Tag Archives: toys r us analysis

Are We Experiencing A ‘Creative Apocalypse’ Post Toys R Us Downfall?

ARE WE EXPERIENCING A ‘CREATIVE APOCALYPSE’ POST TOYS R US DOWNFALL?

The global toy business has been reaching new heights in terms of creativity in recent years.

While we may have been seeing ever more formulaic blockbuster movies with ever more sequels and prequels at the box office, away from movie based toys, I would argue that we have not had a broader range of toy products on sale in the 20 years I have been in the toy business.

There are several drivers for this veritable plethora of toy offerings, but not least of which has been the huge impact of social media and the internet on content distribution and product launch platforms. It has never been easier to go direct to consumer with both content and physical products to prove out demand before mainstream retail needs to adopt/buy in.

So could we be at the start of a short term correction of this creative utopia, largely due to the same phenomenon – the internet revolution & social media? It certainly seems like these very media which have facilitated such a healthy creative atmosphere have at the same time been part of dealing a major blow to the very retailers who are the best supporters of product innovation i.e. the specialist retailers. By making everything purchaseable online with easy price comparison & the devaluing of specialist retail that entails, the move of demand from physical to digital retail has shaped up as an existential challenge for specialist physical retail.

We’re clearly currently getting smashed by the biggest of all physical retail failures in the shape of Toys R Us – THE iconic global specialist toy chain. I’m not going to harp on again here about the role of leveraged buyouts & crippling interest payments resulting – that has all been said, but there is no escaping the fact that the loss of the world’s number one toy retail specialist chain is going to have a seismic impact on the toy business.

Now before I go all ‘doom & gloom’ let me first just reiterate that a). children will still want to own & play with toys b). parents have never, in my 20 years in toys been generally more encouraging of play with toys vs excessive screen time addiction for their children c). the global toy market is still set to grow significantly in the medium to long term due to global demographics i.e. growing population/birth rate = more kids = more toys sold. d). accelerating economic development in the worlds 2 most populous nations – China & India.

So the reality is the mid to long term macro outlook for the global toy business is looking very good.

Nevertheless…in the past few weeks as the TRU situation has unfolded it has become abundantly clear that the pendulum of risk outlook for toy companies is swinging very much towards the risk averse.

Now taking a historical perspective, the toy industry wasn’t in the end as badly affected by the global financial crisis of the late noughties as was feared at the time, as parents tend to cut back on spending on their kids last, so gobally the industry did not shrink even (from a global perspective) during those tough days of economic gloom…however, many companies did cut back on product development and new launch investments, and appetite for taking risks diminished. Perversely, one of today’s biggest trends in toys has roots in the financial crisis – that being the increase in major global toy companies interest in ‘pocket money’/collectable toy ranges. There was a point in time when the low price of this kind of item made this type of product less interesting for major toy companies – whereas today, every global toy company tends to have a significant interest/committment to this category.

So when we fast forward from the global financial crisis to the (short term) post Toys R Us outlook, we can see some similarities in reaction to systemic bad news. In the past few weeks I have spoken to c. 30-35 different toy companies in the USA, Europe & Asia, and nearly all of them has told me of a reduced risk appetite in some shape or form, which is manifesting itself in cancelled postponed product development initiatives. Products which previewed well enough pre Christmas/through toyfair season may not get to shelf, at least not in 2018. Development spending, product development slots and new launch marketing for 2019 looks likely to be at least somewhat curtailed while the global toy industry gets used to the ‘new normal’ post Toys R Us situation.

Clearly the types of products which get through product selection processes are now more likely to reflect the needs & demands of more mass market, multi category retailers in the predicted absence of TRU as a global player. And the accepted wisdom is that these ‘box shifting’ retailers are less interested in innovation and less likely to take a risk. That’s clearly a debatable point in some ways, but the reality is toy companies themselves often make such perceptions self fulfilling via presumption.

So, to the somewhat hysterical question in the title of this article – are we therefore in the midst of a ‘creative apocolypse’ in toys?

I actually don’t think so, because the positive impact of the internet & social media is not going away. Consumer led products and quirky content based product lines are here to stay…these will continue to push the creative boundaries, and children are increasingly watching user genrated content, Netflix and YouTube, so this trend will continue. The challenge for toy companies is that we are in the process of losing a global support base for taking niche/social media driven products from the digital world to mainstream physical toy retail which can clearly accelerate sales volumes.

These are troubling times, no doubt – clearly the Toys R Us situation is going to adversely affect more than the (reported) 30,000 employees of Toys R Us. Cuts or shall we say ‘postponements’ in product development are clearly imminent – at least short term, which will also be likely to have an adverse effect on employment globally.

However, on a brighter note, as per the phenomenal growth of pocket money collectable toys coming out of the global financial crisis, some toy companies will choose to ‘bite down on the mouthguard’ and keep swinging metaphorical punches against the prevailing climate, and these companies will most likely come out ahead when the short term disruption is adapted to as the mid term outlook is so bright for the global toy industry.

Which seems like a good opportunity to use one of my favourite quotes:

“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity.”

John F. Kennedy

 

Another notable disruptive trend is also currently slipping under the radar in terms of Toy manufacturing, as China – the world’s leading toy manufacturing hub of the last few decades seeks to move away from low priced items like toys and further upmarket. This article looks at how & where this toy manufacturing is being replaced, to read, click here:

https://www.toyteamindia.com/single-post/2018/04/06/Toy-Manufacturing—2018-Update-India-on-the-up-Chinas-transition

 

by Steve Reece, CEO of Kids Brand Insight www.KidsBrandInsight.com,  a leading toy expert consultancy to toy companies around the world. Specialities include Sourcing/factory finding especially in India & other ‘new’ manufacturing economies, brand development and product representation.

