Toys ‘R’ Us announced last week that it would shut all 735 of its U.S. stores under the TRU and Babies ‘R’ Us banners, after declaring bankruptcy last fall and subsequently posting poor holiday results. This move raised a number of key questions for toy companies, retailers, analysts, and licensing executives.
Question 1: What happened?
The toy industry as a whole is dealing with fundamental changes in how kids play, with digital options taking share from physical toys, kids aging out of traditional toys faster than in the past, and millennial parents emphasizing experiential gifts and purchases for their families over “things.” These trends have impacted TRU just as they have other retailers.
Meanwhile, TRU has been challenged by intensifying competition from the likes of Walmart, Target, Amazon, and others, many of which can offer heavy discounts (even using toys as loss leaders) that TRU could not match. These competitors have been eroding TRU’s share of industry sales and were cited by TRU as the primary cause of its demise.
Likely the biggest component of TRU’s troubles, however, was its heavy debt load, in the billions of dollars, which had been sucking resources since its 2005 buyout. This made it virtually impossible for the company to invest in addressing its other challenges.
Question 2: Where will TRU’s toy sales go?
Walmart is already the biggest toy retailer, and spent the holiday season doubling down on the toy category in the wake of TRU’s bankruptcy. For example, it hosted holiday parties in 20,000 stores to allow consumers to test toys (a first-time initiative in 2017) and tripled the number of toys it sells online. It has also been offering more high-profile exclusive items in the category.
Target also stands to benefit. In fact, one analyst estimated it could bring in as much as $600 million in additional sales from toys. The retailer has seen its toy sales grow each quarter for the last four years and has been picking up share, thanks to more licensed products, exclusive deals (often involving licensed properties), and the expansion of hot categories such as board games (also often licensed).
Amazon, meanwhile, has been boosting its sales of toys. According to a new survey from Jumpshot, it accounts for 83.3% of online sales of Lego, Mattel, Hasbro, and Nintendo products, collectively. Some analysts believe that TRU’s liquidation will result in more sales going online, with Amazon the major beneficiary. The company is also reportedly considering purchasing some of TRU’s physical locations as it works to make further inroads into bricks-and-mortar retailing, although it almost certainly would not devote those stores to the toy category.
Other retailers stand to gain share as well. Even JCPenney has been strengthening its position in toys—a category for which it had not been known—setting up in-store specialty shops last year. And many independent toy stores, both franchised (as under the Learning Express brand) and mom-and-pop, have been reporting strong results of late, focusing on service, in-store experiences, and hard-to-find products. Of course there are relatively few indie toy stores remaining after years of struggles against TRU, Amazon, and the like.
All of these channels, whether mass, mid-tier, specialty, e-commerce, or other options such as dollar stores, are likely to see some of TRU’s customers turn to them.
Meanwhile, historic toy nameplates are making comebacks. FAO Schwarz, owned by ThreeSixty Group, just announced a deal with the Hudson Group for airport stores, plans a New York flagship at Rockefeller Center before the end of the year, has been selling toys under a licensing model with partners such as Bon-Ton Stores, and is expanding internationally, including in China through a deal with Kidsland. And Strategic Marks, which owns the KB Toys name, was planning to relaunch that brand online only, but now say it hopes to open bricks-and-mortar pop-up shops by the end of 2018, with permanent locations possibly to follow.
TRU itself even has at least a chance for a comeback, in a smaller version with 200 to 400 U.S. stores, thanks to a high-profile effort by Isaac Larian, CEO of toy company and licensor MGA Entertainment. He has pledged $100 million to the effort, with a similar amount in the pot from other investors, including competing toy companies, and hopes to raise the remaining $800 million needed through GoFundMe (a huge goal for a crowdfunding campaign). MGA and partners have also made a bid for TRU Canada, which has 82 locations.
Question 3: Will toy sales fall, and how far?
TRU accounted for 12% overall of the $20.7 billion U.S. toy industry in 2017, according to the NPD Group. Individual companies, meanwhile, relied on the retailer to varying degrees, with analysts estimating Hasbro and Mattel generated about 10% of sales from TRU, for example, and MGA about 20%. Those shares would translate to significant sales drops if TRU’s consumers do not purchase the same level of toys through other venues.
Last year’s fourth-quarter toy-industry results, which came in the wake of TRU’s bankruptcy announcement but before its wholesale liquidation, signal where the industry might go in the short term. All of the major public toy companies, from Hasbro and Mattel to Spin Master and Jakks—whether they reported poor results or results that were encouraging but not as positive as they could have been—cited the negative impact of TRU’s financial struggles and shrinking footprint.
Toy industry sales overall were up just 1% in 2017 compared to the previous year, per NPD Group estimates. These results were disappointing after increases of 5% and 6% in 2015 and 2016, respectively. And the 1% increase for the year followed a rise of 3% for the first six months, confirming fourth-quarter weakness after the TRU bankruptcy. In comparison, holiday sales overall, across all consumer product categories, were up a healthy 5.5%, according to the National Retail Federation.
While customers are unlikely to stop buying toys for their kids, especially during the holidays, these figures suggest that TRU’s closure will be detrimental to industry sales overall, at least in the near term.
Question 4: What is the impact on the licensing community?
In addition to the pressure on toy sales, there are likely to be ramifications on licensed entertainment properties that rely on toys as a key pillar of their programs. This is especially true for newer and smaller properties.
TRU was a place where more toys and properties had shelf space than is possible at mass or specialty. Unlike Walmart or Target, TRU could give new toys time, within reason, to incubate and succeed. Unlike Amazon, it was a destination where it was easy for customers to find the items they were looking for and to browse for new ideas. And unlike specialty stores, it embraced licensed products.
Post-TRU, there will likely be more fragmentation of the marketplace, more power in the hands of fewer mass toy retailers, fewer places that will champion less-established properties and give toys time to succeed, and one less option for exclusive licensing deals. Hot properties will always command shelf space, while niche properties will find a place at specialty or online. But the myriad toys and licensed properties that reside somewhere in between will likely struggle even more than they do now to break through.
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