11 Aug 2016
UK Toy Sector Ponders Bleak Post-Brexit, Post-Argos Acquisition Xmas
As well as the Brexit Blues, the still-reeling UK toy industry also has the spectre of Argos, the largest retailer in the sector, being subsumed into Sainsbury's, none of which promises to make Christmas 2016 memorable in a particularly good way.
Attending several spring/summer 2017 previews recently, it was no surprise that talk turned almost immediately to the likely ramifications of Brexit and how UK-based toy companies are dealing with the situation. In the short-term, the primary focus – for just about everyone – is on coping with the significant currency swing, something that has seen the pound weaken by nearly 15% against the dollar since the outcome of the EU referendum.
The truth is, though, that there is no magic wand, nor – as far as I can tell – any one-size-fits-all solution that will work across the board. As a result, the majority of UK toy companies are currently engaged in a comprehensive review of their portfolios, tackling them item-by-item.
Can some widget be removed from a product or some change made to the packaging that will reduce costs? Will a supplier or factory be willing to help out with the pricing? Can an individual item take a price rise and, if so, by how much?
In the end, whatever decision is reached, it has to work for the supplier, the retailer and the consumer. And that's far from being an easy balancing act.
While some key price-points will almost certainly remain sacrosanct – £4.99, £9.99 – we will, perhaps, see the emergence of new intermediary price points. Could the wider adoption of £21.99 or £23.99 help make the sums add up? Although it's a big challenge, pretty much just about everyone is in the same boat. Indeed, thanks to their own FOB and brand programmes, most retailers will be only too aware of the challenges that suppliers are facing.
The Brexit vote actually came in the wake of a very strong first six months for the UK toy market. Overall, NPD, the global trend analyst, recorded a 7% growth in value and a 13% growth in volume for the sector between January and the end of June this year.
All eyes now, though, are on the second-half performance, with many keen to see just how consumer sentiment has shifted after the Brexit vote. Even though surveys by Visa, Barclaycard and the British Retail Consortium, all conducted over the past month, have indicated that consumer spending has not been adversely affected by the result, economists have rightly warned against reading too much into early indicators. More worryingly, the Bank of England has predicted that growth will slow sharply over coming months, despite interest rates having been cut to a record low.
Although, at present, shoppers appear to be taking something of a life-goes-on approach, the true test of consumer confidence is going to be felt in the run-up to Christmas, the most important time of the year for the toy market. A good Christmas almost inevitably translates into a good overall year for the toy trade, while a poor Christmas can easily undo all the gains of the previous nine months. The season of good will is, literally, make or break time for many UK toy manufacturers and retailers.
Just to add a further layer of uncertainty to the proceedings, there is, of course, the pending acquisition of Argos – the UK's largest toy retailer – by Sainsbury's, the supermarket giant. The Competition and Markets Authority has recently given the nod to the deal, while Argos' own shareholders have also expressed their willingness to see the sale go through.
It seems inevitable, then, that we won't have to wait too long to see how the merger pans out. According to a number of well-placed sources, the takeover is likely to be completed on or around 1 September. Soon after that, the toy industry will find out just how the takeover will impact on its largest customer.
In terms of numbers, the tie-up will create a store portfolio of 2,144 outlets. This will service around 25 million customers per week in-store, accounting for sales in excess of £31 billion per annum. On paper it's a retail colossus. Dig deep, though, and you start to see the devil in the detail.
For one thing, the customer base is arguably not as mutually exclusive as some analysts have indicated. In fact, it is reasonable to assume a 30% cross-over in same-customer shopping, reducing the likely weekly customer footfall to closer to 18 million. Similarly, despite the much-heralded strategic switch to digital, only 60 digital Argos stores actually exist – less than 10% of the company's available store estate. If Sainsbury's wants to leverage these future-proofing retail strategies, it will take time and money – and, in both cases, lots of it.
In the short term, the focus is likely to be on optimising the store estate footage, formats and locations in order to maximise sales and profit. A key point to bear in mind, however, is the demographic difference between a typical out-of-town customer (private transport bias) and a high street customer (public transport bias). It is widely assumed that Sainsbury's will favour out-of-town locations and close – but not necessarily divest – the Argos fascia high street stores in the event of any territory cross-over.
Where, when and just how many Argos high street stores will close is the tough part of the calculation. The likely potential closure or conversion to Sainsbury's local stores, though, could see up to 300 current toy-selling sites close. On the upside, as with the mass Woolworths' store closures of 2009, this could be a welcome boost for the toy independents. It would, however, certainly be of little help to the toy industry in the short term. Inevitably, some sales will simply be lost, as they were when Woolworths went down.
There is also the question of the pricing strategy that the combined group might adopt with regard to general non-food merchandise. Argos has always been very competitive on price, Sainsbury's less so. The Argos business model was heavily geared to driving volume through promotions, while Sainsbury's was the first UK supermarket to announce plans to completely discontinue multi-buy deals in store.
Instead, it will favour selling individual items at lower prices, phasing out multi-buy promotions totally by the end of this month. It is a commitment that has largely been prompted by the Competition and Markets Authority's report into misleading supermarket promotions.
All of this comes on top of the aforementioned issue of suppliers having to grapple with the declining value of the pound. It is a problem that applies equally to retailers, leaving them facing the likelihood of significantly reduced margins. As a result, toy industry observers are wondering just what effect this will have on pre-Christmas retail promotions, a particularly aggressive phenomenon in the UK market.
As a possible indication of what is to come, it is worth considering a recent three-for-two offer run by Argos. Unusually, the promotion only lasted for a few days, giving the distinct impression that the events of the past month resulted in the event being somewhat abbreviated in order to protect margins. If this continues to be the case in the build-up to the festive season, it may have a significant impact on the volume of toys sold, given the sheer number of toys that have been sold via promotions in the past.
So, all in all, there is much to keep an eye on as we approach the business end of year. As ever, though, there is still everything to play for. A fascinating six months unquestionably lies ahead.
John Baulch is the Publisher of Toy World,
the leading trade title for the UK and European toy trade