Retailers Keep Toy Makers in Line

Here's where we get to see whether consumers are all talk and no action, or if they really are committed to buying safer toys for their kids.

In the wake of toy recalls last year that amounted to an ugly scar on the industry, many consumers railed that manufacturers were profiting at the expense of children's health. While it seemed to mix a bit of xenophobia and nationalism with a smidgen of populism, the charge was that toy makers had farmed out safety to overseas manufacturers -- namely those in China -- to lower their own costs.

"Bring the jobs home!" they cried, "and we'll buy your toys."

The withholding of their dollars was certainly felt by the toy makers, most of whom were left reeling from falling sales. Mattel (NYSE: MAT) reported a 2% drop in revenue. JAKKS Pacific (Nasdaq: JAKK) was sent to the corner on its earnings miss. And RC2's (Nasdaq: RCRC) profits were hurt by a 17% decline in sales. Only Hasbro (NYSE: HAS), the one toy maker not subject to lead-based recalls, had results that weren't trivial.

Toy sales in general fell 2% to $22.1 billion in 2007, according to the industry analysts at NPD Group, while those targeted to infants and toddlers -- the group most affected by the recalls -- dropped 5%.

But toy makers aren't exactly abandoning their Chinese counterparts. With 80% of all U.S.-bound toys made in China, the cost differential would probably be too great to remain profitable. So the stores that sell toys are using their not-so-invisible hand to move safety to the fore.

The latest to ratchet up safety guidelines is Wal-Mart (NYSE: WMT), the world's biggest toy seller. Like Target (NYSE: TGT) and Toys "R" Us, which are phasing out certain plastics used in toys and kids' products, the giant discounter is issuing safety directives to suppliers. Moreover, it is "encouraging" toy makers to institute programs that allow toys to be traced back to the factory that made them. Disney (NYSE: DIS) was one of a number of retailers last year that said it would start testing toys on its own.

Like an emperor handing down a fiat, the toy makers will fall in line. If you want to sell toys in Wal-Mart, you'd better heed its call.

MGA Entertainment, which makes the Bratz dolls and says it supports Wal-Mart's move, also says it will raise production costs 5% to 7%, an expense that the consumer will ultimately pay.

Now we'll see just how supportive consumers are. Will they walk the more expensive walk, or were they just toying with the idea of paying for safer toys?

Catch up on the recall action from 2007:

• Mattel recalled toys not once, not twice, but three times last year.
• With this history, I wondered whether we could ever believe Mattel again.
• After apologizing to customers for its tainted goods, RC2 distributed more tainted goods as presents. Oops!