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A shortage of supplies of the Let's Rock Elmo could result in a lot of unhappy children on Chiristmas Day.


Grappling with an uncertain economy, many retailers have scaled back their inventory levels for the holiday season, giving them less flexibility than in the past to order more stock if an item starts to sell quickly.

The trend is particularly pronounced in the toy sector, where retailers have shifted their procurement practices so that the merchants will have little wiggle room if a toy emerges as a must-have item.

North American toy chains, to a large extent, have stopped importing products directly from overseas. Instead, they have put the onus on their suppliers to bring in extra merchandise and store it in warehouses until the chain may want to order it in response to heightened demand.

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"These are the dynamics behind why a lot of toys are going to run out before Christmas, especially the hot ones," Gerrick Johnson, toy analyst at BMO Nesbitt Burns Inc., said in an interview.

"The retailers would rather have the manufacturers take the risk. In good economic times, retailers don't mind taking the risk because they're pretty confident they're going to sell everything. We're in such an uncertain situation, no one wants to carry that inventory risk."

The changing dynamics could have major implications for retailers – and shoppers – if widespread shortages of hit toys sweep the marketplace in the holiday season. Already, the toy sector, which generates about $22-billion (U.S.) of sales in the United States, is rapidly losing business to iPhone apps and other technology gadgets. This year, industry sales will be flat at best compared with last year, according to BMO's estimates.

Still, retailers are trying to avoid the problem they faced during last year's holiday season: While toy sales took off in November, they fizzled in December, leaving merchants with excess products after the holidays that they were forced to sell at steep markdowns, slashing profits.

So far in 2011, no runaway hit toy has emerged, although some products are selling strongly, industry insiders said. The company that made the popular Zhu Zhu Pets now is doing well with the Xia Xia Hermit Crabs, Mr. Johnson said. Mattel is enjoying a Barbie doll renaissance, while Hasbro is faring well with the spinning top game Beyblades, he said. A robust player in the sector this season is the LeapPad Explorer, which is essentially an iPad for children.

Behind the scenes, a transformation is taking place in the way toys are being shipped. In the past, retailers took possession of containers of toys overseas – where most are made – and shipped them to North America, gaining control over inventory to respond to demand. For their trouble, merchants got a 10- to 15-per-cent discount for the product purchases from suppliers.

This year, retailers are forgoing that discount and instead having producers – such as U.S.-based Hasbro and Mattel and, in Canada, Spin Master – bring merchandise to North America and assume the cost of storing it.

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"It's a major shift," said Harold Chizick, a vice-president at Spin Master. "It's happening with all products. It's a trend the whole industry is seeing. The retailer mentality has shifted to looking for less risk. But the implications are bigger than just the risk-reward ... A lot of how this industry works is there's a period in November when everybody chases really hot products. By shifting [to a new model]it makes it almost impossible to react to early reads [of popular items]"

The changes put more clout into suppliers' hands for last-minute sales. Generally, for merchants, it will be "basically first come, first served," Mr. Chizick said. "There's less of a chance they'll get exactly what they want."

There's a lot at stake for toy merchants. While overall dollar sales are expected to be about flat, unit (volume) sales will decline by 5 per cent, Mr. Johnson estimated. Price inflation of 5 per cent will help bolster final sales, he said on a media conference call. "That's about as weak as it gets for the toy category."

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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