Nobody likes price increases, that’s for sure. However, the combination of unfavourable macro economic factors that have hit manufacturers recently is quite unprecedented in the past 30 years.
Currency depreciation of 22 per cent year on year, coupled with Chinese cost increases across last year averaging 15-20 per cent have meant that anyone importing an item for £1 in January 2008 is paying £1.45 for the same item now.
Add domestic cost increases on freight, energy costs, advertising costs and salaries to the mix and you have ‘the perfect storm’ with serious destructive capability.
So why would any retailer with any credibility wish to take an intransigent ‘zero price increase’ negotiating position with his suppliers?
This cannot be in the interest of any party, least of all the retailer, who in a year’s time, should surely realistically expect innovation, TV advertising and promotional support to completely dry up on key brands, thus spiralling the toy business into terminal decline.
Arguably any supplier capable of absorbing all the cost increases of the past months and agreeing to a zero price increase is either a) making too high margins in the first place; b) expecting to go bust very soon or c) should be taken to the local funny farm and locked away until sanity returns.
Until last year inflation had been absent from the toy business for the past decade or more, with prices declining more often than not. Now we have no choice but to put up prices if we are all to survive. Inflation therefore, within reason, is our friend and not our enemy.
Will a great toy or game really stop selling if it moves from £14.99 to £16.99? Of course not. However, if we stop investing in innovation and remove TV advertising and promotional support then we know we are on a road to nowhere.
Just take a look at the top selling toys and licences of each year. Many are new and have been developed over years with big investment budgets in advertising, tooling, packaging, etc.
If we as an industry collectively cut back on innovation then everyone in the industry loses out. And possibly the biggest losers are retailers as in the long run children will find products in other industries more interesting and fun than toys.
Likewise TV advertising investment. We all know what will happens if suppliers reduce, cut back or delay TV campaigns. Yet suppliers may have no choice but to cut back here if retailers do not allow fair price increases. And herein lies the burning question -what is a fair price increase?
There is no single answer to such a question, but it surely makes sense that if a supplier is faced with real cost increases of up to 40-45 per cent year on year, then anything below a 15-20 per cent price increase will seriously damage a supplier’s ability to run a successful and profitable ongoing business (assuming the supplier can afford to absorb some of the cost increase that they cannot pass on).
So what kind of toy industry do we want in 12 months time? One where many suppliers have gone bust and overall TV advertising and innovation has declined?
Or a toy industry that engages constructively together to work through these difficult trading conditions and ensures that the engines of prosperity and growth -innovation and advertising - receive appropriate levels of investment to ensure our industry continues to excite tomorrow’s children?