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With Toys Were Us Beyond Salvation, Toy Retailers Look to the Future

While the toy industry, in the US in particular, is still reeling at the prospect of life without Toys R US, Europe and the UK are beginning to see an upside, with opportunities emerging and existing retailers investing in their expansion.

Photo: Toys R Us: Exiting the UK retail scene with more a whimper than any notable bang.
Toys R Us: Exiting the UK retail scene with more a whimper than any notable bang.
Photo: Toys R Us: Exiting the UK retail scene with more a whimper than any notable bang.
Toys R Us: Exiting the UK retail scene with more a whimper than any notable bang.

Toys R Us' UK demise – a steadily unfolding drama that has pre-occupied the toy community for the past six months – has finally come to pass. With no buyer in sight, the UK operation closed all its 100 stores last month.

While the administrator made every effort to find a buyer, at least for parts of the business, this particular outcome always looked highly likely. Tellingly, there was no pre-pack deal put together before the initial administration announcement was made. Add to that the complex nature of the retailer's global business, its tangled financial web and the fact that the Toys R Us name wouldn't have been part of any deal and you are left with the feeling that there wasn't really anything for an existing retailer to buy that wasn't going to be coming their way anyway.

The notion, advocated by some, that Toys R Us was 'too big to fail' never really made sense. Having said that, there were undoubtedly missteps along the way. The timing of the US bankruptcy protection order, for one thing, can clearly be questioned, with some suggesting the retailer might have been better to wait until January, which may have improved Christmas trading figures and given it additional cash to help reconfigure the business.

As there is a legal obligation on company directors not to trade while insolvent, however, maybe they had no choice. It is, after all, entirely plausible that they knew the operation couldn't survive until the New Year without protection.

Perhaps less understandable was the 'bonus' scandal, which saw 17 senior executives paid US$16 million after the company had already filed for bankruptcy protection. This was a grave error of judgment and cost Toys R US an immense amount of goodwill on the part of many of its suppliers.

Ultimately, these issues aside, the demise of Toys R Us was unavoidable. Its downfall, though, was not the consequence of adverse trading conditions. It was, instead, the inevitable result of its venture-capitalist owners saddling it with $5.5 billion leveraged debt. As one social-media pundit put it: "The best runner in the race was given an anvil to carry, then criticised for not being in front."

Given the Fairfax acquisition of Toys R Us Canada and the imminent sale of the retailer's Asian operation, Toys R Us clearly isn't going to disappear from the global retail landscape. It would, however, take nothing short of a miracle for the chain to be resurrected in the UK. At present, there is no indication that anyone is expecting or planning such a dramatic final twist to this singularly tawdry tale. Domestically, at least, the story of Toys R Us UK ended with a whimper rather than a bang.

Inevitably, the whole saga has had a major impact on the mood of the global toy community. While not wanting to underplay the significance of recent events or make light of the challenges that lie ahead, it is important to retain a sense of perspective. While an air of uncertainty will linger for a long while yet, especially among suppliers, some things we do know for sure – the birth rate will be unaffected, kids will still celebrate birthdays and Christmas will remain a fixture on the calendar.

It is also worth remembering that that British toy community has been here before. Nine years ago, to be precise. Indeed, when Woolworths closed back in 2009, the announcement was met with shock, incredulity, overt pessimism and – in some quarters – an outpouring of emotion that bordered on hysteria.

To some, it seemed like the end of the world or, at least, their world. At the time, many suppliers predicted that the UK toy market would never be the same again, that a huge slice of turnover had been lost forever and that many businesses would go under. In reality, all of these the-end-is-nigh predictions proved to be wildly inaccurate. Within a year, the UK toy market was back to its previous level, new retailers had emerged, while existing retailers had taken full advantage of the additional turnover that was up for grabs in light of the high street's Woolworths-shaped gap.

Photo: The Entertainer: Filling the Toys R Us-shaped space.
The Entertainer: Filling the Toys R Us-shaped space.
Photo: The Entertainer: Filling the Toys R Us-shaped space.
The Entertainer: Filling the Toys R Us-shaped space.
Photo: Smyths: Expanding into Europe and beyond.
Smyths: Expanding into Europe and beyond.
Photo: Smyths: Expanding into Europe and beyond.
Smyths: Expanding into Europe and beyond.

This is, perhaps, why the loss of Toys R Us has been greeted with a fairly sanguine response in the UK, a stark contrast to the histrionics exhibited by many in the US market. Having survived the loss of its largest toy retailer once before, the UK can certainly survive the loss of the fifth-biggest retailer. Life will go on and, just as was the case last time, other retailers will benefit hugely from the situation.

Indeed, two of the retailers that expanded significantly in the post-Woolworths wasteland – The Entertainer and Smyths – once again have an air of carpe diem about their operations. The Entertainer, for instance, has already completed a £700,000 ($950,000) makeover of its flagship London store. Based on the feedback to date, this is said to be everything a great specialist toy shop should be, from the perspective of both a child and a parent.

The Buckinghamshire-headquartered retailer is also planning to add to its store estate as the year progresses, adding 15 outlets to its current roster of 146. For many, The Entertainer's positive, proactive approach is seen as a clear sign that specialist toy retailing continues to be commercially viable, while also demonstrating that there is life yet in the UK's high streets and shopping malls.

Meanwhile, Smyths, Toys R Us' closest direct competitor and its apparent nemesis, is making waves of its own. The Galway-headquartered toy superstore chain has already acquired Toys R Us' operations in Germany, Austria and Switzerland in a deal said to be worth about €80 million ($95.5 million). It was a big, bold move, illustrating Smyths' ambition to grow well beyond the UK and Ireland. At a stroke, the agreement created the largest specialist toy retail operation in Europe, with all stores to be rebranded as Smyths and all employees and management retained.

The deal offers yet more proof of the strength of the UK's toy retail channels, especially those owed by independent operators. Acknowledging this, the ever-prescient general manager of one major toy company said: "If you listen to Argos, Tesco, Amazon and the like, there is apparently no profit to had from toys. The progress being made by Smyths and The Entertainer, however, suggests otherwise."

Photo: Baulch: “Shell-shocked”.
Baulch: “Shell-shocked”.
Photo: Baulch: “Shell-shocked”.
Baulch: “Shell-shocked”.

So, while the retail toy market is in the process of enforced recalibration, there is a massive opportunity up for grabs, with many retailers likely to emerge as far stronger once the dust has settled. In many ways, the UK, in particular, is uniquely well-positioned to benefit from this apparent setback.

In the toy sector, operations that are run by committed private owners have consistently outperformed those controlled by private-equity firms and venture capitalists. Thankfully, the UK has plenty of the former and, of late, a rather reduced number of the latter.

While the overall toy market may or may not grow this year, nothing is impossible, providing the still shell-shocked industry doesn't fall victim to the potentially self-fulfilling prophesies of those who really ought to know better. For the sector to thrive, it is important to turn the corner and to restore confidence. The sooner that is achieved, the better for all concerned.

John Baulch is the Publisher of Toy World,
the UK's leading toys and games trade publication

Content provided by Picture: HKTDC Research
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