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What Killed Toys ‘R’ Us?

Toys

In the wake of the biggest bankruptcy of a U.S. retailer since Kmart in 2004, Toys ‘R’ Us is closing down all 800 stores in the U.S. after failing to secure a restructuring deal.

There were no buyers for the iconic store.

Following a $6.6-billion leveraged buyout by private equity firms in 2005, the toy giant struggled to boost sales and service debt. Last fall, it filed for Chapter 11 bankruptcy protection, burdened with $5 billion in debt that kept it from competing with Walmart and Amazon.

The company also is liquidating operations in other countries, and plans to sell its business in Canada, Central Europe and Asia.

Now, with an estimated 30,000 employees soon to be out of work, the real beneficiaries are Amazon and Walmart.

The Toys ‘R’ Us bankruptcy, according to analysts at Jefferies, would see an estimated 40 percent of the Toys ‘R’ Us sales flow go to Amazon, and 30 percent to Walmart.

It may have dominated the toy store business in the 80s and 90s, but discounters like Walmart and Target slowly chipped away at profits and any competitive edge it had to begin with. Then came Amazon, the online sales beast. Online, Toys ‘R’ Us failed to compete.

In 2016, Amazon recorded $2.16 billion in toys sales, compared to online toys sales for Toys ‘R’ Us of only $912 million. 

(Click to enlarge)

Source: Statista

Saddled with so much debt, CEO David Brandon conceded in an SEC filing last fall that the company had lagged behind competitors “on various fronts, including with regard to general upkeep and the condition of our stores”. Related: Why Aren’t Millennials Investing?

Now, major toy makers such as Hasbro and Mattel will have to choose new retailers. Toys ‘R’ Us accounted for some 11 percent of Mattel’s annual sales and some 9 percent of Hasbro’s. Neither toy company is feeling too stable right now, with or without Toys ‘R’ Us, and the rumor mill is ripe with talk of merger.  

But while Target, Walmart and other online sellers will be able to fill in the retail gap for Mattel and Hasbro, smaller toy makers won’t be so lucky. Toys ‘R’ Us reportedly accounted for more than 50 percent of small toy-makers overall business.

It’s not just Toys ‘R’ Us and toy-makers who are in trouble right now. Toys in general are facing extinction.

Even Lego’s major 13-year bull run is over, and there are simply more blocks out there than anyone wants. Mattel’s’ Mega Bloks is doing even worse, and the company reported a surprise loss even during the holiday season.

Toys ‘R’ Us was an American institution, but it’s a title it can only maintain as long as Americans still love toys. This is the digital era, and the top of the average child’s gift list is an electronic gadget that takes them well beyond the physical world of tangible toys.

By Jan Bauer for Safehaven.com

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