Playing a rough game
Reader, if you could choose three toys that defined (and I use this term loosely) your childhood, what would they be? Here are mine: Rollerball skates, paraphernalia from The Little Mermaid (the seed of mesmeric rebellion, I dare say) and a Nintendo gaming console.
Incidentally, they were all bought at home-grown SA business Reggie’s, part of the then Redgwoods Group, owner of the local operation (through a licence deal) of Toys R Us. Redgwoods was sold to new owners in late 2012 with 65 stores. Today there are just over 50 across SA.
It’s tough going for toy purveyors, and more so for those that have a store-focused business model.
A melange of factors has hit the industry globally, leaving even the big cheeses vulnerable.
Earlier this month, Danish company Lego reported its first quarterly sales decline in 13 years and announced plans to cut 1,400 jobs, or nearly 8% of its workforce of 18,200. Lego toys are sold in 123 countries.
US multinational Mattel, maker of Barbie, booted its CEO in mid-january after poor holiday sales and sustained market-share losses to Hasbro, which owns My Little Pony.
Most recently, privately held Toys R Us Inc filed for bankruptcy protection. It has 1,600 stores and hasn’t recorded an annual profit since 2013.
What we see with most of the bust stories in brick-and-mortar retail is that the sector’s challenges are almost wholly structural. There are new channels through which toys are being sold — Amazon and other online retailers — increased competition from the bigger one-stop shops like Walmart and Target, and, lastly, smartphones and other digital technology.
There’s also this: the way in which toys are marketed is changing. TV ads and printed catalogues, which used to fuel hype around new launches, aren’t enough any more. Essentially, toy makers are having to go where kids are and shift beyond traditional ad spots and media channels.
In Toys R Us’s case, it had the added burden of debt from an illtimed leveraged buyout. It’s like the Edcon of the toy world. In 2005, Vornado Realty Trust and private equity firms Bain Capital and KKR bought the company for Us$6.6bn.
e:
Unsustainable
The company, faced with roughly $400m (of its $5bn) secured and unsecured debt maturing in 2018, has had little ability to invest in growth initiatives such as building online capacity in recent years.
According to Fitch, the company’s capital structure is unsustainable in the long term. Toys R Us was actually hit with twin downgrades from rating agencies S&P Global and Fitch earlier this week. It’s yet another example of how private equity and retail do not a good match make.
Out of interest, operations outside the US and Canada are not part of the bankruptcy, or so-called Chapter 11, proceedings. That’s the roughly 255 licensed stores and joint-venture partnerships in Asia.
As is orthodox in situations such as these, pruning will take place: underperforming stores will shut and remaining locations will be smartened up to make the company viable over the long term.
Toys R Us will use $3bn in bankruptcy financing from lenders, including a Jpmorgan-led bank syndicate, to continue funding its operations (which include laggard Babies R Us) and buy merchandise ahead of the key holiday shopping season, which accounts for the bulk of its sales.