NEW YORK -- With less than three months until Christmas, the Basic Fun toy company has made an unprecedented decision: to leave in China one-third of its Tonka Mighty Dump Trucks destined for U.S. store shelves.
Given surging prices of shipping containers and clogs in the supply network, the transportation cost to get the bulky toy to U.S. soil is now 40% of the retail price, which is roughly $26. That's a significant increase from 7% a year ago. And it doesn't even include the cost of getting the product from U.S. ports to retailers.
"We've never left product behind in this way," said Jay Foreman, chief executive officer of Basic Fun. "We really had no choice."
Toy companies are racing to get their products to retailers as they grapple with a severe supply network crunch that could mean sparse shelves for the holidays. They're trying to find containers to ship their goods while searching for alternative ports. To ensure delivery before Dec. 25, some are flying in toys instead of shipping by boat.
And in cases like Basic Fun, they are leaving certain toys behind in China and waiting for costs to come down.
Like all manufacturers, toy companies have been facing supply chain woes since the start of the pandemic, which temporarily closed factories in China in early 2020. Then, U.S. stores temporarily cut back or halted production amid lockdowns. The situation has only worsened since the spring, with companies having a hard time meeting surging demand for all sorts of goods.
Manufacturers are wrestling with bottlenecks at factories and key ports. Furthermore, labor shortages in the U.S. have made it difficult to get stuff unloaded from ships and onto trucks.
But for toy-makers that heavily rely on holiday sales, there's a lot at stake in the nearly $33 billion U.S. industry. The fourth quarter accounts for 70% of its annual sales.
On average, holiday sales account for 20% of the overall retail industry. And about 85% of the toys are made in China, said Steve Pasierb, CEO of The Toy Association.
The snarls are so severe that some retailers are telling companies they don't want products if they're shipped after mid-October. That's because products that typically took four to six weeks from when they left a factory in China to when they landed at a U.S. distribution center now take 12 to 16 weeks, said Marc Rosenberg, a toy consultant.
The struggles are happening after the U.S. toy industry enjoyed a nearly 17% increase in sales last year and a 40% increase in the first half of this year as parents looked to entertain their kids at home, according to NPD Group, a market research firm.
But while analysts expect strong growth in 2021, many toy companies said they'll see their sales reduced because they won't be able to fulfill orders on hot items, particularly surprise hits. They are also incurring big costs that will force some toy companies to shutter.
Toy executives say they can't raise prices any more than 10% -- even though it won't completely cover the higher costs -- because they're worried about shopper reaction. Mattel Inc., the nation's largest toy company, warned this summer that it's raising prices in time for the holiday season to offset higher shipping costs, though it didn't say by how much.
COSTLY CONTAINERS
Costs of containers on ships have increased more than sixfold from last year, with some brand executives saying they've gone up to $20,000 from roughly $3,000 a year ago. That has forced big retailers such as Walmart and Target to charter their own ships.
Foreman calculates that 1,800 Tonka trucks fit in each 40-foot container. So at $20,000 per container, it's costing the company $11 per toy. That's up from an average of $1.75 each in a typical year.
Foreman said he's focusing on shipping smaller items such as Mash'ems -- squishy, water-filled collectibles -- in containers as he looks to maximize the total dollar value in the container and the profit margins. He estimates the company can fit $150,000 worth of Mash'ems in a container versus $40,000 worth of Tonka trucks.
Some companies such as MGA Entertainment, the maker of L.O.L dolls, are expediting the flying of their toys because it now costs roughly the same as shipping.
Jim Silver, editor-in-chief of Toys, Tots, Pets & More, a toy review site, said big discounters such as Target and Walmart should have a healthier supply of toys compared with smaller ones because of their clout. Target said it has been teaming up closely with its vendors and transportation partners to keep stores well-stocked and ready for customers.
TOUGH DECISIONS
The bottlenecks are expected to have lingering consequences. Toy-makers are facing pressure from retailers to ship the first flow of Christmas season goods for 2022 in early March instead of late April and the second cycle in June instead of by late July, said Andrew Yanofsky, head of marketing and operations at WowWee.
That will force companies to make decisions about how much to make and reorder without having a full picture of the sales data, he said.
Yanofsky said that this year, he placed a big bet initially on Got2Glow Fairy Finder, a light show in a jar that allows children to find virtual fairies, because he knew he wouldn't be able to replenish the production given the snarls.
"We took a risk on excess material beyond the scope of what we thought we could sell, " he said.
Even the few toy companies that make goods in the U.S. have struggled because of labor shortages.
John Gessert is CEO and president of American Plastic Toys, based in Walled Lake, Mich., with another plant in Mississippi. He said the company is missing 35% to 40% of its front-line workers. Now, it's shifting its focus away from play kitchens that require six workers or more toward less labor-intensive toys such as basketball sets, which require just three workers to put together.
"I have never had such a complicated puzzle to fix," he said.