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Tuesday, 19 September 2017

Toys R Us files for bankruptcy - What can we learn from it.

If you ever needed confirmation that these are tough times, Toys R Us has just filed for bankruptcy in the US. An excerpt from the Reuters report:

Toys ‘R’ Us Inc, the largest U.S. toy store chain, filed for bankruptcy protection late Monday, the latest sign of turmoil in the retail industry that is caught in a viselike grip of online shopping and discount chains.

....


Toys ‘R’ Us received a commitment for over $3 billion in debtor-in-possession financing from lenders including a JPMorgan-led bank syndicate and certain existing lenders, said the Wayne, New Jersey-based company, which also operates the Babies ‘R’ Us chain.

The financing, subject to court approval, reassures its suppliers they will get paid for their Lego building blocks and Barbie dolls that are being shipped for the holiday season.

......


Toys ‘R’ Us is the second-largest toy seller in the United States behind Amazon, according to consulting firm Kloster Trading Corp.

“What they have going for them is they are the last major player in their market,” said David Berliner, a partner and restructuring specialist with BDO Consulting.

This means that Toys R Us will probably survive this, but why did it happen?


When Toys R Us first came to Malaysia, it was based on the ground floor in Subang Parade. It was a kid's dream come true and was stocked full of wonderful toys.




For one thing, the news article points towards thinning margins and the onslaught of competition from online retailers and discount chains. Anybody with a connection to the Internet can set up a new online store and compete with Toys R Us. Many people use what is now called "dropshipping", where the online retailer takes the orders, and collects payment, before paying the manufacturer or wholesaler in turn. The manufacturer or wholesaler will then send the orders to the purchaser -- thus eliminating any need for the online retailer to even hold stock. A more popular and institutionalized way is the currently popular FBA -- Fulfilled by Amazon. In FBA, Amazon acts as the dropshipper's supplier.

I hope that Toys R Us continues to survive and delight children all over the world. When it first came to Subang Parade, in Malaysia, I remember going there with my maternal grandparents. We walked around. I didn't like toys then, and I didn't ask for anything. But seeing all those toys were just magical to a young boy. I knew then that my parents were struggling, and it didn't make any sense for me to ask for toys. My maternal grandfather, unlike my paternal grandfather, was a relatively wealthy man. He had a hardware shop in the northern state of Kedah. But he was living with me because of the dialysis treatment for my maternal grandmother, who suffered from kidney failure. Even at that age I knew that it was too much to ask for things.

Back then, when I was a child, Toys R Us would be the main reason for me to want to go to Subang Parade. But the years rolled on, and I soon discovered that life was not always what we might want it to be. When my maternal grandparents passed away, I had the benefit of having spoken to them, and eating with them, up to my early teenage years. When I think of them, I remember Toys R Us. I remember my grandfather walking around with my grandmother, the poor old lady incapacitated, short of breath. But they were a loving couple. I think that they might have remembered me walking around Toys R Us too.

The point is, even though I was never a customer of Toys R Us in my formative years, and even though it was beyond my reach, just walking in their aisles and looking at the many toys from foreign countries was enough to make my childhood a little bit more magical. Now that I have children of my own, they too enjoy the touch of physical toys -- and Toys R Us is one of their favourite places. I can't always buy toys for them, but what little I can afford, I try to give. I hope that Toys R Us survives. If it has to cut its margins to survive, perhaps that will be a good thing, because more children can enjoy the wonder of toys. (It also makes toys more affordable for parents.) I can't begin to tell you the sinking feeling I get when, after my son has told me that he loves this toy or that toy, I take a look at the price tag and see that its a few hundred ringgit. "Gosh," I tell myself, "that's much more than the guitar that I've always wanted to buy for myself." (I have been wanting to buy a guitar for a long time, for myself, and for worship.)

To Toys R Us: Live long and prosper.

I think there are several things that we can learn from Toys R Us's situation.


First, they should compete with the online retailers and discount stores by starting their own online stores and discount chains. If you can't beat 'em, you might as well join 'em. Take a gamble, and don't wait until it's too late!

Second, they might want to pare down their store sizes in order to reduce costs. Instead of having large stores everywhere, they might want to downsize a number of them. This would help them save costs. They might even consider closing down a few branches entirely. But then, that poses another problem, which is: What would they do with the employees? No doubt, salaries would still have to be paid. That leads us to the third thing...

Third. Perhaps they can consider becoming a manufacturer in their own right. After years of selling toy products, has it ever occurred to them to manufacturer those toys themselves? They have the network of retail outlets that many do not. They also have a recognisable brand. Perhaps they can consider it seriously.

Fourth, if bad times persist, perhaps the shareholders can consider selling out to new owners. After all, the Toys R Us brand has value in its own goodwill. The world's number 1 toy retailer, Hamley's, was recently sold to a Chinese footwear retailer called C.banner. No doubt, its goodwill, established since 1760, played a big part in the sale price. Hamley's had previously changed hands several hands, including Icelandic (Baugur, Landsbanki), and French (Groupe Ludendo).

Thanks for reading

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