Some lights at the end of tunnel

While predatory pricing practices, changing consumer shopping habits and economic softness have taken – and are taking – their toll on the toy industry, there are a beam or two of lights at the end of the tunnel.

For one, a leveling off of the current decline in the compounded annual growth rate (CAGR) among kids of toy-playing age is likely — although it probably will not be until after 2007 that we see the benefits.

Over the next five years (2004-2008) the total U.S. population under age 15 is expected to decline at a CAGR of 0.04%, with the under 5 age group, the 5- to 9-year old group, and the 10- to 14-year old group CAGRs measuring 0.75 percent, 0.14 percent and -0.94 percent, respectively.

Based on these estimates the population under 15 will decline until 2007 and not reach 2004 levels again until 2009. Over the long run (2004-2020), however, the trend improves, with the total U.S. population under age 15 expected to grow 0.55 percent.

The categories of under age 5, prime toy-playing time; ages 5 to 9, still within toy-playing range; and 10 to 14-year olds are expected to grow at a CAGR of 0.87 percent, 0.70 percent, and 0.10 percent, respectively.

As a developed nation, the rate of growth in the U.S. population has slowed considerably over the last several decades. In the 1990s, for example, the compounded annual growth rate of the U.S. population was 1.2 percent. This was down from a CAGR of 1.8 percent in the 1950s, which, excluding the decade of 1900-1910, was the peak growth period in the 20th Century.

Additionally, absolute number of births in the United States has declined each year from 2000 to 2002. The CAGR for the period 2000-2002 was 0.46 percent, compared with a 0.58 percent CAGR during the period 1980-2000. A contributor to this trend is the fact that women are waiting longer to have their first baby. The average age of a woman at the time she has her first child in 2002 was 25.1 years, up from 21.4 in 1972.

Considering that a woman's childbearing years are usually between the ages of 15-44, women have a smaller window in which to have additional children. On the other hand, if the woman has a baby later in life, the family will likely have more disposable income to spend on the child – one of the few upsides in the current toy market!

There are some other trends that may contribute positively to the outlook of the toy industry. First, the number of grandparents continues to grow and so does their life expectancy. And according to NPD Funworld, grandparents spent over $3.3 billion on toys in 2003, or about 16 percent of all toy purchases.

Secondly, both the number of dual-income families and the number divorces have increased over the last several years. These trends should help fuel growth in the industry, as parents make more toy purchases to compensate for decreased time spent with their kids.

Although these factors will positively affect the outlook for traditional toys, we do not believe that they will fully offset the influence of a continued decline in absolute births in the U.S.