Retailers dreaming of a green Christmas without Toys R Us
Everyone in retail, it seems, is playing in the toy game this year after the country's biggest toy store liquidated. But will there really be any surprises about who wins?
Even with all the ink spilled over Toys R Us' sudden demise in Chapter 11, it's still an open question whether customers will even notice Toys R Us missing from the retail landscape this year, much less years into the future.
To some degree, the world without Toys R Us (news of its surviving brand property notwithstanding) resembles the world before the category killer came to dominate toys. It calls up a time when department stores, general merchandisers, and specialty and independent retailers all played avidly at the toy game.
Many analysts and industry observers expect the retailers that played starring roles in Toys R Us' decline and ultimate death — namely Walmart, Amazon and Target — to benefit the most in the new market. But many are making a go of it, setting up a kind of Darwinian game of "Sorry!" as retailers battle for toy market share.
"We're seeing a lot of retailers pick up space for toys," Susan Anderson, senior research analyst and managing director at B. Riley FBR, told Retail Dive in an interview. "Really, everyone is flocking to grab this market share. It will be interesting to see what happens."
'Kids want what they want'
Even as companies prepared for a Toys R Us-less world earlier in 2018, the toy seller was still casting a shadow over this holiday season. Anderson pointed to concerns among some analysts that parents may load up on cheap toys for the holiday season at Toys R Us liquidation sales.
The evidence so far isn't bearing that out, though. Anderson and her team found that a majority of parents (66%) did not shop at the retailer's going-out-of-business sales, according to a Sept. 25 report from B. Riley FBR. "The survey showed far less consumers stocking up on holiday sales at the TRU liquidation than we expected," Anderson said in the report.
In an interview prior to that report, she said that major toy makers Hasbro and Mattel both took care to keep their newest products — those that might be their best holiday sellers — off of Toys R Us' shelves so they wouldn't go out in the liquidation sales.
"The spring set of toys is not the same as the toys that sell in the fall for Christmas," D.A. Davidson & Co. analyst Linda Bolton Weiser told Retail Dive in an interview. "Kids want what they want for Christmas, and they accept no substitutes."
Moreover, NPD Group found that 83% of items bought in the Toys R Us liquidation sales were given away by customers by the end of September, according to an NPD study cited by Marketwatch. The research firm also found that the total negative impact of the liquidation this year would be about 3.4%.
The broader opportunity for retailers to enter or expand into the toy category likely wouldn't be there if not for the liquidation of Toys R Us.
The retail market for toys, on the whole, is worth $36.8 billion in revenue and covers more than 60,000 players, according to IBISWorld. Store-based retailing of traditional toys and games is worth nearly $4.8 billion (a figure that excludes digital games), down from about $6 billion in 2012, according to Euromonitor.
The growth of toy revenue has turned negative in recent years as more kids have turned to smartphones for entertainment. IBIS world estimates that toy retail revenues declined 0.8% from 2013 through 2018 and estimates they'll decline 1.1% over the next five years. But there's still plenty of people buying toys, and they need to be served.
"Consumption or sell-through demand by consumers doesn't change just because Toys R Us went under," Weiser said.
'Broadest assortment ever'
Just a few months after Toys R Us moved in court to liquidate its business, retailers — including Walmart, Target, Kohl's and J.C. Penney, among others — signaled their plans to increase their toy offerings for the fourth quarter. "Up until now we just heard allusions," Weiser said in a September interview. But in early fall, major retailers started releasing their plans.
Walmart in August released an aggressive plan to expand in the category, saying it would boost its toy assortment by 30% in stores and 40% online — making for its "broadest assortment of toys ever." Among the new products would be "thousands of new and exclusive items from top brands" and the top 40 toys as rated by children (up from 25 last year), including from Barbie, Fisher-Price, Lego and others. With the expansion, the retail giant also said it planned to market its toy products digitally and through in-store events.
The plans indicate Walmart intends to take over from Toys R Us as the leading "showroom" for toys, in Weiser's view. "It has to be, because Walmart is a really big retailer," she said, pointing to the events that highlight the season's hot toys. "Mattel and Hasbro are loving that."
Target soon followed Walmart with announced plans to double its new and exclusive toys, to more than 2,500, for the season. On Oct. 16, Target unveiled more details about its toy plans, saying it would clear 250,000 square feet for toy merchandise, host 25,000 hours of events around holidays and toys, and create an online "Toy Hub." Target is in a particularly good position to pick up many of those sales, considering that many of its stores are near former Toys R Us locations.
And then, of course, there is Amazon, which along with Walmart and Target stole share from Toys R Us for years leading up to its bankruptcy. The e-tailer reportedly has a paper toy catalog in the works that would be distributed through its Whole Foods grocery stores. That's after capturing one out of every six dollars spent on toys in the U.S. during 2017, according to One Click Retail.
