Morgan Stanley
  • Now, What's Next? Podcast
  • Dec 1, 2021

Trouble in Toyland

Transcript

Nora O'Leary:

What is super hard is you have this demand, you know you've got great product and you just can't get it out.

Sonari Glinton:

How does that feel? I mean, as someone ...

Nora O'Leary:

It's killing me.

Sonari Glinton:

Not exactly the fuzzy, warm feeling you expect during the holidays, especially if you sell toys like Nora O'Leary does. She runs Manhattan Toy Company and like many toy companies, their products are made in Asia. Thanks to supply chain chaos and massive shipping delays, the last few months have been stressful.

Nora O'Leary:

It's go time in the toy world. Like if you don't have your product in, they're not going to make it. It's life or death for the retailer or a toy manufacturer.

Sonari Glinton:

And it's go time for this podcast. I'm Sonari Glinton. On this episode of Now What's Next, an original podcast from Morgan Stanley, how the holiday toy season helps us understand the great shipping crisis. What's really behind the empty toy shelf warnings, tough choices and higher prices and what it all means for what kids will see under the tree this year and in years to come.

Sonari Glinton:

What is that?

Nora O'Leary:

Lili is actually a musical toy and she has all sorts of features. There's an app ...

Sonari Glinton:

Nora is showing me Lili Llama. It's a wooden toy that is one of her best sellers

Nora O'Leary:

Is her tail comes off and it becomes a maraca and you can play the xylophone with her.

Sonari Glinton:

So it's a little bit artistic.

Nora O'Leary:

It's a lot artistic.

Sonari Glinton:

Nora's no Grinch. She knows and loves toys and she knows this holiday season, there won't be enough of the favorites like Lili Llama to go around.

Nora O'Leary:

We are working on keeping enough stock for our website and for certain retailers. There will not be enough stock for the worldwide demand of Lili Llama.

Sonari Glinton:

How does that make you feel?

Nora O'Leary:

Completely and absolutely frustrated.

Sonari Glinton:

For toy executives like Nora, this has been a year like no other Manhattan Toy Company is a relatively small player in the $95 billion toy industry. They make a range of toys for children under six. Musical, educational, the kind of toys that are supposed to spark imagination. In normal times, it takes 90 days for their toys to go from factory floor in China or Vietnam to American toy stores. Not so this year.

Nora O'Leary:

In the beginning of the year, we knew there was a shipping crisis and we had bet on product probably two plus months earlier than we normally would.

Sonari Glinton:

So help me understand the hurdles that have been placed in your way for this holiday season.

Nora O'Leary:

Well, the first would be material factories were shut down. And in Asia, they just get shut down by region. So they may have two or three cases of active COVID in their province and they'll shut down the factory.

Sonari Glinton:

And if Manhattan Toys clears that hurdle and the toy does get made, the shipment gets sent to a forwarder. Now that's someone who arranges for the container and a place on the ship.

Nora O'Leary:

That was a no-brainer before. You'd just send it and they say, "Okay, this is going to be 7,000." And we say, "Now we'll pay five." Now, they tell us it is going to cost us well, $30,000 to get that container. And there is literally no negotiation on price. And then they might say to us, "Oh gee, yeah, we had it, but we're going to boot you for whatever reason, and you go to the back of the line again."

Sonari Glinton:

The ships are full of containers filled with all kinds of products. And some companies have a lot more pull on these ships than others. But for the most part, they're dealing with less shipping space than ever before. That means companies like Nora's started making really tough choices back in March.

Nora O'Leary:

What are the A items that we want to get on a boat? And those are the ones we are going to say, we're going to pay and we're going to get it there. The B items, they might not make it. And the C items, we're not even going to worry about because we can't.

Sonari Glinton:

So what kind of toys make the cut for the holidays and what toys get left behind?

Nora O'Leary:

I don't want anything in a container that's not going to sell. So our experimental products are things that we're kind of gunning for because we think this would be a cool category to get into. We're not shipping those today. So not only have you developed product that you can't get out, but now you're going to have pay more for that product because you got to store it somewhere.

Sonari Glinton:

The costs keep adding up. They also have their retail partners to think about, both big, think Target, and smaller, more local stores like one we'll hear from later in the show.

