It's been a little over a year since bankrupt Toys R Us outlined a plan to liquidate all of its U.S. operations, which not only included the namesake brand, but also Babies R Us.
Before Toys R Us became a leader in the toy industry, the company had its beginnings in the baby furniture business. Founder Charles Lazarus opened "Children's Bargain Town" in 1948 — nearly 50 years before the first Babies R Us opened in Westbury, New York.
While recent reports have alluded to the possibility of Toys R Us stores returning to the U.S., no specifics have been given regarding its Babies R Us operations, and the brick-and-mortar bones are all that remain of the retailer for now.
Aside from the Hobby Lobby, Big Lots, Michaels and, of course, Halloween stores that are filling the physical spaces left behind by Babies R Us, the retailer left behind significant market share.
Suppliers feel the burn
Some previously argued the Babies R Us brand is what kept the struggling retailer afloat. In fiscal year 2005, the company reported store comps at the Toys R Us brand fell 1.4%, while at Babies R Us comps grew 5.7%. However, in fiscal year 2007, store comps at Toys R Us were 2.2%, while at Babies R Us they were just 2%. At the time of the retailer's filing, Toys R Us said Babies R Us contributed to just 11% of the company's total revenue in 2016.
Eventually when it filed and liquidated its operations, the retailer's suppliers began to feel the burn as well.
"They were a significant, significant customer to us, so obviously, everybody in the baby business was affected," Mark Messner, CEO of SUMR Brands, a company that sold its products to Babies R Us, told Retail Dive in an interview.
Messner said following Toys' demise, the company had to quickly restructure and work to redistribute those lost sales to other retail partners, namely Amazon, Target, Walmart and Bed Bath and Beyond's baby brand, Buy Buy Baby.
"I'm not going to say it was easy, but I'm happy to say we're on the other side of that right now."
Mark Messner
CEO, SUMR Brands
In the quarter following Toys R Us' liquidation announcement, SUMR Brands reported net sales declined 11% to $42.1 million from $47.3 million in the year-ago period.
However, the company survived the impacts of Babies R Us' liquidation, and has moved forward. In May, the company reported net sales in the first quarter of 2019 increased 1% to reach $42.5 million, and Messner on a call with analysts said the results "more than make up for the $3 million of lost revenue" from Toys R Us' liquidation.
"I'm not going to say it was easy, but I'm happy to say we're on the other side of that right now," Messner said.
Similarly, Newell Brands, which owns baby brands Graco and Baby Jogger, reported that in the first quarter of fiscal 2018, net sales took a 7.6% hit partially due to "the business disruption to the Baby business created by the Toys 'R' Us ('TRU') reorganization and subsequent liquidation." However, on a call with analysts discussing the brand's most recent quarter (Q1 2019), CFO Christopher Peterson said, "Coming out of the first quarter, the headwinds stemming from the TRU bankruptcy subsides and we expect Baby to return to growth."
Who's filling the void left behind by Babies R Us?
At the time of the company's filing, Babies R Us occupied 223 stores in the United States and 12 international stores. Toys R Us had 568 stores in the United States and 780 international locations.
While data from the National Center for Health Statistics indicates birth rates in the United States have been on a steady decline causing less demand for baby products than years prior, Toys R Us' problems likely stemmed from a variety of factors, including insurmountable debt, e-commerce and private equity.
But the retailer also faced growing competition from major players in the industry, namely Walmart, Target and Amazon.
"You've really kind of seen the sector kind of consolidate and I think the remaining players have really benefited from the Babies R Us, or Toys R Us bankruptcy," Susan Anderson, managing director and senior equity research analyst with B. Riley FBR, told Retail Dive in an interview.
Additionally, the pricing wars that ensued between Toys R Us and some of retail's biggest players resulted in even more turmoil as Walmart, Target and Amazon were able to offer lower prices on the goods they sold. "There's definitely the rise of big box making quality baby goods affordable and available," Earnest Research Senior Data Analyst Stephanie Vabre told Retail Dive in an interview.
In recent years, the big-box retailers worked to ramp up their baby offerings, including through private label lines. Walmart earlier this year teamed up with celebrity couple Kristen Bell and Dax Shepard to unveil a plant-derived baby product line called "Hello Bello." The retailer in April also rolled out a new baby registry experience with an emphasis on digital.
Target also introduced a private label children's apparel line, Cat & Jack, in 2016, and two years later debuted a baby box subscription service through the brand, which contributed to its profitability.
In Toys R Us' bankruptcy filing, the retailer indicated that Babies R Us' "performance in particular has been affected by online 'subscription' ordering models," but also said that its "old technology infrastructure" didn't allow it to offer such services, but had intentions of eventually launching one.
