” Toy Independents today? We know Amazon and the Big Boxes who stayed open won the battle as on line sales of toys, games and activity toys have soared. A good chunk of this business may never come back to brick and mortar. But, those stores that pivoted, used speed and agility to their advantage and had a strong core customer base going into the pandemic will have fared better—in fact, much better than predicted. Let’s take a look at actual performance by Quarter and a forecast for the entire year.

What we see is weakness in QTR 1 pulled down by a weak March, very tough second QTR and then a rebound as stores reopened in June. July and August were strong months propelling the 3rd QTR to a plus joining the Big Box stores in positive growth. The forecast is for even more modest growth in the 4th QTR(+3-5%) yielding an -8 to -10% for the year. Considering all scenarios this is a win for primarily brick and mortar toy stores and being able to fight another day—2021. Plus, we have all learned many lessons and if put to good use, the strong survived and will get stronger. There is truly a lane for both formats –on line and brick and mortar toy stores. Hopefully, this simple analysis points out that history does teach us about the future.