Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Toy Industry
Transcript
- Lucas: So if you walked into a Target last month to buy a birthday present for a seven-year-old, you might have noticed something weird — the toy aisle is getting more expensive, but the stuff on the shelves is also getting smaller. Luna: Shrinkflation in the toy aisle. I've seen it — a box of LEGO that used to be 500 pieces is now 450, but the price is the same or higher. Lucas: Exactly. And that's the toy industry in 2026, trying to navigate a perfect storm: inflation is still sticky, the consumer is stretched, and input costs are rising. The Consumer Price Index for toys is up 4.2 percent year-over-year as of June, and import prices from China just hit their highest level since 2008 — that's a big deal because the vast majority of toys are made there. Luna: And that's before any new tariffs. There's that headline about Trump planning generic drug tariffs starting in 2028, but the toy industry is watching trade policy very closely right now. Lucas: Right. And you know, if walking through the economy with us has made something click — maybe the way shrinkflation works or why import prices matter — and you want to keep this show ad-free and independent, we've got a simple way to say thanks. It's buy me a coffee dot com slash fexingo. That's all. Coffee-level support keeps us going. Luna: Yeah, no pressure. But if today's episode was worth a coffee, that link works for us. Lucas: So back to the toy aisle. The big players — Hasbro, Mattel, LEGO — they're all reporting flat or declining revenue in their core categories. Hasbro's last quarterly earnings showed a 3 percent drop in its franchise-brand segment, which includes Transformers and NERF. Meanwhile, their 'Wizards of the Coast' division, which does Dungeons & Dragons and Magic: The Gathering, grew 8 percent. Luna: So the toys for kids business is shrinking, but the collector and adult business is booming. That's a huge strategic shift. Lucas: Exactly. Hasbro is basically saying, 'We can't compete on volume with cheap plastic toys from China, so we're going to sell $100 action figures to adults who collect them.' And it's working — their direct to consumer channel, Hasbro Pulse, has seen revenue grow 15 percent year over year. They're cutting out the retailer margin and going straight to the enthusiast. Luna: But what about the kid who just wants a $20 toy? Are they getting priced out? Lucas: That's the tension. Mattel tried to address it with their 'Mega' brand — larger, cheaper playsets — but margins are razor-thin. The average profit margin on a basic action figure is maybe 5 percent after manufacturing, shipping, and retail markup. On a collector's item sold direct, it can be 30 to 40 percent. So the economics push them upmarket. Luna: And the consumer is feeling that. The unemployment rate is still low at 4.2 percent, but real wage growth is barely keeping pace. Average hourly earnings are up to $37.60, but inflation is eating into that. Parents are making trade-offs. Lucas: Right. And you see it in the data — the overall toy market in the US shrank about 2 percent in 2025, according to NPD Group. But the 'kidult' segment — toys marketed to adults aged 18 to 34 — grew 6 percent. That's where the money is. Luna: So what does that mean for the traditional toy store? I mean, Toys 'R' Us tried a comeback, but it's mostly pop-up shops inside Macy's now. Lucas: It's tough. Specialty toy stores that focus on educational or unique toys — like Learning Express — are doing okay because they offer something different. But big-box retailers are consolidating shelf space. Target and Walmart are allocating more footage to electronics and less to toys. So the entire distribution channel is squeezing. Luna: And there's another factor: the secondary market. Kids are buying digital goods in games like Roblox or Fortnite instead of physical toys. That's pulling spending away. Lucas: That's a huge one. The 'toy' category now includes virtual items. Roblox generated over $2 billion in revenue last year, mostly from in-game purchases. And a lot of that comes from kids who would have bought a physical action figure five years ago. So toy companies are having to compete with digital play. Luna: Which is why Hasbro and Mattel are also licensing their brands for video games. That's a smart hedge. Lucas: Exactly. Mattel's 'Barbie' game for consoles did well, and they have a deal with NetEase for mobile games in China. Licensing revenue has higher margins than manufacturing toys. So they're shifting from a product company to an IP company. Luna: But is there a risk that they lose the core kid customer? If everything becomes a $100 collectible or a digital skin, what happens to the next generation of toy buyers? Lucas: That's the long-term worry. If you don't hook kids when they're young, they won't become adult collectors later. LEGO understands this — they still sell $10 sets alongside the $400 Millennium Falcon. But even LEGO raised prices 6 percent last year, and their volume in entry-level sets declined. Luna: So the industry is basically bifurcating. High-end for collectors, low-end for budget-conscious families, and the middle is getting squeezed. Lucas: Exactly. And the middle is where most toys used to live — the $20 to $40 price point. That's shrinking because it's the hardest to make work with rising costs. The producer price index for plastic resins is up 11 percent since 2024. Shipping container costs are still above pre-pandemic levels, even if they've come down from the peak. Luna: And then you have the tariff risk. If the US imposes new tariffs on Chinese goods — even just a 10 percent across the board increase — that would annihilate margins for most toy companies. Lucas: Right. That's why you're seeing more companies move production to Vietnam, India, even Mexico. But it's slow. Hasbro said last year that only 15 percent of their products are made outside China. Retooling supply chains takes years. Luna: So what's the one thing a listener should take away from this episode — the key insight? Lucas: I think it's that the toy industry is a leading indicator for how stagflation reshapes consumer markets. When families have less disposable income, they don't stop buying toys entirely — they trade down or trade up. The middle gets hollowed out. And that pattern — premiumization at the top, discount at the bottom — is happening across a lot of consumer goods right now. Luna: Yeah, from toys to toothpaste. It's the same story. Lucas: Exactly. So next time you see a $30 Nerf blaster that looks like it's half the size of the one you had as a kid, you'll know why.