Mike Mozart

On September 19th, 2017, one of the biggest toy and juvenile-products retailers — Toys”R”Us — filed for bankruptcy in the U.S. and Canada in order to reorganis e its debt structure. Toys”R”Us became predominant in its niche field of toy retail in the past decades. Currently, it has more than 1,000 branches all over the world. However, its successful history failed to ke ep it from a decline in revenue and an increase in risk of debt default.

At one time, Toys”R”Us was the place to go for toys. That changed when competing big box stores expanded their own toy sections, and not long after that, consumers were looking for dolls and games online — along with everything else. Add to that the fact that Amazon, Wal-Mart,  and Target are all cheaper than Toys”R”Us, and the company finally succumbed to the competitive pressure, thus filing for bankruptcy.

However, long ago, the CEO of Toys”R”Us started the layout in the online-retail segment. It entered a ten-year contract with Amazon.com to be the exclusive supplier of toys on the website. Unfortunately, Amazon blamed Toys”R”Us for failing to carry a sufficiently large range of goods, including the most popular lines. Therefore, Amazon eventually reneged on the terms of the contract by allowing third-party retailers to use its marketplace to sell toys. In 2006, Toys”R”Us won a lawsuit against Amazon, and in 2009, they were awarded $51m — just over half of the $93m damage fee claimed in their filing. How ever, at that time it was already too late for Toys”R”Us to become dominant in the emerging online market, since it had missed the best time to enter it.

Apart from all the aforementioned, Toys”R”Us faces other problems as well. Firstly, it has a heavy burden of debt. It has had $5bn to $6bn of debt on its balance sheet during all these years, and the annual interest payments for that are building up to $400m or more. That is a lot tied up in those payments. As a result, a very small amount of money was left for the management to reinvest in the business and grow it bigger. Furthermore, the inventory of Toys”R”Us has been painfully slow to adapt to changing trends. All these factors contributed to its bankruptcy.

Only outranked by a 2002 Kmart and a 1990 Federated Department Stores filings, Toys”R”Us now lays claim to being the third largest retailer that has filed for Chapter 11 bankruptcy, according to bankruptcydata.com. Apparently, the announcement is calling a lot of attention. People are wondering: is it actually ‘game over’ for them? According to The Economist, many analysts agree, Chapter 11 bankruptcy is a sensible way to deal with the chain’s $5bn of long-term debt. The bankruptcy offers the company the opportunity to reschedule its business and reorganise its enormous debt. So Toys”R”Us is not dead; its future is just very uncertain.

Surprisingly, while the company’s North American business line is going downhill, it seems to be doing quite well in Asia. The Asian subsidiary — Toys”R”Us Asia — was set up in 1986, and the parent company holds about 85 percent stake in it. The rest is owned by the Fung Group — a holding company owned privately by the Hong Kong businessmen brothers Victor and William Fung. Toys”R”Us controls 20 percent of the Asia Pacific market for traditional toys, such as dolls and action figures. At the same time, the second largest competitor has a share of just 1.4 percent. Thanks to the rising income levels and more trading up on higher-end toys, the company is expected to see faster growth in the toy market there compared to Western Europe and North America. Growth in the Asia Pacific helped offset weaker sales in the U.S. and Europe in the quarter ended April 29, Toys”R”Us said in June.

Given the promising future in the Asia Pacific area, the company continues to expand its business. It combined its Japanese business line with a joint venture running stores in greater China and Southeast Asia. They also opened more stores in India last year. Thus, it is not surprising that Toys”R”Us is said to be in discussions with investment banks to study the feasibility of listing the Asian business line on the Hong Kong Stock Exchange. A successful initial public offering (IP O) could value the subsidiary at about $2bn.

Whether the IPO will happen or not is still unknown. Firstly, although the bankruptcy in September included only North American subsidies of the company (and not the Asian business line), it could still complicate matters for an IPO. Investors are more likely to be concerned about putting money into a company whose parent company is already under bankruptcy. Secondly, even if the IPO is a success,  it is not guaranteed to bring the company back to life. The market share of Toys”R”Us is indeed quite big in the Asian market, but that is also because there is not a lot of competition in that area. With the further development of those areas, more companies might join the market, thus bringing about more competition. As consumers run wallets-first towards online shopping, it is highly likely that Toys”R”Us will end up in the gut ter if it does not radically change its business strategy. In China, for example, the sale of Toys”R”Us in its official online store on TaoBao (the biggest online retail platform in China) is still quite low compared to the average amount per customer spent on the website. Hence, there is still a lot it can improve on.

Traditional retail sales appear to have had their worst patch in the past few years, so let’s hope that Toy”R”Us can return with successful transition.