What is saving the toy industry

So every January, the toy industry descends on New York City for its annual convention. There's buyers, suppliers, sellers, everybody who's planning to, well, be ready for the Christmas toy rush that's happening just 11 months away. And when I looked at some of the articles that came out about it, I expected kind of doom and gloom. I mean, Trump's tariffs are going to hit toys really hard, and those toys, 80% of them come from the U— from, from China. Into the United States. And then there's a lot of other bad news for the toy industry. I mean, birth rates are plummeting. People aren't having kids anymore. And inflation is squeezing wallets, meaning discretionary spending is going way down. And in the end, also, kids are glued to iPads. So you have a lot fewer, like, well, you have a lot of competition for these kids' eyeballs. And it seems like this is the perfect storm for disaster. Like, everything should be going wrong. And when I went and dug into what was going on in the industry, Like the industry is actually exploding. Toy imports went from $17 billion to $44 billion between 2017 and 2023. Just like insane growth. It almost tripled over the past 6 years. So look, there's all these headwinds for the industry. Like, how is this possible? What's going on in the toy industry? And how can we as small business owners learn from what's happening in this particular corner of the market and use that in our businesses ourselves? So let's dig in. So, hi, my name is Michael. I'm a business nerd for fun. I like to study and learn about business, and then I love to teach also. So these are fun things for me. And if you're into that kind of stuff, I make all kinds of videos like this, including this one that I'm making while on vacation. And, uh, you know, you can decide whether I should be doing that or not, but my family's all relaxing and I'm out here, uh, with perhaps the best view in the whole world, uh, here in Mexico. So, uh, If you like that kind of stuff, please subscribe. Would love to have you. I do this stuff out of love, and hopefully you would love it as much as I love making it. So how we got here is really a product of history, right? So toy consumption, if you go look at the numbers, it peaked in 2008, and that's when the Great Recession started. And that particular year, we've hit $20 billion in toy imports from China. And then suddenly, well, because you kind of would expect it from a declining economy, the next year, like, they went down over 15%. And the economy here was a big setback and a reason why the toy industry started struggling. But of course, like bad economies, they don't last forever. On the other hand, we saw two things start happening in 2008 that were kind of semi-permanent, if not long-term changes that will be hurting the toy business then and also leading up to today. The first one is a total societal disruption. And some of this is because of the Great Recession, right? Housing got super expensive and it jaded a lot of young people into where they are today, which is, well, they don't want to have kids because, well, frankly, buying a house is is so expensive and having kids is so expensive now. And so they started having a lot fewer kids back in 2008. And of course, that's really bad if you sell toys, right? Because kids are who toys are meant for. And in 2007, the birth rate in the United States peaked at 2.12 births per woman. And by 2017, just a decade later, it's down nearly 17% to 1.74 births per woman. In the toy world, this is really bad. Imagine your whole market shrinks by like 17%. And that's especially tough when you make a physical product. So remember, physical product businesses tend to have factories. They're made and produced by people. And so that means there's a high level of fixed cost there in these factories. You build a factory and then, well, it's either running at capacity or it's not. Either way, you're paying entirely, you know, the full cost of that factory, including maintenance, upkeep, and all that kind of stuff, plus the cost of capital to build the thing in the— when you started it. So when your market shrinks and you have a high fixed cost business, like, things can get really rough really quickly. And that is the type of business that manufacturing and especially toy retailing, that's how it operates— high fixed costs. And the danger there is if, well, your fixed costs are so high, if revenue shrinks too much, you may not have enough coming in to cover those fixed costs. And that can end up putting you in a bad place, which frankly is where Toys R Us, the world's biggest retailer, that's where they eventually ended in bankruptcy, you know, later in the decade of the 2010s. But the second headwind that we saw in 2008 is a technological one. What we saw around then was the introduction of the iPad and Apple Apple sold 32 