Nora O'Leary:

So what's super hard is we commit to others who are selling our product, that we are going to have our product there for you at this time. And that is super important to us as a company because if we can't get the product there, we have completely destroyed our relationships.

Sonari Glinton:

To keep those relationships, they've had to negotiate on timing, pay for more shipping, ask retailers to split the costs of expensive air freight or piggyback on ships used or owned by those big retailers.

Nora O'Leary:

Hey, do you want to put a Santa hat on that ship and bring some toys in? Let's do that. Let's do that. I mean, let's just put a couple of containers on that baby.

Sonari Glinton:

For a small team like Nora's, the never ending problem solving has been a lot to manage.

Nora O'Leary:

You're like, okay, Nora, run a business. I can't get you product, but I'm going to increase your costs tenfold. What are you going to do?

Sonari Glinton:

And now you're gone from 3,000 to 30,000 for a shipping container.

Nora O'Leary:

Yeah. Where are we going to pull that? What's killing me is we have done a great job responding to what our consumer wants, such that our demand is nice and high and strong. Well, none of that is really going to show or flow to the bottom line. It's super hard to disappoint the consumer and it is super hard to disappoint the employees.

Sonari Glinton:

And the impact isn't just short term. The supply chain problems are making Nora and her employees consider what toys they'll make and how they'll make them in the future.

Nora O'Leary:

How big is the product? Should we make our products smaller? We're thinking about it hard today.

Sonari Glinton:

The Llama toy seems like there's a lot of development, heart, and those things put into that, right?

Nora O'Leary:

Yeah. Some of our top sellers are wood and they're beautiful and they're awesome, but they're heavy and they take up a lot of space. Is that how we're going to run our company now? Is that how we're going to decide? Yeah, a little bit.

Sonari Glinton:

And you've clearly had to make that choice, right?

Nora O'Leary:

We did, but we brought Lili in. She's coming.

Sonari Glinton:

So it is a bright sunny day in Los Angeles and right down there is where container after container of toys are slowly arriving. I am standing on Signal Hill, near Long Beach. It's about 20 miles down the coast from Los Angeles in the national airport. And from here, I have got a pretty perfect view of the ports of Los Angeles and Long Beach, the busiest ports in the United States. You can see dozens of cranes taking containers off of ships. Directly in front of me, not that far into the Pacific, there is a cargo ship traffic jam. There least, come on, five, 10, at least 36 ships stacked with containers, colorful kind of like building blocks.

Sonari Glinton:

And I can't help but think how many Lili Llamas are out there, how many toys are caught up in these delays? Now people are often quick to blame a shortage of shipping containers for these problems, but Lars Jensen says it's about much more than that.

Lars Jensen:

There's a shortage at every single node in the supply chain.

Sonari Glinton:

And Lars would know. He's a genuine insider in the shipping world.

Lars Jensen:

I'm the CEO of Vespucci Maritime. I basically have spent the last 20 years and still do figuring out why things are happening in container shipping and what is coming around the corner.

Sonari Glinton:

Lars spent a decade working as an analyst for Maersk, the international container shipping company, before starting his own Copenhagen based consulting and forecasting firm. But before he got into shipping, Lars was, get this, a theoretical physicist, which gives you just a little bit of the sense of how unbelievably complex shipping logistics can be.

Lars Jensen:

It's basically the same thing I do. In my mind, I'm solving puzzles. You have a lot of different puzzle pieces that don't quite fit together and then finding out how do they fit together, so you can get an idea of how do things work.

Sonari Glinton:

Lars is going to take us into what's not working in this currently broken puzzle of a cargo shipping crisis. But before he does, he wants to set one thing straight. There's an important detail that often lost in all the talk of delayed orders and empty store shelves.

Lars Jensen:

There is more cargo being moved now than at any point in history. We are moving even more than what we did before the pandemic.

Sonari Glinton:

More cargo being moved than at any point in history. Why is that? Because in the last two years, our buying habits have changed. Consumers, especially in the US, are buying more products than ever. Lars says that's where all the mess starts. He's going to take us inside to break down, well, the breakdown.

