Is Toys ‘R’ Us Case Symbolic of Retail Meltdown Across North America and Europe?

The year 2018 has not been a good one for retail chains across North America and Europe.  In fact, what started as a stream of retail closure announcements in 2017 has turned into a river of shops shuttering down this year and it is not just stand alone stores. Brand names like Gap and Banana Republic, Macy’s and Michael Kors are just some of the retailers who have chosen to ‘trim off’ hundreds of under-performing stores in 2018.

But the biggest casualty in 2018 by far has to be the legendary U.S. store Toys ‘R’ Us which plans to sell off 735 stores across the U.S., Canada and UK.  With this sell off, the company plans to restructure $5 billion of long-term debt while keeping the 60-year-old brand alive. The branded toy giant accounts for $12 billion dollars in revenue in the U.S. market which has a toy industry that accounts for $22 billion dollars. It is at number 22 on Forbes's List of Largest Private Companies in the U.S.

What happened?

Multiple reports analyse that the downfall of Toys ‘R’ Us was a perfect storm akin to the global financial crisis of 2007-08.

An industry which had seen negative sales for three consecutive years was faced with headwinds much beyond its control.

• Demographic decline: In the company's most recent annual filing, it cites declining birth rates in the U.S. as a negative impact on its sales. Births have decreased rapidly since 2008 in the U.S, especially among millennial women which in turn has shrunk its customer base.
• Early childhood: Children are switching to mobile and online games much earlier than previously. Most children are playing games on devices from age five-onwards which has meant the age group for which parents purchase toys has greatly shrunk. The rising popularity of online games has eaten into the revenues of exclusive toy stores in the U.S.
• Massive Debt: Toys ‘R’ Us was saddled with heavy debt acquired when Bain Capital and other firms took the company private in 2005. By the time the company was approaching bankruptcy in 2017, it still had about $5 billion in liabilities. With an annual debt payment of $400 million, it turned out to be the metaphorical anchor around the toy giant’s neck.
• Competition: Online deals are eating into the profits of retail stores across the globe and Toys ‘R’ Us was no different. Amazon turned up the heat and offered huge discounts as well as deals during holiday season which greatly cut into Toys ‘R’ Us’s revenue margins. Value-for-money brands like Walmart and Target also offered deals in store and online of cheap Chinese-made-toys which left the branded toy manufacturer crippled.

Despite the state of affairs in the U.S., not all is lost for the toy giant. Apart from the U.S, the company has 1000 stores in 38 countries from Canada to Zambia. Toys “R’ Us opened its first store in India as recently as September 2017. The target customer in India is similar to its traditional base in the U.S. – upper middle class families willing to spend on branded toys for their children. In fact, India offers all the factors for growth that have come to an end in developed countries – growing demographic, growing middle class, increasing availability of retail space in malls and growing brand awareness.

Based on these factors, Toys “R” Us, which also operates the infant- and toddler-focused Babies “R” Us chain, opened its first store through a franchise tie-up with Tablez India. This venture is part of the Abu Dhabi-based Lulu Group owned by, non-resident Indian billionaire Yusuff Ali MA. The partnership plans to open 65 more stores in India over the next decade.

All is not lost for the toy manufacturer as it has set aside more than $400 million out of its $3.1 billion in bankruptcy loans for sprucing up stores over the next three years with more experiences and better-paid staff. But, the crux of the retail melt-down is that retail brands have to make an effort to reinvent their stores to re-shape the way customers look at experiential shopping and the role of e-commerce. It is imperative that they create for themselves a more fashionable and intuitive avatar to compete with and to beat price-competitive Internet-only retailers.

(The above story first appeared on LatestLY on Mar 20, 2018 07:45 AM IST. For more news and updates on politics, world, sports, entertainment and lifestyle, log on to our website latestly.com).