Less will cost more buying toys

NEW YORK — Next holiday, that toy that was supposed to talk for a minute will talk for 40 seconds, and that portable electronic quiz game will ask fewer questions.

The nation's toy makers — faced with soaring energy and raw material prices and rising labor costs in China — are tweaking their new product lines and scaling back their offerings.

Parents will have to do more work, too — they'll be spending more time downloading content online into high-tech toys as companies such as iToys Inc. focus on creating online material instead of using a bigger, more costly memory chip inside a toy.

Despite those changes, consumers could face a 5 percent to 10 percent price increase on many toys later this year, according to Eric Johnson, professor of operations management at Dartmouth's Tuck School of Business. That ends a decade of deflation at a time the U.S. economy may be heading into a recession.

"You are going to see more $7.99 toys at the bottom instead of $2.99," said Michael Greenberg, a toy industry consultant.

The topic is expected to be a hot issue at the annual trade expo American International Toy Fair, which starts Sunday.

Kathleen Waugh, a spokeswoman at Toys "R" Us, the nation's second-largest toy seller behind Wal-Mart Stores Inc., acknowledged that consumers will see price increases in single-digit percentages across the board starting this summer.

Melissa O'Brien, a Wal-Mart spokeswoman, declined to comment specifically on price increases, but said that the retailer will work with suppliers to maintain affordable prices.

The falling U.S. dollar against the Chinese yuan, higher energy costs and a new business code in China are forcing Chinese factories to raise prices for exports. The U.S. toy industry, which imports about 80 percent of its products from there, is among the hardest hit. Toys are mostly made of plastic, and are now under increased regulatory scrutiny after last year's highly publicized recalls due to lead and other hazards.

Still, the average toy price, about $7, remains relatively cheap because the bulk of toys sold involve card games and miniature cars — impulse purchases that can be picked up at the supermarket. And makers argue that toys still should be a good value since prices have been falling for years — down 4.7 percent last year from the previous year, according to the Consumer Price Index. But any price hikes could further squeeze consumers, who already are paying more for food and gasoline, or manufacturers, who can absorb only so much without hurting profit margins.

"This is not a good thing for consumers," said Sean McGowan, a Needham & Co. analyst. "The deflation days may be over."

McGowan expects toy sales this year at best will be unchanged from a year ago, after a weak holiday performance. U.S. toy sales fell 5 percent during the October-December period, while business for the entire year fell 2 percent to $22.1 billion, compared with 2006, according to a report released by NPD Group Inc. on Tuesday.

Analysts say that increased safety controls, which some experts feared would drive up prices, are the least of the industry's problems. Instead, they blame soaring wages, which have increased 20 percent in certain coastal areas in China over the last two years because of labor shortages. A new Chinese workers' rights law enacted in January pushes more costs onto employers with such mandates as severance pay.

Then there are the surging costs of raw materials. Plastic, a key component of toys, has risen by up to 25 percent industrywide over the past two years because of higher petroleum prices, Dartmouth's Johnson said. Copper has skyrocketed 17 percent this year. Another big factor is the declining U.S. dollar against the yuan, which makes buying Chinese goods more expensive.

Across the board, toy companies are scrutinizing their lines, even eliminating some perennials if price increases are not justified. Toy companies are adding accessories to action figure dolls and other products to justify price increases.

Companies also are turning to corn-based plastic in their packaging and products to cut down on costs and appease a growing number of environmental groups concerned about the health risks of polyvinyl chloride, or PVC, a plastic believed to be a carcinogen.

Isaac Larian, president and CEO of MGA Entertainment Inc., the maker of Bratz dolls and Little Tikes, said that he's cutting the number of toys for his holiday collection to 1,200 from 1,500. He estimates that Bratz dolls, priced at $20, will retail for $22, while a $55 Little Tikes toy car, which relies heavily on plastic, would see up to a 15 percent price increase at stores.

Neil Friedman, president of Mattel Inc.'s Mattel brands division, wouldn't comment on specific price increases, but said that the company was reworking some products and eliminating others that had low sales volumes.

The world's largest toy maker told analysts it was raising its wholesale prices for fall 2008 products by mid- to high single-digit percentages. Rival Hasbro Inc. announced Monday that it plans price increases to offset costs that have risen 14 percent to 15 percent.

Alfred J. Verrecchia, Hasbro's chief executive, said that as long as the company remains innovative, it won't have a problem.