million of these things in 2011. Now just to put that in perspective, that's one iPad sold that year for every 10 people. And to some extent, that's probably, well, about one iPad for every 3 kids. Like, pretty rough when you think about that the iPad is, well, very quickly became something that parents used to replace an entire toy box. For $399, you could go down to the store, buy an iPad, it came with a suite of free games and all this kind of stuff you could get from the App Store. And suddenly, instead of buying Jimmy or Tony Timmy or Sarah, your kid, a train set or an expensive doll set that they might play with for a couple days and then forget, you could buy them one iPad for maybe 2 times the cost that they could use a million different times in a million different ways. And it was kind of perfect if you had to be one of those parents who took your kids out to dinner. Well, you might just end up, well, using it to babysit them while you and, you and your spouse had a nice meal and a nice glass of wine. I see it all the time when I go to restaurants. And if you look back at the data on iPad usage, you can see the majority of the time spent by little kids matches up what I would— exactly what I'm talking about. It's spent on games and playing. And so by 2010, like, the toy market was under siege, not only from the fact we had fewer kids, there's also from this technology disruption. And the good news is, like most and many things in capitalism, capital finds a way, and all was not lost. But there were some strange things that kind of happened that turned it around for the toy industry. The first was a radical shift in basically the retail nature of the toy market. Remember, up until this date, you had kind of retail giants like Toys R Us being really the, the people that were bringing you toys, right? Target and Walmart and Amazon, they weren't players at this time. But Amazon came in and they really decided to become a player in toys, right? They had gone in and won with books, and now they were going to make it easier for you as a parent to get the in-demand items and the toy that Jimmy or Johnny wanted. And I remember seeing stuff at this time, right around the time Amazon started to get really big into this space. I would see parents going to toy stores and they would look and say, okay, well, like, they don't have exactly the color that I want, so I'm gonna click a button, it'll show up at Amazon in 2 or 3 days. And that was just the nature of what started to happen to specialty retail around that time. It happened especially with toys. And Amazon has now 15% of the total U.S. toy market. That includes Walmart, Target, everybody, and 35 to 40% of the online toy market depending upon who you ask. Um, just kind of a fascinating rise of their dominance into this space. And similarly, big box retailers came into the space as well. Um, you know, they started to get heavily into toys. They— toys play to what a Walmart or Target likes to do. They're good at negotiating with the Chinese, they're good at negotiating with the Vietnamese, they're good at negotiating with big brands and getting special deals for themselves. Like, they know how to do that. And so In addition to what Amazon did to go in and streamline supply chains and get the cost of toys cheaper, uh, these big box retailers did the same. And interestingly enough, if you go look at what's happened to toy prices relative to the value of a dollar, it's one of the few areas in which the cost of toys has gone down year over year. We're actually seeing deflation in the prices of toys, and that's like 4 to 6% on average. Toys are getting cheaper. And look, when toys get cheaper, it's a pretty amazing thing, right? You have the whole idea of supply and demand. Demand goes up when prices go down, right? There's price curves and all that stuff that happens in economics. And so what we're seeing there is the toy market getting buoyed by getting more efficient. Prices are going down. You're getting China and Vietnam and all these other countries producing toys cheaper. So it's growing the total pie because ultimately parents buy toys based on return on investment to some extent. Like if you can spend less money on that toy, well, why the hell not? Right? You're going to buy it and spend more of it. And toys can get off the toy aisle and end up in places like right near the checkout counter and become impulse purchases. And so that was a huge benefit to the toy industry. And most people just don't understand that the prices— well, toys have been getting cheaper year after year and therefore more appealing to parents. And look, this trend of toys getting cheaper, like, it's not stopping. You know, Amazon came in and cut out the middleman before of Toys R Us and other folks like that. You're seeing a different thing where Temu and Shein are coming in And they're even