Lars Jensen:

First, you have a massive boom in US consumers that want to buy goods. So the carriers respond by putting in far more ships than normal in order to actually pick up all that cargo. All these ships then arrive into the ports, but a port is a static entity. It cannot magically just create more capacity. That's problem number one. Problem number two then arises the containers get off, but the importers are not picking up their cargo as fast as they used to. He needs a truck. You have a shortage of trucks. And if he does get a truck, he needs a driver as well.

Lars Jensen:

You also have a shortage of drivers. Then I have a truck and a driver, but I need a chassis. You have a screaming shortage of chassis. That was even a problem before the pandemic. If I am in the really lucky situation, then now I finally got a truck and a driver and a chassis, it goes to my warehouse, but the cargo has not arrived in the originally planned sequence. So your warehouse is now jammed up. And if you really are lucky and your warehouse is empty, you have a shortage of labor. There's not enough hands on deck to physically take the cargo out of the containers.

Sonari Glinton:

And on and on we go. So with all the toys out there on the ships or stuck in the ports, or even still at factories in China, does this mean the holidays are canceled?

Lars Jensen:

The answer is no. Are there importers that might risk going bankrupt over this? The answer to that is yes, because there are losers to this game. What you will not hear so much from are the winners of this game, but they also do exist.

Sonari Glinton:

The winners in large part are big companies, but not just because they have enough money to absorb the losses and extra costs. Take a big toy company that imports toys all throughout the year.

Lars Jensen:

Well, they might be shipping thousands, if not tens of thousands, of containers per year. They have much better contractual terms. For some, prices have increased tenfold. For others, prices have only doubled. For some, their cargo is months delayed. For others, it's just a matter of weeks. Container shipping and logistics as a competitive parameter has been catapulted into becoming much more important than it has been in decades.

Sonari Glinton:

Remember Nora talking about the choices she had to make in terms of what to bring over, her A toys, B toys and C toys?

Lars Jensen:

And again, here you see a skewing because if I'm the small toy importer, my portfolio of different toys is not very large. Whereas if I'm the guy that imports 20,000, we're saying fine, we know this is going to be a crunch. So some of the very large bulky toys, let's just leave them over in China. We can sell them next year anyway, and let's focus on the stuff that does not take up so much space.

Sonari Glinton:

Toys that not only take up less space, but also sell for a higher margin. Don't expect to be seeing many big cheap plastic trucks on the shelves this year. But while all companies are struggling to find ways to get their products to retailers in time for the holidays, Lars thinks the reports of empty shelves are a bit overblown.

Lars Jensen:

Can you find some empty shelves for some specific product? Absolutely. Yes. But it does not mean that suddenly we are not getting as many products in as we used to. We are getting more products in.

Sonari Glinton:

As Lars sees it, the reports of empty shelves are part of a bigger story around scarcity and rising prices. A story he says needs a lot more nuance.

Lars Jensen:

Let's say I'm importing cheap fridges. A refrigerator takes up a lot of space and it's not very expensive. So are you going to see massive cost increases on refrigerators? Likely, yes. On the other hand, if I'm moving expensive sports shoes, even though the prices have gone up for container shipping, it is very, very marginal. So saying across the board that because freight rates have gone up, you're going to see price increases, the math just doesn't check out. If you are selling goods in the current market environment, you have everything to gain by fueling the narrative that shelves are going to be empty mean.

Lars Jensen:

It's an obvious opportunity for the sellers to also increase prices, which will drive inflation. And it's going to be very easy to come up with a narrative, it's because of the supply chain.

Sonari Glinton:

So needless to say, there's going to be some disruption in the short term, but what about the long term? Let's start with the skyrocketing demand that's filling all these ships. Has the pandemic changed our buying habits fundamentally? Lars isn't so sure.

Lars Jensen:

The US authorities had this fantastic data source that goes back to 1959, which basically is the entire history of container shipping. And you can see this gradual change over three generations where people gradually allocate more money to services rather than goods.

Sonari Glinton:

That changed dramatically in 2020, thanks to the pandemic. But, Lars says there have been other big disruptive events in the past.

Lars Jensen:

We had the financial crisis, 9/11. We all had multiple wars, multiple massive recessions, none, like an absolutely zero of these events have ever given rise to any permanent change in consumer behavior.

