Toys R Us did too little, too late

Toys R Us did not ultimately adapt to omnichannel retail. (Pexels)

Toys R Us plans on selling off or closing its remaining 700 U.S. stores. The 70-year-old toy store tried to keep doors open by filing for bankruptcy protection in September 2017, but by then the company was $5 billion in debt and was spending $400 million a year to service it. And most analysts believe it wasn't e-commerce that led to the retailer's demise but rather a lack of progression.

Matthew Hudak, senior toys and games analyst at Euromonitor International, says while the news is not unexpected, given the retailer's many years of declining sales, it will have a major impact across the toys and games landscape. 

"Toy makers, while they have been slowly moving to other channels for sales over the years, will quickly lose a major avenue to get their product to consumers," Hudak said in a blog post. "Larger toy companies like Lego, Hasbro, and Mattel will likely see a greater impact, as they were a sizable portion of the Toys R Us store offering. Smaller players, especially for areas like games and puzzles that get a lot of niche new products each year, can typically rely more on specialty shops and online channels and therefore might not see as immediate an impact."

According to data from Jumpshot, Amazon dominates in total share of toy purchases. It seems like major toy brands (Lego, Mattel, Hasbro and Nintendo) understand the trend toward selling across multiple online marketplaces/retailers and so will not miss Toys R Us as a selling space. 

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Even in online sales, Toys R Us year-over-year conversion rates were down 41% and 43% in January and February, respectively. Looking at the products that could be affected by a Toys R Us closure—Lego, Mattel, Hasbro and Nintendo purchases—Amazon dominates with online purchases for all four brands, and Toys R Us only captured a fraction of online purchases. Mattel and Hasbro are a bit more at risk since they have a larger percentage of purchases via, but still a vast majority are sold via Amazon.

Over the long term, however, larger toy brands will likely get even more competitive for remaining in-store shelf space, especially in hypermarkets like Walmart, which ultimately could limit the space for smaller players, says Hudak. 

JoAnn Martin, VP of retail industry strategy at JDA Software, believes that the closures could be a positive for brands such as Mattel and Hasbro.

"Companies like Mattel and Hasbro will have to seek out additional customers potentially going into the downstream midmarket in order to fulfill the demand Toys ‘R’ Us once generated as a revenue stream for their companies," she said. "There will be a repositioning of the market as an equilibrium between suppliers and customers are met.  There is even the potential for these suppliers to leverage this dynamic as an opportunity to potentially go direct to consumer in the wake of the downfall of Toys ‘R’ Us. This opens the potential to drive a new node, direct to customer, on their supply chain distribution strategy."

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Tim Barrett, senior retailing analyst at Euromonitor International, agrees with other analysts that Toys R Us just entered into the online game too late and lost its opportunity to reinvent itself. 

"Had the chain embraced e-commerce earlier instead of outsourcing it to Amazon from 2000-2010, things might have gone differently," Barrett said in the Euromonitor International blog post. "Had the chain made a bold move to reimagine stores, perhaps by adding in daycare centers, things might have improved. But Toys R Us did none of these things. Spread thin across too many countries, with too many stores and too much debt, it boxed itself into its current fate."

Gina Ashe, CEO of retail intelligence company ThirdChannel, agrees that Toys R Us caused its own demise. 

“In my opinion, Toys R Us’ bankruptcy and store closings have less to do with fierce competition from Amazon and Walmart, or the doom and gloom stories that point to the ‘death of physical retail.’ Instead, the closings tell the story of a retailer that was confronted with varying priorities and in-store strategies, causing them to lose sight of what’s important in today’s retail landscape: the in-store consumer experience," Ashe said. "Toys R Us’ CEO said himself in a SEC filing that the company had fallen behind competitors when it came to ‘general upkeep and condition of our stores.’"

Ashe points to research that shows 82% of consumers still prefer brick-and-mortar. So online was not the death of Toys R Us, it was not adapting to a smaller format or offering experiential shopping,

"Retailers are leveraging analytics, hiring the right in-store staff, creating an omnichannel strategy, and improving customer-facing policies, among other strategies, to meet the shopping preferences of today’s consumers," she added. 

Barrett believes the big winners from the closures will be Amazon, Walmart and Target: "In the next year, it will be interesting to see if the release of Toys ‘R’ Us’ inventory into the market depresses toy sales for other retailers."