Scary Picture: Flix Candy Is Caught In A Horrible Scenario

Flix Candy is caught in a perfect storm of bad externalities that has given CEO Debbie Diamond few choices but to ride out current circumstances and try to plan products for the licensed-candy manufacturer for Halloween season—in 2021.

The Niles, Illinois-based maker of novelty candy products — mostly those tied to big kids’-movie releases — has been battered by the pandemic-related shutdown of the movie industry, a related swoon in sales, huge new U.S. tariffs on its substantial imports from China, and other resulting strains on its global supply chain. With a product lineup of pop-culture-dependent items such as Trolls Lollipop Rings, Frozen II Gummies and Games, and Scooby Doo Pop-up Lollipops, Flix has seen its top line absolutely ravaged by the idling of the movie business and its bottom line seriously eroded by additional 25-percent tariffs, with no room to raise its own prices.

“We’re not a huge operation – we’re a family business” with about 25 employees in the United States, Diamond told Chief Executive on a day she also was to be tested personally for Covid-19; she was negative. “Between Covid and the tariffs that started in September 2018, there has been a lot of soul-searching about how we’re going to get through this.

“The only big thing in our favor is that we’re not highly leveraged with banks,” Diamond said. “We’re financing ourselves to get through this hard time, with our own, personal money. Otherwise, we probably would be out of business.”

In fact, their dire situation has left her with little to do other than plan optimistically for a mid-term horizon they can be confident won’t be overshadowed by a persistent pandemic, which in Diamond’s view is Halloween one year hence.

Just nine months ago, things looked so much brighter for Flix Candy. Sid Diamond had founded Imaginings 3 in 1969 around the idea of commodity toys such as “yo-yos, rack toys, little dolls and Army men,” as his daughter put it. Licensed candies became a big part of the business, and he established the Flix name in 1994. Debbie and her sister, Michelle Diamond, began helping Dad as youngsters and joined the company as adults. Debbie is a certified public accountant and was Flix’s chief financial officer for a decade; Michelle is vice president of operations. A granddaughter of Sid’s also has joined the company.

Flix boomed as Hollywood kept churning out more blockbuster movies with cartoon characters aimed at kids, and the company was able to source most manufacturing in low-cost factories in China where it partnered with owners willing to understand and meet Flix’s specifications for sometimes-complicated products that are hybrids of toys and candy. Many are akin to old-fashioned Pez candy dispensers that boomers grew up with.

Flix’s current woes indeed began with President Trump’s 2018 imposition of 10-percent tariffs on “Confectionary List 3” candies such as its products, which the administration then hiked in early 2019 to 25 percent – on top of an original 5.6-percent duty that remained in place.

“It was devastating,” Diamond recalled. “We had no ability to increase prices to our customers, because POs are placed a year in advance. Plus, many of our products are at a 99-cent retail price point, so our customers weren’t going to pay us a penny more – plus we had a 25-percent increase in our cost of goods up front. This is a huge problem and still ongoing. [Trump] hasn’t done anything to reduce the tariffs, and we haven’t been able to get relief” through appeal channels, either.

Then, in March, Covid hit, shutting down both the company’s movie-based revenue machine and many of the factories in China that produced its goods. “Sales are way down from the summer, and we can’t make that up,” Diamond said. “We’re trying to tread water.” This year’s iffy Halloween was a big hindrance, and now Valentine’s Day business seems endangered. But “retailers are starting to place orders again, and we’re hoping for 2021,” Diamond said. “But if there’s another wave of Covid, we’re wondering if everything is going to get shut down again.”

Flix has been “looking at all our options” to boost revenues and cut costs, including selling more of its wares online, trying to shed office space and, as a last resort, laying off employees. “Our last resort would be letting go of people,” she said. “That’s something we don’t want to have to do.”

Between the disruption in manufacturing over there and the possibility that Flix will face pressure from customers and consumers to de-couple from Chinese sourcing for political reasons, rethinking the supply chain has become a priority for Diamond.

But as with everything else at Flix these days, that’s not so easy. One of the things that Flix worked out over time with its Chinese suppliers was how to meet U.S. regulations that covered both toy safety and food safety. “It’s hard to get factories that can comply with those,” Diamond said. “We worked with our [Chinese] factories over the years to make sure they’ve met all the requirements. So vetting new factories and outsourcing everything out of China is a huge obstacle.” Flix has “tried to move as much production as we can” to other countries, including Brazil and Mexico.

As with many family-owned companies, the current generation of Flix leadership benefits from lessons taught by the previous one. “My parents went through a lot of tough times over 50 years,” Debbie Diamond said. “I was a kid when Dad almost had his credit line pulled by a bank. So we’ve been proactive to make sure we’re not reliant on banks. If we have to, we will cut our overhead and do what it takes to survive. If we have to, we will take a few steps backward and downsize.

“Right now, we’re just looking at all of our options and being open.”