Want Safer Toys? It Will Cost You
The recent flurry of toy recalls because of lead-paint contamination and other safety issues will ultimately cost worried parents more than just lost peace of mind.
It could also cost them in the check-out line.
Since June -- when RC2 recalled 1.5 million Thomas & Friends wooden trains when it was discovered they may have contained excessive amounts of lead paint -- many toy makers have passed along the costs of increased random factory inspections and extra layers of product testing in an effort to beat back industrial malpractice.
With this year's toy prices already set, analysts said the additional safety measures will show up on price tags next year, making new toys more expensive.
"All those costs do add up ... Anything that's a new introduction, you can make that price point $19.99 rather than $14.99," BMO Capital Markets analyst Gerrick Johnson said.
"In the future, I definitely think there will be some additional costs of doing business and getting products to market."
More than 20 million toys made in China have been recalled over the last three months, mostly due to the use of lead paint, which is toxic and can pose serious health risks, including brain damage, in children.
With more than 80 percent of toys on U.S. shelves marked "made in China," toy makers have been taking a closer look at their overseas operations.
Prior to the wave of recalls, Oakbrook, Illinois-based RC2 Corp typically conducted random inspections of its Chinese company-owned factories twice a year and tested certain toys on a yearly or quarterly basis, Chief Executive Curt Stoetling said in an interview.
The company now tests every batch of toys multiple times and randomly inspects its factories every quarter, Stoetling said, adding that the new measures mean higher costs.
Montreal-based Mega Brands, meanwhile, is inspecting its Chinese factories every two weeks, as opposed to twice a year, spokesman Harold Chizick said.
Mega Brands has been grappling with the effects of an extensive recall of its Magnetix building sets. One child died and 27 others suffered internal injuries after swallowing some of the small magnets in the toys.
"We have almost 200 Mega people that go around to factories and test," Chizick said. "From a frequency standpoint, the cost is going to go up."
David Leibowitz, the managing director at Burnham Securities, said these new costs will undoubtedly lead to more expensive toys.
"It would be difficult to imagine that all of the incremental costs now being factored in can be absorbed directly either by the manufacturer or the retailer," Leibowitz said. "Starting next year, specific items might carry a higher price than originally anticipated."
Arcadia Investment analyst John Taylor said increased monitoring of toy safety could eventually result in a "mid-single-digit" price increase for consumers.
"Toy companies have already passed along cost increases that have occurred naturally due to supply and demand," Taylor said. "I'd expect the costs of monitoring and quality control to have a similar effect."