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31 December 2024

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Lessons from the endgame for Toys 'R' Us

  •   Alex Wu
  •   6 August 2018
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After failing to secure a buyer, Toys 'R' Us (Australia) Pty Ltd has closed its 44 toy and baby goods stores, affecting approximately 700 employees. The closure has come as no surprise following the parent company, Toys 'R' Us Inc., filing for bankruptcy. The company’s online store was shut down in June 2018 and the retail stores closed on 5 August, after an inventory clearance sale.

Inability to adapt to change

The demise of Toys 'R' Us can be attributed to the company’s inability to adapt to changes in the Toy and Game Retailing industry. Industry operators have faced intense competition from online retail giants over the past five years. Amazon has dominated the US online toy sales market earning double the Toys 'R' Us’ revenue in 2016. Toys 'R' Us Inc. outsourced its online business to Amazon in 2000. While Amazon grew rapidly, Toys 'R' Us never managed to catch up with the online trend. After Toys 'R' Us was acquired by private equity firms in 2005, the company accumulated significant debt and consequently lacked the resources to invest in building robust online infrastructure.

The Australian Toy and Game Retailing industry has struggled in recent years, with revenue only increasing at an annualised 1.4% over the five years through 2017-18. However, Australia Post’s Inside Australian Online Shopping report shows that online game and toy sales have increased strongly, including a rise of 19.2% in 2017. Toys 'R' Us’ offline operations have also been challenged over the past five years. Department stores represent a significant source of competition for operators in the Toy and Game Retailing industry. Department stores such as Kmart and Big W offer a wide range of products at lower price points, due to their strong bargaining power and economies of scale. Being a specialised retail chain has limited Toys 'R' Us’ potential sales.

When one door closes, another opens

However, the exit of Toys 'R' Us represents a significant opportunity for Associated Retailers Limited, the owner of Toyworld, which is the major competitor of Toys 'R' Us in Australia. Toyworld has adopted the same traditional strategy as Toys 'R' Us, which focuses on bricks-and-mortar stores. There are currently over 120 Toyworld stores across Australia. Many parents are expected to turn to Toyworld’s retail chain.

Associated Retailers Limited’s revenue in the Toy and Game Retailing industry has declined in recent years, from a peak of $230 million in 2014-15 to an estimated $190 million in 2017-18. Intense competition from online operators and department stores has affected the company’s performance. These challenges are expected to continue for the overall industry in the current year, with industry revenue anticipated to decline by 0.5%. However, the exit of Toys 'R' Us represents a significant opportunity for Associated Retailers Limited, if the company can avoid the same challenges that led to the closure of their main competitor.

 

Alex Wu is a writer for IBISWorld's Analyst Insights.

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