Toys R Us bankruptcy tsunami tests toy business

Like a big kid belly-flopping into a kiddie pool, the Toys R Us Inc. bankruptcy sent massive waves through the toy industry this year.

After filing for Chapter 11 bankruptcy protection in September 2017, Toys R Us shuttered its remaining 735 U.S. stores in June. The everything's-gotta-go pricing at the closing stores gave a sugary rush to the domestic toys market.

Retail toy sales in the first four months of the year climbed a healthy 7 percent to $7.9 billion from the year-before period, reported Port Washington, Pa.-based market research firm NPD Group.

"A significant amount of children's products were sold at extremely low prices throughout the first half of 2018, flooding the market and thereby reducing price points," wrote Jim Miller, president of Simplay3 Co., in an email interview. The Streetsboro, Ohio-based ​ firm uses rotational molding to make sit-in and ride-on toys.

The Toys R Us-quake also poured rocket fuel on the sector's ongoing shift from bricks-and-mortar to online outlets.

Toys R Us's demise, though stunning, was not unexpected to industry grandees such as Richard Gottlieb of New York-based consultancy Global Toy Experts.

"The United States has been over-stored for years and part of the reason for bankruptcies and store closings is therefore due to too many bricks and mortar locations for the number of consumers," Gottlieb wrote in an email to Plastics News.

U.S. e-commerce sales are expected to represent 8.9 percent of total retail sales this year, up from 8.3 percent last year, according to Farmington Hills, Mich.-consultancy Invesp.

In the short term, Toys R Us's bankruptcy was most definitely not kid's play for some of the biggest names in the business.

At Mattel Inc., the El Segundo, Calif., home of Hot Wheels and Barbie, net sales from Jan. 1 to Sept. 30 dropped 9 percent to $2.99 billion from the year before period.

Pawtucket, R.I.-based Hasbro Inc. saw U.S. and Canadian sales for the first three quarters slip 10 percent to $1.75 billion. The game giant that makes Mr. Potato Head and Monopoly, among others, saw global sales slide 12 percent to $3.19 billion.

In their financial reports, both companies were candid about the Toys R Us bankruptcy hurting sales. Both companies have also announced layoffs.

Mattel also said it was hurt by slower sales in China, where the GDP growth rate is still strong, but down slightly amid trade war fears.

Third-quarter sales for Santa Monica, Calif.-based JAKKS Pacific Inc. tumbled 10 percent to $237 million from the year before period.

The Toys R Us tsunami washed up on distant shores, too.

In Australia, all 44 Toys R Us stores and the company's online sales were shuttered this summer, according to Brisbane-based administrator McGrathNicol. Toys R Us and Babies R Us employed 700 people in Australia.

In the United Kingdom, all 105 Toys R Us stores closed, according to London-based restructuring and insolvency specialists Moorfields Advisory Ltd., which was put charge of winding down the retailer there, closing stores and selling off its assets.

But the bankruptcy has been less disruptive in Canada, where Toronto-based Fairfax Financial Holdings Ltd. earlier this year purchased all 82 Canadian stores for $300 million and will keep them running. Toys R Us in Canada employ more than 4,000.

While sales at about 400 Asian stores remain strong, the parent company is poised to sell its stake there.

Despite the year's drama, macroeconomic indicators remain strong. The National Retail Federation predicts consumer retail sales of all types should be up 4.3 percent to 4.8 percent this November and December, compared with last year's holiday season.

"Confidence is near an all-time high," Matthew Shay, the National Retail Federation president and CEO, said.

Fifty-five percent of surveyed consumers plan to make at least some purchases online, the Washington-based group says.

Many of those buyers will be harried parents, aunts, uncles and grandparents.

"We are seeing an accelerating shift to online toy purchasing by consumers. We believe the absence of Toys R Us has definitely impacted this," Simplay3's Miller said.

Gottlieb agrees.

"Time does not seem to be on the side of bricks and mortar retailers as the current and coming generations of shoppers are extremely comfortable shopping online and see driving to the store and not finding what they want to be a waste of time and resources," Gottlieb wrote.