Toys ‘R’ Us Canada ready for its makeover
Retailer embarks on revised game plan following recent demise of U.S. parent
Toys ‘R’ Us Canada has made it through eight months of bankruptcy protection and the demise of its former U.S. parent, which closes its remaining stores on June 29. Now, it’s ready for a makeover.
But first, the retail chain is busy reassuring consumers that it’s alive and here to stay amid the confusion of outliving the ailing stateside Toys ‘R’ Us Inc., which in March announced it would close all 735 of its U.S. stores after failing to either find a buyer or restructure its US$4.9-billion debt.
“The media still coming in from the U.S. is enormous and, unfortunately, the pickup of bad news is tenfold that of good news,” said Toys ‘R’ Us Canada president Melanie Teed-Murch, who is embarking on a two-month coast-to-coast tour to promote the chain’s plans under the wing of new owner Fairfax Financial Holdings Ltd., which bought the 82-store retailer for $300 million in early June. (Bloomberg earlier this week reported that Fairfax and former Toys ‘R’ Us chief executive Jerry Storch are trying to reboot the U.S. chain.)
“It’s our No. 1 priority to get our message out that there is a business here,” said Teed-Murch, who was named president of the chain in 2016, 20 years after she began her career with the retailer as a store manager in Kitchener, Ont.
“It’s 100-per-cent Canadian owned and operated, and employs over 4,000 Canadians. That’s a phenomenal story to tell when we have seen so much retail leave the Canadian landscape. Overall, the brand hasn’t been damaged, but there has been some confusion.”
Part of that confusion stems directly from the company’s hardiness in Canada relative to its defunct U.S. counterpart, despite having a dated-looking store format, fighting erosion from growing competitors such as Amazon.com Inc. and eBay Inc., and facing limitations on reinvesting in the business since it was loaning money to its U.S. parent.
But with more than $1 billion a year in sales, the Canadian stores have had a steady track record of sales gains and earnings before interest, tax, depreciation and amortization of more than $100 million per year for the past nine years.
Nevertheless, the Canadian chain had to file for protection under the Companies’ Creditors Arrangement Act last September when the U.S. parent filed Chapter 11 because they shared a credit facility. Court filings revealed that Toys ‘R’ Us Canada had been sending surplus cash from its operations to prop up the U.S. operations since 2016, making $101 million in unsecured inter-company loans.
To be sure, there were clear bumps during the Canadian company’s period of court-approved protection from creditors — aside from customer confusion, gift card purchases over the Christmas period were softer than usual — but it also showed some surprising resilience: Overall sales exceeded expectations and half-a-million customers joined its new loyalty program.
Industry observers say the success of Toys ‘R’ Us Canada is remarkable because it has thrived while operating with a largely aging fleet of big-box retail stores, a format that proliferated in the 1990s and whose chief attribute, namely a varied and deep selection of goods, has been outdone in modern times by the so-called “endless aisle” of the internet.
In order to evolve to meet the needs of digitally savvy millennial parents, retailers have to better merge their digital and store-based operations, analysts say.
The stores will have to eschew the classic “stack ‘em high and sell ‘em cheap” merchandising style of box stores in favour of more modern, “experiential” shopping by improving service and adding activities that encourage people to make a mall visit rather than shop on their laptops or cellphones.
Teed-Murch believes the boxstore stigma hasn’t hurt Toys ‘R’ Us Canada, which has been incorporating weekend events at its stores, including a “Make and Take” program that allows children to put together toys and take home a small freebie, such as a poster.
But that doesn’t mean its aging fleet of stores don’t need work.
“As stewards of the toy and baby industry, we need to bring the boxes to life,” she said. “That’s what they can count on us for in the future.”
With a willing long-term partner in Fairfax, Toys ‘R’ Us Canada is spending more than $10 million to renovate its store network by the end of the year, with more than 40 refreshed locations to be completed before the end of summer.
“We look forward to building for the long term and allowing the Toys ‘R’ Us team in Canada to reinvest in the business instead of the past history of just sending earnings to the U.S.,” Prem Watsa, Fairfax’s chief executive, said after the deal closed.
Some upgrades have already been rolled out at newly renovated stores in Barrie, Ont., and Langley, B.C. The changes include lowered shelving, grouping toys according to children’s age, stage and play pattern rather than by brand, and adding interactive play areas and places for parents to sit down.
Teed-Murch said stores will also introduce mobile pay and reconfigure the checkout area in order to process payments and online pickups more quickly.
She has more ideas about what she’d like to see in the future: a food-service partner, in-store birthday parties and themed events to promote workshops in fitness, child development, and science and learning.
Jennifer Marley, partner at Toronto-based marketing consultant Sklar Wilton & Associates Ltd., believes experiential retail could help drive more customer traffic at Toys ‘R’ Us Canada.
“It makes sense, because the key for toys is picking up traffic drivers,” she said. “One of those is buying for birthday parties. As kids get older, those triggers go away. A kid probably attends fewer birthday parties as a 12-year-old than as a six-year-old. I’d suggest (Toys ‘R’ Us Canada) also look at what they are doing for the kids that are above 12 before they let Best Buy have them.”
Michelle Liem, a toy industry analyst at market research firm NPD Group Inc., notes Toys ‘R’ Us in the U.S. was ultimately brought down by its debt burden and was in a weaker competitive position than the chain was in Canada, with a fourth-place market share in toy retail.
Toys ‘R’ Us Canada is No. 2 in toy sales behind Wal-Mart Canada Corp., she said, but the toy industry continues to grow despite some industry worries about the proliferating avenues of activity that now compete for kids’ attention compared to the 1970s.
“Kids are still playing with toys,” Liem said. “They are busier kids than the previous generations. They fit in sports, they play with toys, they are gaming, they watch entertainment, they have mobile devices and they (use computers).”
The Canadian toy market has been growing by about $100 million a year on average since NPD began tracking it in 2014, when the market was worth $1.7 billion. Sales rose three per cent last year to $2 billion.
Liem said the Canadian arms of global toy distributors are also keen to ensure Toys ‘R’ Us Canada stays alive, and are negotiating prices that reflect the retailer’s size in the market rather than the scale of its prior global parent.
“When you think of how much retailers invest in marketing and advertising and creating events, it is valuable to the manufacturer to have their brands shown in the stores,” she said.
As Teed-Murch looks to the future, she sees a possibility for Toys ‘R’ Us Canada to open stores as small as 5,000 square feet in towns that might have been deemed not big enough for one of the retailer’s 35,000-to-40,000-square-foot box stores in the past.
“There are a number of communities in Canada that we are not serving,” she said, noting such moves would be in keeping with that of a more nimble retailer.
“As a smaller company now, I liken (the difference) to that of a speed boat and a yacht. We are able to make swift decisions about important factors that impact our business, and really cater to a rapidly changing retail marketplace.”