Toycos reinvent to cope with COVID-19

IP owners and toymakers like Exploding Kittens, Kellytoy and Zuru are pivoting their manufacturing and shipping processes to overcome delays caused by the pandemic.
June 19, 2020

In February, after hearing rumblings of problems in China, California game maker Exploding Kittens took a closer look at its manufacturing efforts. China had locked down due to ongoing spread of a novel coronavirus, and the manufacturer wanted to look for alternative locations to produce the game. It turned its attention to Poland, securing a facility for additional production that same month.

Because there are only a handful of manufacturing partners in the world that can handle Exploding Kittens’ capacity requirements at the company’s ideal price point, the decision to move to Poland was a simple one, says the game maker’s CEO Elan Lee.

But it soon became clear that COVID-19 was affecting the entire world, and Exploding Kittens’ decision to produce its games in Europe wasn’t enough to avoid significant disruptions. The virus began moving through China in late 2019, before spreading globally throughout January and February. Poland announced a state of emergency and closed its borders in mid-March, around the same time the World Health Organization declared the outbreak a pandemic. And at press time, the country has reported more than 30,000 confirmed cases. (More than 82,000 and 1.3 million cases have been reported in China and the US, respectively.)

Businesses closed. Events were cancelled. And all around the world, the manufacturing and shipping procedures the consumer products industry relies on screeched to a halt. More than 87 billion parcels were moved in 2018, according to the Pitney Bowes Parcel Shipping Index. And as people increasingly turn to online shopping, the number of goods shipped is expected to reach 200 billion parcels by 2025. More than a few of those boxes contain kids products, with US toy sales alone generating US$20.9 billion in revenue in 2019.

exploding kittens

Exploding Kittens expanded its production to Poland and has plans to further diversify manufacturing efforts.

But even as manufacturing and shipping routes were disrupted, families in lockdown triggered a boom for some toycos. Educational toys, arts and crafts, and board and card games all saw upticks in the early days of the global stay-at-home orders. By the end of March, total toy sales had grown by 25% in the US, according to The NPD Group, with games and puzzles specifically seeing an increase of 228%. Kids Insight, meanwhile, found that the popularity of board games among kids doubled in April, compared to the previous 12 months. But as demand grew, companies were increasingly faced with a conundrum: How do you get these goods to the people who want them?

The Exploding Kittens team realized that to keep up with the quarantine-time orders (Q1 2020 sales were around three times what the company normally reports at this time of year), it would need to collaborate with multiple manufacturing partners in different territories to guarantee its ability to quickly and effectively react to disruptions.

“We don’t want to say this game is manufactured in China or Poland,” says Lee. “Instead, we want this game manufactured in as many places as we can possibly manage, so that when emergencies arise— as they have lately, and inevitably will continue to do over the next few months—we will always have other methods of producing the game. We’re focusing on removing any single point of failure, because everything in the world is so unreliable right now.”

The game maker plans to expand its production into additional regions that fit the bill when it comes to capacity and price range (Mexico was mentioned as a possibility). Price is especially important; the company worries that something which may have cost US$1 last year might cost as much as US$8 in a post-COVID world. Exploding Kittens is also over-ordering from its manufacturers, because the majority of orders have seen delays. “As long as 10% of it comes through, we will have enough.”

The same strategy is being applied to Exploding Kittens’ shipping efforts. The company is working with as many shipping partners as possible to distribute its wares to customers when ordered directly from its website. This is necessary, Lee says, because each region is dealing with a different timeline when it comes to quarantines and shutdowns—and the circumstances in each country can change within a few hours.

“As different regions around the world go offline and then come back, the ports are getting completely clogged up. Customs and safety inspections suddenly have seemingly endless lines and almost no staff to deal with them,” he says. “It’s been our entire team scrambling every single day to find solutions.”

This applied to everything from warehouses closing down without warning, to Amazon abruptly changing its shipping policies, announcing in March that it would prioritize sending essential items to fulfillment centers. To adjust to Amazon’s new normal, Exploding Kittens has started using dropshipping —shipping purchases made on Amazon directly to consumers through third-party logistics partners, rather than through Amazon’s fulfillment and distribution network—to keep things moving.

COVID CP 3 Kelly Toys Squishmallows

Johnathan Kelly, CEO of Kellytoy Worldwide, predicts toymakers will respond to the pandemic with further consolidation.

“This is a set of circumstances that none of us ever thought we’d live through,” says Jonathan Kelly, CEO of California-based Kellytoy Worldwide, the maker of Squishmallows. “The second quarter will be the toughest quarter of 2020, but the second quarter usually isn’t the strongest of the year. Unfortunately, the longer this lasts, the more casualties there will be.”

Kelly anticipates the majority of toymakers and retailers will respond to the pandemic with further consolidation. (In fact, Florida’s Jazwares acquired a majority stake in Kellytoys in April.) Kelly says opportunities may be found in licensing, acquisitions and the employees being laid off by big toycos. Washington-based Funko furloughed what it called a “significant portion” of its employees on April 5 and implemented a salary reduction across the executive team and members of upper-level management, for example. And Florida toymaker Basic Fun! laid off approximately 10% of its global workforce in early March.

No toyco is too big to be affected by the pandemic. Following lower-than-planned production levels in the first quarter, Hasbro withdrew its 2020 outlook and is bracing for what it anticipates will be a “challenging” second quarter as half of its manufacturing is done in China. Mattel, meanwhile, saw gross sales decline for nearly all of its toy categories in Q1 2020.

And while all eyes might be on the figures coming out of toymakers’ Q2 financial reports, Zuru is looking ahead to the holiday season.

The New Zealand company’s products are manufactured in China, and Zuru worked closely with factories there to bring production back to full capacity at the end of March. The company installed isolation booths that protect line workers in plastic shells, and lunches were staggered to make sure no large groups of people eat together or gather in break rooms. Social distancing is being enforced at all times, and the factories are sanitized two or three times each day.

Another obstacle in reopening factories was a lack of public transportation for workers. Zuru collaborated with local organizations, which worked with governmental bodies to ensure all of its employees had access to bus transportation to and from work. The toymaker considers these measures an investment against the potential loss of revenue caused by shutdowns, as manufacturers that fail to follow pandemic-specific health and safety regulations—like providing hand sanitizer and proper ventilation—are quickly being shut down by the Chinese government.

With employees back at work and the toyco’s manufacturing once again operating at full capacity, Zuru is now turning its attention to Q4 plans.

“This Christmas is going to be tighter for families, so we are making some changes in terms of our product range,” says Renee Lee, Zuru’s global marketing director.

The toymaker planned to bow a big-ticket item (around US$80) for this holiday season, but will now wait to launch it in Q4 2021 instead. Zuru is also in the process of reassessing how many SKUs it will put into the market in the fourth quarter, because issues around retail shelf space and rising shipping costs (the company reports air freight pricing has quadrupled in recent weeks) will affect how many products it plans to push.

Zuru’s Lee explains that the pandemic is putting pressure on toymakers because decisions around end-of-year strategy need to be made now, even though so much could change by the time the holiday season arrives. These decisions are further complicated by the fact that the manufacturing, shipping and retail industries are so interconnected, she says. “Around 80% of the world’s manufacturing shut down for an extended period, and that has an impact on everything.”

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