- The Washington Times - Wednesday, November 10, 2004

NEW YORK - With the start of holiday shopping just weeks away, toy companies and other purveyors of seasonal merchandise are living through a nightmare as merchandise remains stranded aboard cargo ships amid the gridlock at two West Coast ports.

“This is terrible. There are a lot of order cancellations” from retailers tired of waiting for their deliveries, said Isaac Larian, president and chief executive officer of MGA Entertainment Inc., maker of the popular Bratz dolls.

The backlog — the result of an ever-growing flood of cargo from Asia into the twin ports of Los Angeles and Long Beach — means that some toys and other merchandise will be in short supply this season, even as manufacturers and retailers take steps to ease the problem.

Mr. Larian said some retailers have canceled orders with MGA Entertainment in the past month because his company missed delivery deadlines, and he predicted MGA Entertainment’s fourth-quarter results will suffer.

MGA Entertainment and other companies including Spin Master Ltd. are resorting to strategies such as flying in hot products from Asia, but that won’t make up for all the merchandise tied up at the docks.

So some retailers are just giving up.

“If stores can’t get it in the right place and at the right time, they would rather do without,” said John Taylor, toy analyst at Arcadia Investment Corp., based in Portland, Ore.

The twin ports have become the nation’s main entry point for cargo containers. About 43 percent of all 20-foot containers from the Far East arrives at these ports, said Peter H. Powell, chairman of the National Customs Brokers and Forwarders Association of America, which oversees activities at the nation’s ports. He estimates that this season’s cargo volume to the West Coast ports has increased about 10 percent to 13 percent from a year ago — when congestion was already a problem.

It’s not just imported goods that are causing the pileup. With U.S. exports increasing — they reached a record $97.5 billion in September, the Commerce Department reported yesterday — there’s more outbound cargo for the ports to handle.

More dockworkers are being hired, allowing the ports to become 24-hour operations, but there’s still a labor shortage, and some ships have to wait at least a week to be unloaded. Mr. Powell said the increased work force will help, but it’s a temporary solution that doesn’t take into account future growth in imports.

The congestion affects companies across the economy, but the toy business is taking a particular hard blow because 80 percent of its products sold in the United States are made in Asia. And holiday sales account for up to 60 percent of toy makers’ annual sales.

Because the problem is unlikely to be resolved anytime soon, retailers might need to consider other long-term options besides the Los Angeles-area ports. Alternatives include ordering goods earlier next year or rerouting cargo to other ports.

They also have the option of flying in merchandise, but Mr. Larian noted that airlifting the season’s most popular toys from Hong Kong and China wipes away 10 percent to 20 percent of the products’ profit margins.

Charlie Woo, chief executive officer of Megatoys Inc. — a Los Angeles-based toy company that makes baby dolls, dollhouses and radio-controlled cars — is in a similar predicament, as the backlog of his merchandise has worsened in the past few days. About 20 percent of the company’s holiday merchandise is either on the ships or sitting on the docks.

“I have been talking to [stores],” he said, hoping to forestall cancellations, but he fears a 5 percent to 10 percent drop in holiday sales this year.

Companies need to “be thinking now” about long-term solutions, said Ken Walker, principal at Kurt Salmon Associates, a retail consulting company, who is working with clients on ways to solve the problem.

But every alternative comes with risks. For example, ordering merchandise earlier adds to inventory costs.

And if companies decide to reroute their products to eastern ports such as New Orleans, New York and Norfolk, they have to add seven to 10 days to their timetable, Mr. Powell said. Companies also need to find ports that will be big enough for the larger fleet of vessels, he said.

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