Toys R Us – The Retail Growth Story Of The Next 5 Years?

Toys R Us – The Retail Growth Story Of The Next 5 Years?

 

One of the little reported facts pertinent to the media circus recently surrounding Toys R Us’ bankruptcy filing is that the companies over reported debt pile was primarily due to the ‘leveraged’ purchase of the business by investment firms. I am no financial guru, but as I understand it, the system we work in allows buyers to buy an asset i.e. a retailer like Toys R Us mostly via loans/financing secured by/put against the business itself.

I’m not going to pontificate about the rights or wrongs of this – reality speaks for itself. There are several notable examples of this type of transaction working (or at least not killing the business in question), but in the end the benefiting party is most likely to be the owners who risk the business itself to  pay off the loans. The business is then saddled with significant interest fees & repayment fees which can’t fail but to constrain development of the business.

Frankly, this is one of the most infuriatingly under reported aspects of Toys R Us’ tribulations – the underlying business is sound! Reporting an operating profit of $460m and EBITDA of nearly $800m in the last full reported financial year. Interest paid in the same financial year = $457m (!).

So to be categorically clear – there is nothing fundamentally wrong with this business! This is a business generating significant positive cashflow aside from the debt used to purchase it.

(please can any one of the hundreds of journalists who have covered this story with apocalyptic doom & gloom in the last few weeks please advise if I have missed anything fundamental here, or failed to read the financial results properly?)

I’d like to highlight the positives of the situation from the toy industry’s perspective and highlight why I believe TRU could become the growth story of the next 5-10 years in toy retailing:

Firstly, there is one positive reality likely to come directly from the TRU bankruptcy filing – the company is generally expected to emerge from Chapter 11 with significantly reduced borrowing, and therefore much less of a millstone around the neck of this toy industry flagship retailer.

Secondly, this will free up money to invest in the refurbishment of stores and growth plan.

Thirdly, the support of toy companies has been almost unprecedently loud and vociferous. Toys R Us is definitely ‘too big to fail’ as far as the major toy companies are concerned – therefore the company has much goodwill in terms of suppliers offering support of all kinds.

Fourthly, once the long term future & security of TRU is confirmed post Chapter 11, it should prove easier to expand further the global footprint.

Overall, the toy industry has shown it is unwilling to let TRU go to the wall. There aren’t many retailers which enjoy such nearly unconditional support. Viva Toys R Us!

 

 

 

by Steve Reece, CEO of Kids Brand Insight www.KidsBrandInsight.com,  a leading toy expert consultancy to toy companies around the world, which helps people & companies to get ahead in the toy industry, find the right toy & game factories and to consumer research test their products with kids and parents. Steve also advises investment companies via leading expert networks like Gerson Lehrman (Steve is an acnowledged GLG toy expert).

 

 

5 Reasons Why Toys R Us Is A Crucial Partner To The Global Toy Industry

5 Reasons Why Toys R Us Is A Crucial Partner To The International Toy Industry

It’s not uncommon in the toy industry for people to take Toys R Us for granted.

In many ways the set up of TRU makes it an easier partner for the toy industry to deal with, and the destination approach makes it a potentially powerful sales driver for toy companies and their products.

Here’s 5 reasons why TRU is so important to the toy industry:

1. Global Opportunity & Growth – at the time of writing, TRU has more than 871 stores in the USA, 730 international stores and 230 licensed stores in 36 countries. In terms of market share, we calculate that TRU has (very roughly) c. 6% of the global toy market. That puts Toys R Us in the very top bracket in terms of the biggest global players in toy retail. While the chain may not be so focused on new store openings in some mature markets, global expansion is nevertheless firmly on the cards – late in 2014 the company announced plans for the opening of 90 new stores globally.

2. The Store Format Is Immensely Helpful To The Toy Industry – we recently visited a number of TRU stores in the UK, from mid Jan to end Feb, and while there were some gaps, there was still a huge quantity of  stock on shelves. If you compare this to generalist/non specialist retailers who tend to drastically cut back their sku count for toys in the first half of the year (at least in North America & Europe that is), we can see that TRU is carrying significant quantities of inventory into Q1 and taking in new inventory across the board. This leads to less pressure on brand trashing price cuts towards the end of Q4, and the expansive warehouse format means shelves need to be filled regardless of time length to next peak season. This factor alone should make TRU highly cherished by toy companies in an industry where the cashflow/peak sales cycle is one of the most fundamental business challenges to manage.

3. Specialism = Focus On Toys – TRU is focused on our industry and has a great vested interest in it. Whereas many generalist retailers use their toy offering opportunistically to drive in-store/online traffic, regardless of the effect on the health of the industry, TRU is structurally set up to support it.

4. Broader SKU Count – to the best of our knowledge TRU stocks more toy SKUs than any other major ‘bricks and mortar’ toy retailer. This is an operational challenge of some scale for TRU to manage, but it works to the benefit of toy companies as a whole, acting as a facilitator of greater product diversity and supporting more toy company initiatives/developments. As an example, the 2nd area you come to in most TRU stores is the board games aisle. You don’t find such an extensive range of games in many specialist games independents, and you certainly don’t in other (physical world) major toy retailers. In many markets, the TRU listing alone is likely to add up to enough to amortise a significant amount of development and inventory expense.

5. POS Marketing – TRU offers unrivaled opportunity for major brands to make a statement in store. For sure there are showpiece opportunities with some other stores/chains, but not to the same extent as TRU can offer. Whether it’s the latest mega hit movie or a classic brand, TRU’s flexible branding at the main entry point to the toy aisles offers a huge impact statement, combined with strong branded bays throughout the store and in store TV.

So there you have it, Toys R Us is a critically important retail partner to the global toy industry – let’s not take it for granted!