Why there are no new toys for Christmas

December 5, 2012: 9:02 AM ET

Toy sales are expected to have their worst year in 30 years. Did the video game kill toy innovation forever?

Furby

Furby: Hot or Not?

FORTUNE – This holiday, the toy aisle will be a lot quieter. Again. It seems like we haven't had a must-have holiday toy since the Furby hit stores in 1998. The plush owl-like creatures spawned a buying frenzy, drawing more than 40 million sales during its first three years.

Furby is still selling relatively well today; it's not as if kids aren't interested in toys anymore. It's that toys are simply boring, analysts say.

The shaky economy following the Great Recession has thwarted innovations in toy making. Instead, top toymakers have banked on what's safe, clutching onto classics that were hits back when today's grown-ups were kids. Think of the 1960s classic Easy Bake Oven by Hasbro (HAS), which re-launched in 2007; My Little Pony, which debuted in 1983, re-launched twice in 2003 and 2010. And remember Mr. Potato Head? The plastic mix-and-match potato was big in the 1950s and continues to sell in the millions today.

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The strategy has kept toymakers afloat, but it hasn't helped push U.S. retail toy sales much higher. This year, sales are expected to have their worst year in more than 30 years, says Gerrick Johnson, toy analyst with BMO Capital Markets. This has less to do with an uncertain economy than a dry spell of ideas in the toy industry. Sales were strong during the Great Recession, as parents replaced big indulgences like trips to Disney (DIS) with smaller purchases like toys.

That's one reason why Zhu Zhu pets – robotic hamsters by Cepia that sell for less than $10 each – was such a holiday toy fad in 2009. At the moment, the closest thing to a blockbuster is Teenage Mutant Ninja Turtles by Playmates Inc., a team of crime-fighting reptiles that first gained popularity in the 1980s and again in the 1990s. And Doc McStuffins, born out of an animated pre-school television series on the Disney Junior channel. But their hype hasn't come close to the frenzy of Cabbage Patch Doll generated in the early 1980s or Tickle Me Elmo in the late 1990s.

Since last year, U.S. retail toy sales have slipped. They generated $21.2 billion in 2011, down 2% from $21.7 billion the previous year, according to market research firm NPD Group. The decline has continued, with sales over the summer down 6%, compared with a year earlier, Johnson says. He forecasts sales during the fourth quarter, amid the height of the holiday shopping season, will be 2% lower. Which means sales for 2012 are forecast to be down 3.5%.

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"It's probably the worst time for toymakers right now," he says.

To be sure, the industry has had to compete with computer games, hand-held games and the like. This has been going on for the past decade, though. It doesn't explain the latest slump, Johnson says.

Take the Pokemon craze in the mid-1990s. It started off as a pair of interlinkable Game Boy role-playing videogames, which spun into everything from trading cards to plush toys and books.

It takes toymakers between 18 months to two years to bring a product to store shelves. As the economy improves, so will the market for toys next year, Johnson predicts. It will be worth waiting to see what they will come up with next.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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