Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Toy Industry
Transcript
- Lucas: You know, I was at a birthday party for a friend’s kid last weekend — nothing fancy, just backyard pizza and cake. And what struck me was the gift table. Luna: In a good way or a bad way? Lucas: More like a revealing way. The pile had maybe half the toys it would have had three years ago. And what was there? A lot of smaller items — card games, a single action figure, a coloring set. The big Lego sets and the big-ticket dolls were mostly absent. Luna: That sounds like a real-time consumer spending signal. And it probably ties into something I saw in the data this morning — import prices from China just hit their highest level since 2008. Lucas: Right, that's the headline that jumped out at me too. And when you think about it, the toy industry is at the intersection of two big macro forces right now. On one side, input costs are rising — a lot of toys are still made in China, and tariffs plus logistics have pushed up landed prices. On the other side, the consumer is increasingly price-sensitive. Luna: So you've got the classic stagflation squeeze — higher costs, but limited ability to pass them on because buyers are pulling back. Lucas: Exactly. And the numbers bear that out. The overall CPI for toys — the Bureau of Labor Statistics tracks a category called 'toys, games, and hobbies' — has been running below the headline inflation rate for a few months now. That suggests retailers are having to absorb some of the cost increases rather than passing them through. Luna: Which eats into margins, especially for the big public companies. Hasbro and Mattel both reported their most recent earnings a few weeks ago, and the tone was cautious. Hasbro specifically mentioned that they're seeing 'value-conscious behavior' across their portfolio. Lucas: Yeah, and that's a polite way of saying parents are trading down. Instead of a forty-dollar Nerf blaster, they're buying the twenty-dollar version. Instead of the big Barbie Dreamhouse, maybe just a fashion doll. And that dynamic really favors companies that have a strong presence at multiple price points. Luna: Or it favors third-party sellers on Amazon who can undercut the big brands with cheaper alternatives. I was looking at Amazon's toy bestseller list yesterday, and the top ten were mostly generic — no-name building blocks, unbranded craft kits. That's a big shift from even two years ago, when the list was dominated by Hasbro and Mattel products. Lucas: Which raises an interesting question: are the big toy companies losing market share, or are they just seeing the overall pie shrink? Because there's also a category that's booming — the secondhand toy market. Luna: Right, I've seen that. Platforms like Mercari and Facebook Marketplace have huge toy sections now. Parents are selling used sets and buying used sets. There's even a company called Kidizen that's basically a resale marketplace just for kids' stuff. Lucas: And that's a direct response to the affordability challenge. If a new Lego set is eighty dollars and a used one in good condition is thirty, that's a no-brainer for a lot of families. The interesting thing is that this could actually be a long-term shift, not just a cyclical one. Luna: Why do you say that? Lucas: Because the pandemic normalized secondhand shopping for a lot of categories that were previously seen as 'gotta be new' — think about kids' clothes, baby gear, books. Toys are just the next frontier. And if the resale infrastructure keeps improving — authentication, easy shipping, buyer protection — then even when the economy improves, some families may stick with used toys. Luna: So the toy industry might be facing a permanent shift in consumer behavior, not just a temporary belt-tightening. That would force the big players to rethink their business models. Lucas: Yeah. One response we're already seeing is a bigger push into collectibles and licensing — products that have a higher perceived value and can command a premium even in a tough environment. Think about Funko Pop figures, or limited-edition collaborations. Those items are less price-sensitive because they're bought by enthusiasts, not by parents just trying to entertain a kid for an afternoon. Luna: That makes sense. But it also shrinks the addressable market. Not every kid cares about a collector's edition Spider-Man figure. The mass-market toy business is about volume, and volume is under pressure. Lucas: Absolutely. And that's the core dilemma right now. You can go upmarket into collectibles, or you can go downmarket into value packs and basic toys. But the middle — the classic toy aisle at a big-box retailer — that's getting squeezed. Luna: And speaking of big-box retailers, we should talk about the role they play. Walmart and Target are the biggest toy sellers in the country, and they have enormous leverage over pricing. If they decide to push for lower wholesale prices, the toymakers have to decide whether to accept thinner margins or lose shelf space. Lucas: Right. In fact, one of the reasons wholesale prices unexpectedly declined in June — down 0.3 percent, driven largely by a drop in gasoline — might actually be good news for toy margins on the input side. But the bigger input cost story for toys is labor and raw materials, not fuel. Luna: Right. Plastic resin prices are still elevated, and so is shipping from Asia. The peak in import prices from China is a major headwind. So even if domestic wholesale prices ease a bit, the cost of goods sold for most toys is still going up. Lucas: Let's zoom out for a second. If we look at the broader economic picture — unemployment at 4.2 percent, job openings steady around 7.6 million — the labor market is still relatively tight. That means consumers are still earning, but they're being more careful about how they spend. And toys are one of the first categories to get cut when discretionary budgets tighten. Luna: Yeah, especially after the holiday season. The first quarter is always a lull for toy sales, but this year it felt particularly slow. I think a lot of retailers are going into the back to school and holiday planning seasons with a lot of caution. Lucas: And that caution shows up in inventory levels. Retailers don't want to get stuck with unsold toys, so they're ordering leaner. That means the toy companies have to be much more surgical about which products they push. Luna: One interesting sub-trend I've noticed is the rise of subscription boxes for toys. Companies like KiwiCo and Lovevery have been growing steadily, and they offer a way for parents to spread out toy spending over time. It's like a monthly installment plan for kids' entertainment. Lucas: That's a clever model for this environment. It turns a large upfront cost into a predictable monthly expense, which is easier on the household budget. Plus, it creates a recurring revenue stream for the company, which is less volatile than relying on holiday spikes. Luna: Exactly. And it also aligns with the trend toward fewer, more curated toys. There's a whole philosophy now around 'less is more' for kids' development. So the subscription model taps into both the economic pressure and a cultural shift. Lucas: You know, the parallel I keep coming back to is what happened to the toy industry in the late 1970s, during the last major stagflation period. Back then, the industry consolidated — a lot of smaller players went under, and the big companies like Mattel and Hasbro survived by diversifying into electronics and other categories. Luna: Interesting. Are we seeing similar consolidation now? Lucas: Not yet on the same scale, but there have been some acquisitions. Hasbro bought Entertainment One a few years back to get more entertainment IP. Mattel has been restructuring. And the smaller independent toymakers are definitely struggling to compete on price with the big guys and with generic Amazon sellers. Luna: Speaking of independent operators, I want to ask about the toy stores themselves. The local toy shop — how is it faring in this environment? Lucas: It's tough. Independent toy stores rely on a differentiated experience — knowledgeable staff, unique products, in-store events. But they can't compete on price with Walmart or Amazon. So they have to lean into the experience factor. Some are doing well by focusing on educational toys, craft kits, and specialty brands that aren't available at big box stores. Luna: That seems like a viable niche, but it's a limited one. The overall market is still dominated by mass-market players. Lucas: Right. And the mass-market players are the ones feeling the most pressure right now. If you're a publicly traded toy company, you have to deliver growth in a market that's basically flat to declining in real terms. That's a tough ask. Luna: So where does the industry go from here? What's the smart play for a toy executive listening to this? Lucas: I think the smart play is to double down on what I call 'recession-proof' segments. Collectibles. Licensed products tied to enduring franchises — Star Wars, Marvel, Pokémon. And second, to embrace the subscription and resale models rather than fight them. Maybe even partner with resale platforms to offer certified used products. Luna: That's an interesting idea. Like a trade-in program where you can return old toys for credit toward new ones. Lucas: Exactly. That keeps the customer engaged with your brand even when they can't afford new products at full price. And it addresses the sustainability concerns that many parents have now. Luna: Alright, I think we've covered a lot of ground. And you know, if this conversation has given you a new lens for thinking about the toy aisle — or about how inflation and growth are intersecting — that's the kind of thing that makes doing this show worth it. Lucas: It really is. And on that note, if today's episode was useful to you, there's a way to help us keep doing it. This show is ad-free by design, and the reason it can stay that way is listener support. Luna: Yeah, it's a small thing, but it makes a big difference. If you've gotten value from what we do, you can go to buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash f-e-x-i-n-g-o. Lucas: And we truly appreciate every single one. It's what keeps this independent and focused on the substance. Luna: Alright, back to the economy. One more angle I want to bring up before we wrap: the impact on the holiday season. With import costs high and consumer wallets tight, what are the early signs for toy sales this Christmas? Lucas: Good question. I think we're going to see a bifurcated holiday. High-end collectibles and exclusive sets will do well because they're aimed at enthusiasts who aren't as price-sensitive. But the mass-market toys will see heavy discounting, starting earlier than usual. Luna: So the message for parents is: if you want the big Lego set, buy it in October, not December? Lucas: Exactly. Retailers are going to pull demand forward because they're worried about inventory. And that might be the biggest structural change — the holiday shopping season is no longer a sprint in late November. It's a marathon starting in September. Luna: That's a good note to end on. Thanks for walking through this with me. Lucas: Always a pleasure. Talk to you next time.