Toy makers tweak lines to offset rising costs

Consumers could face anywhere from a 5 percent to 10% price increase on many toys later this year.

Next holiday, that toy that was supposed to talk for a minute will talk for 40 seconds, and that portable electronic quiz game will ask fewer questions. The US toy makers - faced with soaring energy and raw material prices and rising labor costs in China - are tweaking their new product lines and scaling back their offerings. Parents will have to do more work too - they'll be spending more time downloading content on-line into hi-tech toys as companies like iToys Inc. focus on creating on-line material instead of using a bigger, more costly memory chip inside a toy. Despite those changes, consumers could face anywhere from a 5 percent to 10% price increase on many toys later this year, according to Eric Johnson, professor of operations management at Dartmouth's Tuck School of Business. That ends a decade of deflation at a time when the US economy may be heading into a recession. "You are going to see more $7.99 toys at the bottom instead of $2.99," said Michael Greenberg, the former CEO of toy maker Shelcore Inc. and now a toy industry consultant. The topic was expected to be a hot issue at the industry's annual trade expo American International Toy Fair, which features holiday 2008 products. Kathleen Waugh, a spokeswoman at Toys "R" Us Inc., the second-largest US toy seller behind Wal-Mart Stores Inc., acknowledged that consumers will see price increases in single-digit percentages across the board starting this summer. She declined to be more specific while the chain works out details with its manufacturers. Melissa O'Brien, a spokeswoman at Wal-Mart, declined to comment specifically on price increases, but said the retailer would work with suppliers to maintain affordable prices. The falling US dollar against the Chinese yuan, higher energy costs and a new business code in China are forcing Chinese factories to raise prices for exports. The US toy industry, which imports about 80% of its products from there, is among the hardest hit. Toys are mostly made of plastic, and are now under increased regulatory scrutiny after last year's highly publicized recalls due to lead and other hazards. Still, the average toy price - about $7 - remains relatively cheap because the bulk of toys sold involve card games and miniature cars - impulse purchases that can be picked up at the local supermarket. And makers argue that toys should still be a good value since prices have been falling for years - down 4.7% last year from the previous year, according to the Consumer Price Index. But any price hikes could further squeeze consumers, who are already paying more for food and gasoline, or manufacturers, who can only absorb so much without hurting profit margins. "This is not a good thing for consumers," said Sean McGowan, a Needham & Co. analyst. "The deflation days may be over." Yolande Sprague, a stay-at-home mom from Rochester, New Hampshire, typically spends about $100 a month on toys for her two sons, Eddie, three, and Isaiah, one, but she said she would probably cut back to somewhere between $50 to $80. She was already careful about buying toys, considering their resale value on auction site eBay before purchasing, because of the slowing economy. "Everything is going up. I have a big vehicle and I am paying $80 [weekly] on gasoline," Sprague said. McGowan expects toy sales this year will be at best unchanged from a year ago, following a weak holiday performance. US traditional toy sales fell 5% during the October-December period, while business for the entire year fell 2% to $22.1 billion, compared to 2006, according to a report released by NPD Group Inc. Analysts say that increased safety controls, which some experts feared would drive up prices, is the least of the industry's problems. They blame instead soaring wages, which have increased 20% in certain coastal areas in China over the last two years because of labor shortages. A new Chinese workers' rights law enacted in January pushes more costs onto employers with such mandates as severance pay. Then there are the surging costs of raw materials. Plastics - a key component of toys - has risen by up to 25% industrywide over the past two years because of higher petroleum prices, Johnson said. Copper has skyrocketed 17% so far this year. Another big factor is the declining US dollar against the yuan, which makes buying Chinese goods more expensive. Across the board, toy companies are scrutinizing their lines, even eliminating some perennials if price increases are not justified. Toy companies are also adding accessories to action figure dolls and other products to justify price increases. Companies are also turning to corn-based plastic in their packaging and products to cut down on costs and appease a growing number of environmental groups concerned about the health risks of polyvinyl chloride, or PVC, a plastic believed to be a carcinogen. Isaac Larian, president and CEO of MGA Entertainment Inc., the maker of Bratz dolls and Little Tikes, said that he's cutting the number of toys for his holiday collection to 1,200 from 1,500. He estimates that Bratz dolls, priced at $20, will retail for $22, while a $55 Little Tikes toy car, which relies heavily on plastic, would see up to a 15% price increase at stores. Neil Friedman, president of Mattel Inc.'s Mattel brands division, wouldn't comment on specific price increases, but said the company was reworking some products and eliminating others that had low sales volumes. The world's largest toy maker told analysts it was raising its wholesale prices - the price it charges for retailers - for fall 2008 products by mid- to high single-digit percentages. Rival Hasbro Inc. has announced that it plans price increases to offset costs that have risen 14% to 15%. "We have more price flexibility then you would have with a wire coat hanger," said Alfred J. Verrecchia, Hasbro's chief executive. He added as long as the company remains innovative, it won't have a problem. But balancing costs while retaining the toy's magic is tricky. "It forces us to be even more imaginative," said Marc Rosenberg, partner and chief marketing officer of Zizzle LLC. One of its holiday toys will now have 40 seconds of speech instead of 60 that was originally planned and will use the same speech in more than one place.