cutting out Amazon and going direct to consumer from the factories and allowing the Chinese factories to come in and use certain loopholes in our customs and in our customs, basically, basically set up here in the United States to do direct importing of individual items to consumers and cut out a lot of these tariffs that are going to be affecting Walmart, Target, and other big box retailers as well as, you know, Amazon itself. And if you want to be mad about something from this whole video, I mean, you may be mad that I'm on vacation and you're not, but Anyway, it's not that great, but, uh, if you're interested in one of the things that's kind of crazy and horrible about how our tariff regime is currently in the United States, uh, there is a rule that allows, uh, basically all of the imports of toys to be exempted from tariff rules. And it's not all the— it's not all the toys, but if you're a Temu or Shein and you're shipping directly, uh, to customers in the United States, you can bypass the tariff rules by simply shipping individual packages to the US. And as long as your package is less than $800 in value, it is not subject to customs tariffs and duties. And look, if you're going to be angry about something, like, this absolutely sucks. This totally sucks that we're penalizing domestic companies through tariffs when in reality, like, the companies that are best able to take advantage of this are foreign companies. It gets me mad all the time. Even though I'm on vacation, I'm super pissed about this. But look, all this doesn't tell the whole story about why toys are booming. There are more kids, inflation sucks, consumers are pulling back on spending, like, it's rough. And of course now we have these 20% China tariffs imposed by Trump. So with all these headwinds, like, why is the toy market booming? Well, the industry is actually being saved by the rise of these people called kidults. And this is not something I made up as a phrase, but basically a kidult is an adult who buy and they're really into kids' toys. And those 18 or older, they accounted for a significant percentage of the US total toy sales. Depending on who you ask, it's 15 to 20%. And that was $7.3 billion worth of sales in the year ended last September. And look, we all know that 35-year-old man who's like weirdly into like Star Wars toys or like Superman toys or whatever, or 20-somethings who are totally into things like, Well, Squishmallows, right? This is something I discovered and learned about only in researching this video. And if you go look at the lines that are of people going to buy these types of things, they're young adults. Like, these are kids' toys and they're like 20-somethings who are basically collecting these type items. And in the numbers, like, if you go look at— and I'll put it up here on the screen— if you go look at the breakdown of where there's growth actually happening in the toy industry, like, one of those areas is plush toys. And I was like, cool, like plush toys. That means people are buying those toys for their kids to kind of get out of the idea of being on their screen all the time. But in reality, like, those are adults buying collectible fluffy toys, not kids. And if you look around today, like, the brands that are actually doing well are the ones in the toy market that are focused heavily on these adult segments. I mean, let's look at the kind of poster child for this, and it's the LEGO Corporation. They've been on absolute tear since the early 2000s when they almost went out of business. And look, like, if you don't believe that they're totally targeting adults, I'll put this up on the screen. Uh, who do you think is buying a $1,600 LEGO set Star Destroyer? And it's certainly not kids. And I don't know any parents who are buying that just for their kids to have. Uh, my 8-year-old is not getting a $1,600 LEGO set. And, uh, and so if you look at it, it's this strategy and the collabs that have enabled LEGO to go from the early 2000s to basically almost being bankrupt bankrupt to in 2022 doing $9.8 billion in revenue. Just pretty crazy. And it's all because of these kiddults. And so these kiddults have grown to be 25% of the total toy spend. Like, they're adults who are drawn to brands from their childhoods, and it's all because of nostalgia. That means they like LEGO, Star Wars, Harry Potter, uh, etc. Like, they are the big driver in what's keeping the toy market going and growing. And look, you can even look at the packaging and the way products are being positioned and all that kind of stuff, uh, to match this idea of kiddults being the ones that buy stuff. And I'll link to a YouTube video here, and I'll try to show a clip of it. But basically, this guy who is like a toy influencer, he goes through and notes that the packaging that Hasbro has done for different items has changed over the past few years to target these