NEW YORK (Reuters) – Concerns over product safety will loom large onSunday when one of the world’s largest toy fairs kicks off, after ayear in which a series of high-profile recalls of China-made productshurt U.S. toy sales.
As an estimated 15,000 buyers from 7,000 retailers descend on theannual American International Toy Fair in New York over the next week,many manufacturers will spend a chunk of their time touting tightersafety measures in addition to showing off the latest toys.
That all comes at a cost and could hurt the industry’s margins at a time when it will be coping with a weakening U.S. economy.
No one in the industry wants a repeat of 2007, when sales declinedpartly from negative publicity surrounding the recall of millions oftoys due to lead paint and faulty magnets.
"It’s going to be a much talked about topic," said Anita Frazier, ananalyst with market research firm NPD Group. "There will be a lot ofdiscussion about the extra protocols and the measures being taken toassure product safety."
Canadian toy maker Mega Brands (MB.TO: Quote, Profile, Research),which was stung recently by a global recall of its Magnetix toys, onThursday unveiled a re-engineered version of the line that it renamedMagNext.
Montreal-based Mega, Canada’s largest toy maker, said it teamed withLondon testing firm Intertek Group to craft magnetic building setsfeaturing embedded magnets and parts that cannot be swallowed.
A Magnetix recall began in 2006 and expanded into 2007 as one childdied and 27 suffered serious intestinal injuries from swallowing small,powerful magnets. The company paid $13.5 million to settle a number oflawsuits in 2006 and has several still in litigation.
Potentially dangerous magnets and lead paint also led industry-leader Mattel Inc (MAT.N: Quote, Profile, Research) to yank millions of its toys from shelves worldwide last year.
"Toy safety is a cost of entry into this industry. And so I thinkthat everyone always just assumed that there would be no holes," saidMega spokesman Harold Chizick.
"None of the recalls happen on purpose … Everybody suffers from what happened last year," he said.
Earlier this week, data from NPD Group showed the negative publicityfrom last year’s recalls helped push U.S. toy sales down 2 percent to$22.1 billion in 2007.
Meanwhile, Mattel and Hasbro Inc (HAS.N: Quote, Profile, Research) each saw some weakness in their U.S. results, despite posting better-than-expected, fourth-quarter profits.
"Obviously the industry lost a lot of consumer confidence last year," said Soren Torp Lorsen, president of Lego Americas.
"Therefore, the industry has to prove that there are very tightprocedures going forward that ensure we don’t disappoint again," Lorsensaid.
On Saturday, the Toy Industry Association will make a new toy safetyassurance proposal available to the public. The TIA said the proposalis part of a plan to formalize industry guidelines for product testing.
DOWNBEAT MOOD
It isn’t only the increased costs of improving safety that has thetoy industry in a downbeat mood heading into toy fair this year.
Toy makers are confronting the impact on costs of the rising priceof labor and commodities, the appreciation of the Chinese currency, andhigher inventories, analysts said.
The weakening U.S. economy is threatening to compound thesechallenges, with penny-pinching consumers less likely to buy moreexpensive toys this year.
"There’s a lot of concern about costs — manufacturing costs inChina, even for companies doing well," said Needham & Co analystSean McGowan. "There’s a lot of concern about how much worse the U.S.economy will get."
Toy executives seem more concerned about the rising cost of doingbusiness in China — where most U.S. toys are made — than the growingstruggles of American consumers, BMO Capital Markets analyst GerrickJohnson said in a February 13 research note.
"We anticipate that gross margin expansion — particularly if salesvolumes are disappointing — could be very hard to come by in thecoming year."
(Reporting by Justin Grant, editing by Leslie Gevirtz)
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