WHERE WILL ALL THE TOYS GO?
What’s Next for Toy Retail After the Loss of Toys “R” Us? by HARVE LIGHT, managing director, Conway MacKenzie TOYS “R” US FILED FOR BANKRUPTCY protection almost nine months ago. The battles over assets are still raging in the courtroom, but the industry marches on. The filing’s immediate impact on the supply chain was harsh. Stores closed and thousands lost their jobs. As expected, there was a great deal of panic despite the fact that many anticipated the filing. What would happen to the supply chain? Worries about follow-on bankruptcies were common. Enough time has passed that now is a good time to ask the question, “Was there a ripple effect?” More specifically, what was the effect on suppliers and their liquidity? What happened to all the vacant real estate? How has the toy industry adapted? What are some of the unintended consequences? It is a little early to see the full impact on suppliers. They still have to go through the first holiday season since Toys “R” Us’ exit, but early indications point to two very different results. As expected, the other major retailers— Amazon, Walmart, and Target—are picking up a lot of the slack. The margin compression for suppliers in the U.S. is beginning to show itself, and it will have a negative impact on supplier profitability. The large toy makers appear to be the big winners in the race for share with these retailers. In addition, the bigger companies continue to deploy resources for growth outside the saturated U.S. market. The future is much less clear for small and mid-size toy makers. It is all about risk management. Without the breadth of product of the larger companies, retailers are less willing to take any risk on a company with one or two products, much less give up valuable shelf space. The broad, traditional toy lines with predictable results are winning the day. So, what happens to the hot new toy from the creative entrepreneur? One bright spot in this process is that liquidity appears to have been managed appropriately. When a supplier begins to see negative issues with a significant customer, communication with other stakeholders, espe-
cially lenders, is critical. If these conversations do not take place, liquidity and credit line availability can evaporate in an instant. In talking with lenders, it appears that these conversations did take place with many suppliers. In the months leading up to Toys “R” Us’ bankruptcy, several lenders indicated that exposure was reduced in a very controlled manner. This is also evident by the lack of immediate follow-on bankruptcy filings by suppliers. The next major hurdle facing suppliers is the upcoming holiday season. Do they have enough capital and liquidity to get through the season? One of the big issues that perplexes real estate observers is the amount of retail space that became vacant as more retailers fall by the wayside. It is a trend expected to continue. Toys “R” Us is no small contributor with the closure of all 735 stores in the U.S. While there will likely be many sites that will sit vacant for a time, there is no shortage of interest in many of the locations. Our firm’s real estate practice saw a high level of interest in retail space in general. Inquiries maintained a steady pace over the past several months. There appears to be a great deal of ingenuity and creative ideas to repurpose these properties. It is also evident that local communities are not waiting to see how these closures will affect them. Many local governments and property owners are now working together to develop alternative use plans for the more mature mall properties, and the ideas are wide-ranging. Whatever the result, the retail properties of today will look very different in the future. Unlike many other retail bankruptcies, Toys “R” Us was a dominant player in its space. There are some very interesting developments starting to materialize because of its exit from the market. As with several other iconic American brands, it is unlikely that this is the real end of the Toys “R” Us name. Someone will buy it out of the bankruptcy and find a way to resurrect it in the future. We have seen other brands, such as Converse and Eddie Bauer, rise from the dead. The
RadioShack name also survived, only to file again. HobbyTown recently announced it will open RadioShack Express shops in up to 100 of its stores. Toys “R” Us has that same brand appeal. It had such a long history that it is very likely we will see it again someday. The second interesting development is how the void left by Toys “R” Us will be filled. Walmart, Amazon, and Target will surely get the lion’s share of the business, but other companies are trying to take advantage. One intriguing announcement is that KB Toys, a long silent competitor, is returning to the market. Once a strong player in the toy market, it liquidated in 2009. Interestingly, Toys “R” Us bought the brand rights as a part of the liquidation process, only to sell it later. The current owners announced plans for 1,000 pop-up stores to try to take advantage of the current market conditions. It will be interesting to see how this works out. Additionally, Party City recently announced it will open approximately 50 Toy City pop-up stores for the holiday season. As we look back, many expected the collapse of Toys “R” Us to have a calamitous impact on the toy industry. Fortunately, many suppliers lived to fight another day. Planning and communication were two of the major contributors to their survival. New players emerged to pick up the slack and more will follow. However, the final chapter has not been written. The retail market continues to shift, but retailers and their suppliers are tough, scrappy fighters. Caution, communication, and capital will ultimately decide the winners and losers. »
Harve Light, managing director of Conway MacKenzie is a member of the American Bankruptcy Institute, the Turnaround Management Association, and the Association for Corporate Growth. He consults on the management of distressed situations.
toybook.com | JULY/AUGUST 2018 | THE TOY BOOK 13