In many places around the world, the toy industry’s preeminent big-box store is being sealed shut. New Jersey-based retail giant Toys “R” Us began the process of shuttering its US operations in March, just a day after it announced the closure of its UK locations. A month later, Irish retailer Smyths Toys Superstores acquired TRU’s operations in Germany, Austria and Switzerland, while Toronto-based investment firm Fairfax Financial Holdings is now preparing to take over the retailer’s Canadian assets.
Toys “R” Us (along with certain of its American and Canadian subsidiaries) filed for bankruptcy protection last September, three years after launching a transformation strategy witha focus on a strengthened omni-channel fulfillment model, optimized e-commerce business, international growth and improved customer experience both in-store and online. Now, as the retailer closes up shop across the globe, industry experts are adjusting their strategies and preparing for a post-TRU world.
“From an industry perspective, of course this has been a blow,” says Juli Lennett, toy industry analyst at market research firm The NPD Group. “Toys ‘R’ Us has been one of the larger retailers in the space and a testing ground for many new products, as well as a significant home for many smaller toy manufacturers. The landscape has already changed abruptly.”
The industry’s showroom
According to NPD’s consumer tracking service, Toys “R” Us represented approximately 12% of the US toy industry’s sales in 2017, and manufacturers have been reacting accordingly. For example, Florida-based toyco Basic Fun! will lower its 2018 forecast by 10% to account for the loss of TRU.
“The whole industry is reeling,” says CEO Jay Foreman. “If you’re a small company, there was always an open door to launch a product. If you’re a bigger company, you had a very good chance of Toys ‘R’ Us carrying 80% of your product line and acting as a showcase where consumers could walk down the aisle, see the section and have the opportunity to buy a real breadth of your product.”
Despite its reputation as the industry’s showroom, however, Foreman says Basic Fun! had been limiting its business with Toys “R” Us for several years. “We did less business with Toys ‘R’ Us in 2017 than we did in 2016, and we already planned to do less business in 2018, even if they restructured,” he says.
Andy Heyward, chairman and CEO at California’s Genius Brands International, agrees that many toy companies anticipated a Toys “R” Us liquidation. He argues that e-commerce has been imposing on brick-and-mortar sales for years, and that TRU’s folding under pressure from competitors like Amazon was expected.
“Everybody’s been aware of this. Things are going to need to recalibrate a little bit, but I think strong properties are not going to be affected in the least,” Heyward says. “With our Rainbow Rangers preschool brand, we were certainly looking at having a prominent presence with Toys ‘R’ Us. So now instead, we’re going to places like Target, Walmart and Amazon.”
Heyward admits that Genius Brands’ partnerships with powerhouses like Mattel and Nickelodeon boosted the company’s ability to pivot into a new retail strategy quickly, but he argues that strong properties will surmount the industry’s current instability.
“The same number of toys will be sold, and the same amount of product is going to be there,” he says. “Kids aren’t disappearing; they’re just going to get these products from other places.” And as toys make their way onto the shelves and e-commerce platforms of other retailers, so do many of TRU’s most famous practices.
The Amazon effect
Carol Spieckerman, president at Arkansas-based retail consultancy firm Spieckerman Retail, says there are a number of parallels between Toys “R” Us and Amazon, the online retailer most frequently credited with TRU’s decline.
“A lot of retailers lamented that Toys ‘R’ Us got really good at creating private brands. TRU would put national brands on the shelf for a little while, and once they gained traction, they would create their own versions,” Spieckerman says. “Now, Amazon is creating private brands at a rate no one has seen before in private retail. Amazon isn’t just sitting back and operating as a passive marketplace. It’s offering fulfillment services and starting to crowbar its own private brands into its marketplace.”
For some toycos, this means that many of the dynamics that were challenging in the traditional big-box space have just been super-sized in the digital one. “When I first started my business [in 1979], we were only a US$30-million toy company,” says MGA Entertainment CEO Isaac Larian.
“At that time, we did more than 40% of our business with Toys ‘R’ Us. Other retailers, frankly, didn’t want to deal with small companies like us. It’s going to be hard, unfortunately, for a lot of smaller toy companies to come about.” That mindset led Larian and affiliated investors to submit a US$900-million bid to buy TRU’s 82 Canadian and 400-plus US locations in April, though the offer was rejected by the retailer later that month.