Sonari Glinton:

Based on that information, Lars expects to see us return to normal spending. That's spending more on services than goods when the pandemic is over.

Lars Jensen:

The one thing we cannot predict with any degree of certainty is when will this happen and how quickly will it happen.

Sonari Glinton:

But what about the long term effects of this shipping and supply chain chaos? Some companies will go out of business, but have we learned any significant lessons about how to make the supply chain more resilient?

Lars Jensen:

My response to that will be of course we haven't. All the importers, they will build more buffers into their supply chain. But let's say I'm a toy importer and I build all these buffers in and now the supply chains are back to normal, say two years from now, or somebody's going to take a look at my company and say, what a stupid old guy, let me start a competing toy import business with a much more lean supply chain. So over time, the moment the supply chain start to become normal, you will also see these buffers disappear out of it again.

Lars Jensen:

There is this one about saying, well, when you design a church, you don't design the size for Easter mass. And yeah, sure, you're going to have congestion every once in a while, but that's the most efficient thing to do.

Sonari Glinton:

Efficiency may be important to the design of the supply chain, less so for a toy store. When Keewa Nurullah set up her shop Kiddo on Chicago South Side, she was thinking of joy, light and color.

Keewa Nurullah:

Okay. So walking up right now, we actually have a big balloon display that you can see through the window. It's like candy for children. They see these balloons in the window and they know it's for them and they want to come inside and we often see little children's faces pressed up against the windows, just trying to look in and distract their parents from going straight towards wherever they wanted to go.

Sonari Glinton:

Now, once they're inside, they might notice it's not your average toy store.

Keewa Nurullah:

There's a little something for everyone. Different kids, faces of different cultures, different languages. It gives you a taste of what we do, which is acknowledge everyone, provide a mirror for everyone and share culture with everyone.

Sonari Glinton:

Now going to Kiddo is an experience. They hold events, music classes, and during the pandemic, the store became an online hub of ideas and support for parents of young children. For Keewa, that community matters. It helped keep her afloat during the pandemic and weather the current supply chain problems.

Keewa Nurullah:

Because we're a family business, because we're a black-owned business because we're a mom-owned business, I think the level of care in terms of our place in the community is higher. Our customer cares about us.

Sonari Glinton:

In Keewa's family, that connection between the shop owner and the community goes back at least four generations. Her great-grandfather had a tailor shop on Black Wall Street in Tulsa, Oklahoma. This was an oasis of black business success. But in 1921, it was destroyed in what is considered one of the worst incidents of racial violence in American history. Keewa's great-grandfather resettled and set up shop on the South Side of Chicago.

Keewa Nurullah:

And so part of that just feels like it's in my blood, even though we started online and were online for two years, I think I always knew that we would have to have a physical shop because that's just how a small business stakes its claim in a community. Do I care about my community? Do I want to see my community be the strongest that it can be? Then I have to be in my community. Like they have to see my face. You have to come in my business and know that I care about your daughter or your niece or your great aunt.

Sonari Glinton:

There's also the power of a kid walking into your physical toy shop that's been all done up for the holidays.

Keewa Nurullah:

We see toddlers come into the Kiddo shop for the first time and literally gasp. I mean, especially the holiday season, there's that magic of an in-person purchase informed by a kid's reaction that cannot happen over a computer. It never will.

Sonari Glinton:

In the spring, Keewa began hearing from her toy reps that supply chain problems were going to impact her biggest season. She knew she had to stock up early, but that presented a problem in and of itself, cashflow.

Keewa Nurullah:

I definitely had to take a loan out and just make these massive orders of getting as much as I can of the things that I needed, which as a small business makes you feel really vulnerable to just have all your cash out, just hoping that all of these people will buy around the holidays. But it was kind of like go hard or go home because you knew these toys wouldn't be coming back in.

Sonari Glinton:

Her early planning paid off. She got all kinds of stock, but with no big warehouse to store it in, she's playing Tetris with the stockroom and her shop floor.

Keewa Nurullah:

We have this big thing that we kind of call the Fort and we've kind of turned it into a little mini stock room on the toy store floor. And as I move to the rear of the store ...

Sonari Glinton:

And into the store room.