kiddults. The headers of the kind of plastic packaging and stuff like that. It's much more solid and stable. And that means basically what you guess. These toy makers are not stupid. They realize where the growth is and who their target market is. And like, it's these kiddults. It's kind of crazy because a lot of kiddults don't actually like open the packages. Like, why do you buy a toy if you're not going to play with it? I don't know. Am I showing my age here? Look, and I think it's a big question as to what will happen as these kiddults get older. Like, are they going to keep spending? Maybe. What happens when they start retiring and downsizing? What happens when they get busy with their own kids? Look, I'm not sure. And look, then you have Gen Z, which is kind of the generation that my kids are part of, like current teenagers into their 20s. And they don't have the same influences of Star Wars, Harry Potter, or frankly Barbie, because, well, cable TV and the movies have totally imploded. Like my kids couldn't give two craps about Star Wars. I mean, I'm sure some kids do, but like they do not have the nostalgia for Star Wars that my wife and I do. you know, being here in our 1950s or in the 50s and kids of the 19— and products of the 1980s. Like, it just doesn't mean anything to them, and there's no way they're going to grow up and want to buy those nostalgic toys, you know, just because it wasn't part of their childhood. And look, so in this video, like, I'm on vacation, I nerded out and spent a bunch of time reading about this whole market. It is huge, it is complex. I'm gonna love to do more videos about elements and particular parts of the toy market, um, So take it all with a grain of salt. I'm not a toy expert and this is definitely not an exhaustive video, but dang, it's just what I learned about. And the whole toy industry is super fascinating. And so what do I think about all this? Look, first of all, I think the sun's going down, so I think we're going to run out of light pretty soon. But I think kidults are just freaking weird. Like, I don't get it. Like, why do you want to buy a bunch of toys when you're an adult? And I've seen TikTok videos and I'll try to put one— here's a clip where there's just like dudes sitting in like a room they've created in their house, which is just like all Star Wars stuff. They're playing with a Lego set. And look, maybe I'm just old— I was born in the '70s— like, and I'm the odd one, but I just don't get it. Personally, in life, like, I see a lot of value in doing age-appropriate stuff. And the only age-appropriate time for me that an adult should be doing Legos is when they're playing Legos with their little kids, for whom it is actually age-appropriate. And look, I'm also willing to be wrong on this. I make YouTube videos for fun about business. So like, I don't know if that's age appropriate or not, but anyway, at least I'm enjoying. So where does it all go from here? Look, I think we'll see what happened. We'll see in this presidency for Trump what happened in the last one, which is industry after industry went in and got exempted from the tariffs. That's what happened in the previous Trump presidency. The toy industry got exempted from it. I think, you know, Jeff Bezos was there at Trump's inauguration. I would be shocked if those Trump tariffs on the Chinese toy market, if they stick, you know, I think that's going to all go away just like they did in his last presidency. So that should help them. You know, in the meantime, like, I'm worried about this industry in the long term. If I was a toy manufacturer or I was a toy producer, I was a toy middleman, of which, by the way, there are a lot of mom-and-pop toy companies. Everybody seems to want to start a toy company. I would be worried about the long-term future of this, uh, of this industry. You know, kiddults are great, but once they age out, like, we're going to be in trouble. Just people are not having children, and, uh, when you have a shrinking market like that, it's a scary thing to be into. So, um, I'm worried about it therefore in the long term, and I don't see MrBeast or Minecraft nostalgia being a thing that my kids and kind of the kids being born right now are going to want to buy. So That's where I'm at on the whole thing. Uh, hope you enjoyed this video. Tell me what you think in the comments below, and we'll see you next time, uh, when I talk some more about toys or some other business topics. Thanks. Vacation, not as expensive a room as you think. So room cheap, good view. The reason the room is relatively cheap is— and we're way up here on the side of this hill— uh, is that, uh If you want to get anywhere, you got to walk like down the side of a mountain. It's like, it's way down there. So it's like a bazillion steps. So pretty crazy. Plus the road outside is basically the Indy 500. It's pretty nuts.