Toys, Tariffs, and Turbulence

As many of the Trump Administration-dictated tariffs are set to go into effect later this week, it seems like a good time to take a macro-level look at what’s happening in the toy industry, realizing that this is a snapshot in time and that the landscape continues to evolve daily. The toy segment is one of the most-affected by the tariff situation and the steps it is taking are illustrative of the status in many other industry sectors as well.

At this writing, for those keeping score, a base tariff of 10% is being applied to all goods from countries with which the U.S. has a trade surplus, and a tariff of 15% to all merchandise from 40 countries with which the U.S. has a trade deficit. Certain countries are tagged with more than 15%, either because a higher rate was unilaterally imposed by the U.S. or because a higher rate was negotiated after the trading partners faced U.S.-dictated rates that were sky-high.

Of note for the toy industry is the 55% collective rate currently placed on China, which is responsible for the manufacture of about 75% of the toys that come into the U.S. That number consists of the 10% universal rate, 20% for a “fentanyl tariff,” and the 25% Section 301 tariff that was imposed during Trump’s first term. Other countries that have grown in importance for toy manufacturing also are associated with higher rates, namely India at 25%, Vietnam at 20%, and Indonesia at 19%. Note that while many of the current tariffs are lower than once threatened, they remain significantly higher than historic levels. 

Based on recent financial results and/or public comments from toy suppliers involved in licensing—including Mattel, Hasbro, Jakks, Spin Master, Jazwares, Lego, Playmates, MGA Entertainment, Moose Toys, Super 7, Basic Fun, and others—as well as industry analysts, here are some considerations to be aware of when it comes to the ramifications of tariffs on the industry:

• Impact on sales. According to financial releases, the second quarter was a difficult one for many toy companies in terms of both sales and profits, as retailers delayed ordering for the holiday. Some toy makers also recorded goodwill impairments on certain businesses, signaling their declining value, and attributed those moves at least in part to the tariffs. After delaying their forecasts for the full year due to extreme uncertainty (especially when tariffs were set at 145% for China), most public toy companies now say they expect their full-year performance to be much better than Q2, but still worse than previously forecasted, with tariffs cited as the main reason. Companies are starting to see softer consumer demand as well.

• Supply-chain diversification. Since the pandemic lockdowns, toy companies have been trying to move more of their production, where possible logistically and economically, to countries outside of China, and that goal is even more important now. However, this is not an easy transition. Some of the countries to which production has been moved (Vietnam, India, Indonesia, etc.) have also been hit with high tariffs. And, aside from tariffs, production costs may be higher in other countries, due to labor costs or other factors. Meanwhile, the U.S. lacks the infrastructure to handle toy manufacturing at present, except in specific categories such as board games. 

• Potential for product shortages. Several factors play into the possibility of empty shelves during the holiday season. They include stoppages of manufacturing and shipping during the 145% tariff era, delays in retail ordering during the second quarter due to uncertainty about pricing, and conservative strategies on both the manufacturing and buying side. Most experts expect plenty of merchandise to be available at the start of the season, but worry about what will happen when in-demand gift items sell out and cannot be replenished in time. This could dampen sales for hot items, but also offers opportunities for other properties and products that are ready.

• Decisions on pricing versus profits. Some toy companies have already raised prices on select items, and most experts expect increases to be noticeable at retail starting later this month if the tariffs stay where they currently are. But retail prices can spike only so much without negatively affecting demand. Thus players all along the supply chain, including toy companies, their factories and intermediaries, and retailers, are likely to assume some of the burden, where their margins allow, especially in cases where tariffs are particularly high. Figuring out how to share the pain can lead to complex negotiations, and the result will be lower profits for all parties.   

• Cost cutting. Many toy makers have been cutting their workforce in the past few years as they position themselves to succeed in a challenging environment. That has continued post-tariff, with several companies announcing layoffs this year; some are reducing or eliminating raises or bonuses as well. Other cost-cutting measures include changing product specs (e.g., not including batteries, featuring fewer playset accessories, using less packaging or having the packaging replace playable elements, integrating less-powerful magnets, reducing the amount of painting on an action figure or doll, or designing smaller figures or pieces); streamlining the product assortment by eliminating certain colors or models; and/or terminating certain product lines entirely to put resources behind only the best-performing offerings. These decisions are intended to save money, but also to address the fact that retailers are narrowing their focus, ordering both lower quantities and fewer SKUs, to reduce their risk. 

• Changing focus. Even before the tariff situation began, toy companies had been putting more emphasis on activities outside the realm of traditional mass-market toys, such as digital gaming; products aimed mostly toward less price-sensitive adults, including high-end collectibles and complex board games; and entertainment productions based on their IPs. Some who have concentrated mostly on the U.S. are also turning their efforts to international markets. Attention to these higher-growth, less tariff-challenged segments is intensifying this year.  

• Looking to licensing. Toy marketers view outbound licensing as a way to generate additional revenue streams while preserving their margins. Opportunities include content licensing, which is not affected by tariffs, as well as outbound licensing of IPs for toy production in lieu of in-house manufacturing, which puts most of the tariff burden on their partners (although some licensors are negotiating or renegotiating contracts to give some relief in specific instances). Inbound licensing is also attractive in times like these, since tying in with a hot property can drive sales without requiring high marketing costs, among other benefits.  

Of course, a feeling of continued uncertainty hangs over the industry. Tariff negotiations are still ongoing with several key trading partners, and the Administration has left the door open for additional changes to the rates already announced, whether for economic or non-economic reasons. Lawsuits are also ongoing, focused on the legality of how the tariffs are being imposed. In addition, the devil is in the details, and most of the tariff agreements so far have not been hammered out in full. The ramifications from an economic and consumer-demand standpoint are also unknown at this point. All of it adds up to a stressful fourth quarter ahead, both for U.S. toy companies and those who sell into the U.S. market.