Keewa Nurullah:

... All you see is cardboard back here. There are just boxes on boxes on boxes. We've got things written on the side so that we know what it actually is. And then as we move on in holiday season, we'll shuffle and shuffle and shuffle some more.

Sonari Glinton:

Keewa ha never had this must stock ever.

Keewa Nurullah:

I'm just like snatching as much as I can because my worst nightmare would be for it to be the weeks before Christmas and to have an empty store for the people who come in as foot traffic off the street.

Sonari Glinton:

Planning for her biggest quarter has been a challenge this year, but being a smaller local business has also worked to her benefit. Keewa has not beholden to big contracts and she has as more freedom.

Keewa Nurullah:

I really tried to take advantage of the fact that we are already a curated space. I make the choices for my shop and I stand on them and people value my integrity and they like my taste. We can kind of make these micro decisions or micro purchases to fill in gaps that bigger toy stores or big box stores can't do.

Sonari Glinton:

Bigger stores started their holiday messaging early, even before Halloween, encouraging their customers to order early to avoid being let down by supply chain delays. Keewa let her customers know she's had supply chain problems as well, but as a local shop, it's a bit different for her.

Keewa Nurullah:

When we're transparent and we say, "Hey, this is what's going on. Things are shipping out a little late," people understand because we're human beings and that might not be the same for the big box brands that people want their thing when they want it and they're looking at the tracking and you said at this. People are much more understanding that we're doing our best and that nothing's perfect,

Sonari Glinton):

But Keewa thinks that small independent shops have an important role to play. If they close ...

Keewa Nurullah:

So much is lost. I mean, I think we lose options. I think we lose quality. It's nothing for one of these it companies to just drop a product or drop a style. There are five dolls and the black doll is selling the least, so let's take it off. A smaller toy company might be more intentional about keeping that doll around not for the bottom line, but for the purpose, for the effect that this doll will have on the kids who are looking for that particular doll. We always have to keep that connection to what kids need, because if they're not getting what they need, then I think some magic is just lost in the world, in general.

Sonari Glinton:

The shipping issues this year have changed how Keewa does her business and shifted her perspective in other ways.

Keewa Nurullah:

I just have been feeling so much more not only for the people who design and put the toy together, but to the people who actually manufacture it overseas more than I did before. It's a team effort. I couldn't do what I do without the person on the opposite end who is literally putting the bolts in the wheel and gluing the body, too. It's a team effort. I do feel like with everyone trying to survive, that we have been handling the holiday season with more care, I guess, just to ensure that we all make it through.

Sonari Glinton:

And when you really think about it, isn't that what the holidays are supposed to be about anyway? While I'm back here at beautiful Signal Hill, I can see yet another ship getting unloaded and actually I can see a cruise ship going out to see. It's hard not to think what's inside that cargo ship, where it came from, where is it going and if it's going to make it on time. The past couple of years has given us a chance to reconsider how we've always done things and what we might want to a change. And once this cargo ship traffic jam clears up, are we going to keep buying stuff with the same exuberance as when we were stuck in lockdown during the pandemic?

Sonari Glinton:

Will we see a resurgence of shopkeepers anchoring their communities? And what about the small toy companies like Nora's that are trying to survive the $30,000 shipping container costs?

Nora O'Leary:

Where are we going to pull that, like rabbit out of your hat kind of stuff?

Sonari Glinton:

That could be a new toy.

Nora O'Leary:

If you can get it here.

Sonari Glinton:

I'm Sonari Glinton. On the next episode of Now What's Next, an original podcast from Morgan Stanley, the great kettlebell shortage of 2020. What did waiting for weights teach us about the pros and cons of making goods a long way from home? From the top of Signal Hill, I'm Sonari Glinton. Thank you so much for listening.

How shipping chaos is wreaking havoc on the busiest buying season, and what some toymakers and toy stores are doing to save the holidays.

On this episode of our supply chain season, we meet Nora O’Leary, President of Manhattan Toy, who’s had to make some tough decisions this year. Lars Jensen, CEO of Vespucci Maritime, is an expert in the shipping world who breaks down exactly what is breaking down, and why. And we meet Keewa Nurullah, a toy store owner in Chicago, who believes supply chain challenges are highlighting the importance of local, independent shops.

 

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