Data provided to Retail Dive by Earnest Research shows how the big three — Walmart, Amazon and Target — have been stealing share from Toys R U, and each other, in the years past. Since 2014, Toys R Us' total share of wallet (as measured by anonymized transaction data) of its customers fell from 5% to almost nothing by 2018. During the same period, Amazon's grew from 18% to 32%. Walmart's, while remaining larger than Amazon's, fell from 49% to 42%. Target's fell from 29% to 24%.
During that same period, the total proportion of households that shopped at Toys R Us or Babies R Us fell from 36% to 30%, according to Earnest Research.
All the way in?
It's not just mass merchants that are going after the category. Party City, Kohl's, J.C. Penney, Five Below, BJ's, Michaels, Costco and a host of others are going after the Toys R Us' lost share, as are specialty retailers, including the revived FAO Schwarz and independent stores. Independent toy retailer members of the American Specialty Toy Retailing Association said this past spring that 2018 will be "the best year yet for neighborhood toy stores nationwide" and dismissed efforts by mass merchants to capitalize on the Toys R Us decline.
But toy demand, and the hole left by Toys R Us, might not be that large — not large enough for everybody who wants in. If not, then, who is going to come out of the holiday season on top of the toy market?
"To me, it's pretty straightforward," Ryan Fisher, a partner in A.T. Kearney's consumer products and retail practice, told Retail Dive in an interview. "Toys R Us had been declining for a very long time. The shoppers that left for e-commerce left for Amazon already. The [Toys R Us] consumer overlaps with Walmart and Target. Consumers will shift their spending there for the holiday."
"When it comes down to it, the powerhouses that exist are just going to get stronger," he added.
Other analysts and research back that view. "Back in March, we ran a survey asking Toys R Us shoppers at which additional retailers they had browsed for toys and games in the past year," Deborah Weinswig, founder and CEO of global retail think tank Coresight Research, told Retail Dive in an email. "What they told us was that Walmart and Amazon were neck and neck, with Target just behind. This suggests to us that all three will capture a substantial share of purchases that previously went to Toys R Us."
Coresight found that Toys R Us was the fourth most-popular retailer by the number of shoppers and that its shoppers were "much more likely" than average toy shoppers to have also browsed toys at Walmart or Target. In March, more than 65% of Toys R Us shoppers surveyed said they had also browsed at Walmart and Amazon, and just over 63% browsed at Target, according to Coresight research.
"The relative strength of Walmart and Target was probably due to the fact that many Toys R Us shoppers, by definition, had a preference for shopping at multichannel retailers instead of internet pure plays such as Amazon," Weinswig said.
Another nearly 30% had browsed at dollar stores, 23.2% at department stores, 21.6% on eBay, 18.6%, at Costco, 15.3% at Five Below and 14% at Kmart. "We believe that lower-ranking retailers are also likely to see gains, as toy dollars flow down as well as up," Weinswig said. "Indeed, our data suggests that dollar stores, department stores, eBay and Costco could also chalk up gains as a result of the Toys R Us closures."
Gordon Haskett has found that Walmart so far is leading the pack, having captured 26% of lost Toys R Us traffic, according to a note cited by CNBC. Target, meanwhile, got 14% of that traffic, while dollar stores captured 10% and Costco 8%.
As for the other players, there's probably not room for them all to succeed. Fisher said for retailers entering the category the play needs to be a long-term investment to succeed, rather than "investing a lot of money to capture market share for the next year or two."
"Where's the market for toys going? Well, it's going online, not in stores," he added. For retailers not committed to the category — especially smaller ones that can't land exclusive deals — it would be harder for them to compete, Fisher said. "If it's just to have toys in the store to pick up some share, then you're really not all the way in."
A ghost of holidays past
With the market working so quickly to fill in the gaps left by Toys R Us, it raises a question: Will the world even miss the toy retailer?
It could be suppliers who feel the impact the most. The big toy makers, namely Hasbro and Mattel, have suffered financial pain from the Toys R Us liquidation, but some analysts, including Anderson and Weiser, expect the toy giants to make up their Toys R Us sales in short order, likely in 2019. That said, Mattel has cut more than 2,000 jobs as it regrouped in the wake of the toy retailer's wind down. And on Oct. 18, reports broke that Hasbro, too, plans to potentially cut hundreds of jobs as it works on its "transformation."
While the big toy makers are, on the whole, able to absorb the shock of the Toys R Us liquidation, the story is different for smaller toy manufacturers.
"Very small brands and companies are being hurt," Weiser said. "Many are selling themselves because they can't survive. … There's more consolidation on the supply side."
As for customers, Fisher has a blunt answer to the question of whether they will miss Toys R Us: "No, not at all."
"I think the world misses the Toys R Us of years ago, when the retailer's stores provided a compelling shopping experience," he said. "But missing the Toys R Us that it had become — not at all."
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