According to Spieckerman, smaller toycos getting lost in Amazon’s digital jungle is another example of traditional retail troubles being amplified on e-commerce platforms. “When Amazon runs the platform, Amazon decides which brands are more prominent and what comes up in the search results. It’s not like everybody is treated equally any more than they were in the brick-and-mortar space, where many brands would use pay-to-play methods—like co-op advertising—to stay prominent,” she says. “Toys ‘R’ Us was famous for that. They knew how valuable they were to these toy manufacturers, and they milked it for all they could. With e-commerce, so many factors like prominence, searchability and the content ecosystem are much more complex and knitted together in a way that can be difficult for companies to get their heads around.”
By way of advice, Spieckerman suggests that building relationships with third-party support networks, such as digital agencies, will help struggling toycos adjust to the realities of a retail landscape dominated by e-commerce.
The new normal
Whatever the strategy, Basic Fun!’s Foreman agrees that adjusting—and quickly—will be crucial in a post-TRU world. “Two years ago, Amazon was our ninth-largest account, and this year it will be our second-largest account,” he says. “Next year, Amazon might very well be our largest account. We have to go where the demand is.”
Foreman points out that the demand is not just with exclusively online retailers like Amazon, but also the e-commerce platforms associated with traditional retailers like Walmart and Target—the brick-and-click approach that’s become the new standard.
According to Spieckerman, an inability to distinguish between these categories can lead to an inaccurate understanding of the retail landscape. She says many in the industry think of the issue of brick-and-mortar versus e-commerce as one of traditional retailers moving their businesses online. However, the industry is actually seeing more growth among both omni-channel retailers and pure-play digital entities.
“That fact alone is going to make e-commerce a much bigger consideration,” she says. “The growth will be there, not because retailers are doubling down on digital business, but because there are so many purely digital marketplaces now that represent the most viable growth opportunities for these toy companies.
This is particularly true in international markets like China, where online marketplaces are the dominant channels.” The companies that will fare the best moving forward, Spieckerman says, are those that have already explored diversification.
“We’re trying to refocus our lives around Amazon being the new TRU,” Foreman says of Basic Fun!’s strategy moving forward. “We’re also planning to invest in some extra inventory at the end of the year, because we think that our key retailers will be short on product. We’ll be investing in inventory in our warehouse to make sure we can fill the gaps. That way, after Black Friday weekend when it would be impossible to ship merchandise from China and have it arrive on shelves in time, we’ll have inventory to backfill.”
The road ahead
Genius Brands’ Heyward is also focused on the fourth quarter, arguing that TRU’s reliance on the holidays was a major contributing factor to its ultimate demise. “With Walmart or Target, you’re shopping there year-round. You’re not going to these stores just to buy toys, but while you are there, you will buy those products for kids,” Heyward says. “Just toys by themselves—that is a baked-in problem for the industry. It’s a fourth-quarter industry, and if you’re relying on that, you have a fundamental problem to begin with.”
Now that Toys “R” Us has gone the way of many other so-called category killers (Blockbuster, we hardly knew you), the retail landscape is on the brink of becoming the Wild West. As such, Spieckerman notes that retailers are opening their platforms to third-party sellers to avoid becoming similarly focused on a single category.
These retailers are essentially renting space on their digital platforms without having to hold inventory in their stores, reaping the benefits of a massive category expansion. However, she warns this might lead to an identity crisis.
“I think we’re entering into the potential for category-agnostic retail, where everyone potentially sells everything,” she says, adding that price becomes the only differentiating factor in such a market. “In that case, it does tend to become a race to the bottom on price.”
MGA’s Larian, meanwhile, is concerned about sustainability for smaller toymakers. “The industry isn’t going to fill US$11 billion in annual sales overnight,” he says of Toys “R” Us. “It’s going to have a major impact on the toy industry, and the smaller toy companies are the ones that will suffer. They’re going to disappear, and with them a lot of innovation, too.”
Foreman agrees that many smaller companies will go under, though he believes they will do so by consolidating with other toycos in an effort to survive. “Consolidation has to happen,” he says. “Even before Toys ‘R’ Us exiting the business, it was getting really challenging for small- and medium-sized companies. Now, without TRU, it’s going to be even harder.”
However, Foreman says Basic Fun! is ultimately optimistic about the toy retail landscape moving forward. “We have sustained lots of upheaval over more than a hundred years of the modern toy industry. Through world wars, a depression and a major financial collapse. We’ve survived it all.”