However, in the same document, Toys R Us said that it had plans to invest $54 million from 2018 through 2021 to "upgrade in-store product offerings and employee service levels, launch a new Babies 'R' Us registry app, remodel the brand's website, implement a customer loyalty program, and create a digital concierge service that helps new and expecting — and often overwhelmed — parents find the items they need." However, the retailer ultimately couldn't fulfill this before its time ran dry.
Additionally, Target's private label Cloud Island brand, which launched in 2017, earlier this year expanded into essentials offering things like wipes, diapers, toiletries and feeding products. And Amazon, which seems to be trying to grab a piece of share in the majority of retail markets, isn't leaving the baby category off its list either.
The e-commerce giant acquired Diapers.com's parent Quidsi in 2010 for about $550 million, and in 2017 Amazon relaunched its "Mama Bear" private label diaper brand, just two years after it initially pulled the brand due to customer feedback.
Data shared with Retail Dive from Earnest Research indicates that as Toys R Us (including both Toys R Us and Babies R Us) lost share in the market, Amazon gained share. In 2014, Amazon held 18% share in the market, but by 2018, that number had nearly doubled. Meanwhile, Toys R Us held 5% share in 2014, but by 2018 that number fell to just 1%. And while the data shows that among Toys R Us, Walmart, Target and Amazon, the latter is the only player consistently gaining share, it's important to note that Walmart still holds the majority of the market (42% in 2018) with Amazon and Target (24% and 32% in 2018, respectively) not far behind.
But these retail giants aren't the only players trying to capitalize on Babies R Us' demise. Destination Maternity, which is currently facing its own struggles, announced it would begin testing accessories and baby clothes "to some degree," CFO David Helkey told investors.
According to a recent IBIS World report, the online baby product industry grew at an annualized rate of 8.9% in 2019, and is forecast to increase by 10.2% annually to reach $8.6 billion over the five years to 2019. Brandless, a direct-to-consumer home essentials startup, in January expanded its assortment to include the baby category, a move that could prove beneficial. Other direct-to-consumer companies have also popped up in the space as well, including Colugo and Mockingbird, brands that offer strollers, among other baby products. Even SUMR Brands, which was founded in 1985, just launched its own direct-to-consumer brand, "Born Free," earlier this spring. However, the baby sector has seen relatively little disruption from direct to consumer businesses.
But while the retailers that exclusively sell children's apparel, like The Children's Place and Carter's, may pick up some lost share from Babies R Us, it's not to the same degree as the much larger players, and Anderson said that's partially due to Walmart, Target and Amazon's ability to offer a full range of products to consumers.
"I think Walmart and Target are getting the lion's share of store traffic. I think other stores are kind of being shunned," Anderson said. "I think it's tough for some of these players, with the ease of online nowadays, and ordering on Amazon and everything, to find a compelling reason to really drive consumers into the store."
Potential for a comeback
Aside from the sheer size difference between Toys R Us and Babies R Us, the latter also didn't have the same impact on consumers when it eventually closed its doors.
"With Toys R Us, it was kind of a treat to bring your kids there," Anderson said. The nostalgia surrounding the company's namesake brand was almost too much for consumers to let go of, and other retailers tried to capitalize on that at the time of the closures.
Last holiday season, grocery store Kroger brought exclusive brands from Geoffrey's Toy Box — one of the bankrupt retailers remaining assets — to nearly 600 of its stores. The same can't be said for the company's baby brand.
"You root for retailers like that. There definitely was a gap created when they closed."
Mark Messner
CEO, SUMR Brands
But, in February the Toys R Us company was given a second shot at life, emerging as a new company dubbed "Tru Kids," which is run by Richard Barry, Toys R Us' former global chief merchandising officer.
Tru Kids in June announced plans to open about six U.S. stores and launch an e-commerce site, according to multiple reports. Details are scarce and there's been no indication whether Babies R Us will be among those store openings, although the possibility is enough to excite suppliers who viewed it as an important customer. Tru Kids did not immediately respond to Retail Dive's request for comment.
"You root for retailers like that," Messner said. "There definitely was a gap created when they closed. Moms are parents and expectant parents are looking for people who can help them in the parenting journey, especially new parents who don't want to walk into a store and look at a sea of strollers and car seats and other products, trying to decide which one's right for them."
However, while Toys R Us' absence was harder to replace due to the volume of toy products it was able to offer, which is "hard to get anywhere else," according to Anderson, the void left by Babies R Us appears to be easier to fill. Although a Babies R Us future remains to be seen, it's unclear how necessary a return would be with retail giants comfortably acquiring more share in the market.
