Conversations With Conley: The Economics of Toy Trouble

TDmonthly: It’s been a difficult few years for major toy retailers and manufacturers. Are the big names now vulnerable to industry evolution?

Tom Conley: Every company in this business is extremely vulnerable. We sort of laugh about the fact that parents in the toy industry have caught themselves saying, “Put down my Blackberry, that’s not a toy, or put down my cell phone, that’s not a toy.” From my observations, and some things we have heard on a confidential basis from companies who are bringing things to market for the ‘06 holiday season, we’re going to see a lot more product that looks like electronics.

Frank Clarke: Nobody is saying that the toy industry is in trouble; it’s going through a period of change. I think that the toy industry is working as quickly as it can to adapt to that and begin to give children products that they want.

TDmonthly: So what happens to shareholders in these companies during this “period of change”?

Tom Conley: The industry has gotten a bad rap over the years because it’s difficult for investors to get good data. Even the NPD Group isn’t able to get enough data anymore. We have seen a decline in the number of analysts that cover the toy industry. So if you are a shareholder, or a trade association, or a competitor, you don’t have an opportunity to look at as many points of view, and as many points of fact. Those things make it difficult to make informed decisions.

I know companies that need money, especially now with Sarbanes-Oxley [1]. They go private. Toys “R” Us went private because the folks who bought that see real opportunities to turn that company around in a private kind of environment, where you’re not judged quarter by quarter.

TDmonthly: The video game industry has taken bite after bite out of the traditional toy industry. How are the major companies fighting back?

Tom Conley: Mattel and Hasbro and others have come out with products that look both like video games and products that look like adult productivity products. You will see other companies that are going back to the traditional sort of value of play, and they will push that not only for children, but for children of all ages.

It is an extremely challenging, innovative business and it really takes a special kind of person to devote their life to making products that children and people that are children at heart enjoy, and yet dealing in this oppressive atmosphere of government regulation, profit squeeze, raw material shortages and labor shortages.

I predict that we will see some major changes in the next three, four years; there will be a wonderful growth in this business. I can’t tell you it’s all gonna happen next year. Things just don’t happen that fast.