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Crunch Year for Toys R Us with Manufacturers Hoping for Turnaround

Toys R Us remains one of the most important players in the global toy retailing market, with the company facing a number of challenges and a European restructuring, John Baulch, publisher of Toy World, assesses its prospects.

Photo: Toys R Us: What is its game plan?
Toys R Us: What is its game plan?
Photo: Toys R Us: What is its game plan?
Toys R Us: What is its game plan?

Toys R Us is an integral component of the global toy retail market. The company straddles several channels – it is one of the largest major multiple accounts in the world but, at the same time, it is essentially a specialist toy retailer, not a multi-category outlet, such as Walmart or Target. One of the principal reasons why the health of Toys R Us is so crucial to toy companies is that the long-term future of the toy industry is unlikely to be assured by retailers that aren't committed to the category. It would be unwise to solely rely on those accounts that have a tendency to ebb and flow, with the retail space given over to toys varying according to prevailing conditions.

On the other hand, the fortunes of specialist retailers are inextricably linked to those of the toy market. After all, these retailers can't simply switch their attention to another category to make more margin. Retailers for whom toys are their lifeblood depend on the toy industry as much as the toy industry depends on them. It's the perfect example of a truly symbiotic business relationship.

All of which explains just why the toy market has been quite so concerned with the fortunes of Toys R Us over the past few years. The retailers' ongoing financial challenges have been well-documented. In 2005, it became private corporation, jointly owned by Bain Capital Inc, KKR & Co and Vornado Realty Trust, in a deal worth US$6.6 billion. It has long been thought that these backers were hoping to have exited the retailer by now. Attempts to garner momentum for an initial public offering didn't succeed, though. The last attempt, in 2013, failed due to what were described as "unfavourable market conditions."

Shortly afterwards, the company refinanced its $1.85 billion senior secured revolving credit facility and pushed out maturities until 2016, buying it a few years to turn the company around. When this move was announced, observers suggested it came with a caveat – if the company couldn't figure out how to compete with the likes of Walmart and Amazon, it might have to resort to bankruptcy protection. This, of course, would be potentially catastrophic for the global toy market.

With that date rapidly approaching, where does Toys R Us currently stand? There is no clear-cut answer. For the year ending 1 Feb 2014, Toys R Us generated about $12.5 billion in net sales, compared to about $13.5 billion for the year before. This resulted in the company posting a net loss of about $1 billion from net earnings of nearly $40 million for the same period a year earlier.

By February 2015, comparable same-store sales had slipped by a further 1% domestically, a significant improvement on the 5% drop the previous year. With US toy sales climbing by around 4% to $18.08 billion, the decline suggests that Toys R Us has continued to lose market share to competitors. In its defence, executives say they were more disciplined on promotions and were able to sell toys at more profitable prices, especially in the second half of the year, a development that offers some reassurance.

The question remains, however, as to whether Toys R Us can rectify its financial situation in the timeframe that meets its owners' expectations. Several recent announcements indicate that a dramatic turnaround strategy is being implemented. The company has publically acknowledged that attempting to increase market share as a toy retailer against the likes of Amazon and Walmart is unsustainable, therefore it will concentrate its efforts on profitability, rather than gross sales.

In line with this, the company has revealed that it is looking to save $23 million by implementing a Pan-European structure. This will include the provision of shared service centres, the outsourcing of back office finance functions and streamlined reporting. The measures are likely to result in numerous head office posts being made redundant in Europe, as the company moves away from managing each country as its own autonomous region. It has been suggested, for example, that the UK office is likely reduce its staffing numbers by around 60%, with a number of senior personnel moving on.

A new European Management Board, based in Spain, is being set-up to take overall responsibility for the region. While existing management teams will continue to handle all issues local to their particular territories, it is thought that cost-savings will be made by ordering own-brand and FOB merchandise in larger quantities for a greater number of stores across Europe, rather than allowing each national office to place its own orders.

Some observers, though, have questioned whether the European market can really be harmonised in this way. There are some American companies which have a tendency to view Europe as a single territory but, time and time again, it has been shown that regional variations are significant. Overall, there is a prevailing belief that Europe can't be handled as a single market in the way that America can.

Photo: Urcelay: “A specialist”.
Urcelay: "A specialist".
Photo: Urcelay: “A specialist”.
Urcelay: "A specialist".
Photo: Toys R Us New York: Future prototype.
Toys R Us New York: Future prototype.
Photo: Toys R Us New York: Future prototype.
Toys R Us New York: Future prototype.

Toys R Us is also looking at transforming its retail approach with some bold new initiatives. The company will start with a prototype store in New York this year, featuring interactive technology and a play area. Commenting on the move, Antonio Urcelay, the Chief Executive of Toys R Us, said recently: "It has to be something where kids want to go and play. We have to reinforce that we are a specialist."

While taking away selling space to add play space may not seem like a natural remedy for a declining sales model, the move is designed to make Toys R Us a more engaging destination in which to shop. The management clearly believes this will have a significant impact on consumer buying decisions.

Moving forward, it is entirely possible that Toys R Us could also decide to experiment with its real estate format. In Asia, for example, the company has 427 stores, most of which are typically smaller than their European and American counterparts. For many years, the Asian stores have been focussing on interactivity and giving kids a fun experience, an approach which is now being adopted in other territories. Whether Europe and America will also choose to adopt the smaller store format is an interesting question.

With the combination of renewed emphasis on the bottom line and fresh focus on its in-store engagement, it is clear that the Toys R Us management team has appreciated that it is time to try something different. Whether these new developments are enough – and whether they have been implemented in time – remains to be seen. One thing is for certain, though – every toy supplier wants to see Toys R Us survive and thrive.

A former senior Toys R Us director I spoke to, over a year ago, suggested that a large part of the battle was internal – a fight for the 'soul' of the company between the financial people and retail strategists, as much as a fight to reduce a growing debt burden. Right now, it seems that the retail strategists – the 'traders' – are calling the shots.

Photo: Toys R Us No More: Game over for toy retailer?
Toys R Us No More: Game over for toy retailer?
Photo: Toys R Us No More: Game over for toy retailer?
Toys R Us No More: Game over for toy retailer?

If these new initiatives produce the right results, hopefully it will assuage the moneymen. If they don't, the alternative would have major repercussions across the global toy market, putting the demise of a single-territory retailer like Woolworths into stark perspective. This is why toy companies will continue to do everything they can to support Toys R Us. The toy industry needs them. It's as simple as that.

John Baulch is the Publisher of Toy World,
the leading trade title for the UK and European toy trade

Content provided by Picture: HKTDC Research
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