Same store retail sales eventually rallied after a late December snow dump to rise about 3 percent.  Of course, this was compared to the very weak year earlier period.  It’s also difficult to discuss retail sales trends without including Wal-Mart, but Wal-Mart doesn’t report monthly sales data anymore.  As a shareholder, I like that but as a chronicler it’s a pain in the neck.  I would assume that in the current economic climate they did well but we should also keep in mind that their December ’08 numbers were better than most which will skew current comparisons downward.

During the past year retailers seemed to get it just about right.  They navigated the tough economic terrain by discounting just a few items and offering other promotions but by keeping prices relatively steady for much of their inventory.  Of course in the toy aisle, Wal-Mart did its usual October price slashing which was then followed by much of the retail community.  NPD reports that overall US toy sales were down by 2 percent.  Obviously that isn’t good but it is far from being catastrophic.

While the congress fiddled (yes, the Nero illusion is intended) with a healthcare plan that almost nobody wanted, the rest of the country focused on jobs. The economy began to grow in the second half of 2009 but the jobs market lagged behind with businesses still being reluctant to hire.  Although the December headline (U3) unemployment number was unchanged at 10% from November, the broader measure of U6 – which includes those forced to work part time or discouraged from seeking work – rose from 17.2 to 17.3 percent.

Here at Toyjobs we had our worst year ever.  The overall number of searches was way down and many of the searches that were started were canceled or put on interminable holds.  Waxing philosophically, “Some days the fish are there and some days they are not but I’m out there fishing hard in either case”.  Perhaps a quarter of all search firms went out of business last year but thanks to three decades of success Toyjobs is in strong financial shape and I will be out there fishing well into the future.

Recent discussions with toy execs returning from Hong Kong reveal that the mood at the Hong Kong Toy Show was mostly buoyant.  Retailers were pretty clean on inventory and were looking to buy.  That said, toy companies may want to temper their enthusiasm.  Wal-Mart and Target are cutting back on toy space, SKUs, and vendors.

In Wal-Mart’s case, toys have never been all that profitable and have primarily been used to drive foot traffic during the fourth quarter.  The “groceryization” of Wal-Mart has worked out so fantastically – with the average customer visiting the store once a week rather than once a month – that toys are no longer needed to drive traffic.  Of course, they’ll keep their hand in and stock the obvious big company items backed by big advertising dollars, but they’re not going to think too hard about the toy business anymore – no more guessing at what will be a hot seller.  They’re just going to focus on moving merchandise.  Don’t expect them to take any chances.  I’m not sure of the thinking behind Target’s strategy (no grocery to drive traffic), perhaps it’s just a case of me-tooism.

This trend will obviously benefit big toy companies who are able to make big TV advertising commitments.  It also allows other retailers to create a larger toy footprint without having to compete with Wal-Mart’s crushing margins.  Sears has been testing getting back into the business.  Barnes and Noble and Borders, two retailers who generate a lot of traffic despite Amazon, are putting a greater emphasis on toys.  I suspect that other retailers will follow suit now that they won’t have to compete with Wal-Mart’s pricing.  Not initially, but over the longer pull, toy companies should be pleased with the ability to diversify their customer base and at higher margins.

The biggest beneficiary of the Wal-Mart/Target downsizing of the toy department should be Toys ‘R’ Us.  People like to shop specialty stores because of their broader product offerings.  Toys ‘R’ Us is also taking big steps to counteract their Achilles heel – the fact that they have traditionally been standalone – separate trip stores.  During the past holiday shopping season they opened more than 80 pop-up stores in malls and shopping centers.  The concept may have been quickly conceived and erratically executed but they should have it nailed by 2010 or 2011.  Toys ‘R’ Us has also been working hard to turn itself into a destination by placing its Babies ‘R’ Us and Toys ‘R’ Us stores side by side.  Babies ‘R’ Us can function similarly to Wal-Mart’s grocery business by bringing in customers for their weekly needs (diapers, wipes, etc.) and acting as a feeder for Toys ‘R’ Us.  We should all hope that this strategy works as the toy industry surely needs a stronger Toys ‘R’ Us.

Here at Toyjobs, search starts jumped significantly in mid December as companies anticipated a new year with new budgets.  It is still too soon to tell if this improvement will be sustainable throughout the year or if it is just a new budget bump.  It is also too soon to tell if these search starts will turn into actual hires or be canceled or put on hold as so many were in 2009.  I should have a much better handle on that by the time of our post New York Toy Fair issue.  I can tell you that the air is different than it was even six months ago.  It “smells” better.  Certainly some companies are still having problems and most companies are still cautious but the palpable sense of fear is gone and has been replaced by a feeling of “we’re working through it”.  My sense is that this will be a recovery year much like 2003.  It won’t be a good year but it will be increasingly better than last.  I just hope that we only have ONE recovery year rather than two or three.

Muddling thru,

Tom Keoughan