TOYS 'R' US DEMISE COULD SPUR MERGER BOOM IN US TOY MAR­KET

The Gulf Today - Business - - SPECIAL REPORT -

The US toy in­dus­try looks set for a flurry of merg­ers and ac­qui­si­tions be­tween smaller toy mak­ers in the af­ter­math of the Toys ‘R’ Us bank­ruptcy, as they seek more scope and ne­go­ti­at­ing power with big box re­tail­ers Tar­get and Wal­mart.

Smaller toy com­pa­nies that tra­di­tion­ally re­lied on Toys ‘R’ Us as a launch plat­form to sell and pro­mote prod­ucts, say it is dif­fi­cult to de­velop re­la­tion­ships with mass re­tail­ers, which now have the coun­try’s big­gest toy de­part­ments.

They say re­tail­ers are in­creas­ingly picky about al­lo­cat­ing dis­play space, pre­fer­ring bil­lion dol­lar well known brands like Mat­tel’s Bar­bie and Hot Wheels and Has­bro’s Marvel Su­per­hero ac­tion fig­ures. “If you’re a young brand, it’s hard to be found,” said Shaun Rein, an an­a­lyst with China Mar­ket Re­search Group, who cov­ers Asian toy pro­duc­ers.

“A lot of the smaller niche brands that you’d buy be­cause you’d seen (them) while brows­ing in Toys ‘R’ Us are go­ing to be hit very hard.”

With Toys ‘R’ Us out of the picture, re­tail power has shifted to Wal­mart, Tar­get and Ama­zon, said Jackie Breyer, ed­i­tor-inchief of in­dus­try mag­a­zine The Toy Book.

Consolidation helps smaller toy firms get their name out and get prod­ucts on shelves as they will have a big­ger port­fo­lio of prod­ucts for a mass mar­ket re­tailer to choose from, she added.

The to­tal value of deals in the US toy in­dus­try has soared to $962.7 mil­lion since Toys ‘R’ Us filed for bank­ruptcy on Sept. 19 last year, com­pared to $85.4 mil­lion in the same pe­riod a year ago, ac­cord­ing to Thom­son Reuters data.

Of the 19 deals in the US toy in­dus­try since the bank­ruptcy, the big­gest was Has­bro Inc’s $522 mil­lion pur­chase of fran­chises, in­clud­ing Power Rangers and Julius Jr from Sa­ban Prop­er­ties LLC, the Los Angeles-based firm cred­ited to have launched the “Mighty Mor­phin Power Rangers” live-ac­tion TV show in 1993.

Play­mon­ster, the maker of the ‘5 Sec­ond Rule’ card game, in Feb­ru­ary bought Kid O Toys, while Cana­dian toy-maker Spin Mas­ter Corp bought plush toy maker Gund for about $79 mil­lion.

Spin Mas­ter de­clined to com­ment, while Has­bro said its ac­qui­si­tion was not be­cause of the re­tailer’s bank­ruptcy.

More gen­er­ally, merg­ers and ac­qui­si­tions in the con­sumer prod­ucts and sta­ples space have racked up their strong­est open­ing to a year since 2008, with more than $216 bil­lion spent glob­ally, ac­cord­ing to Thom­son Reuters data. The to­tal value of deals is up 33.6 per cent over the same pe­riod last year.

HUGE GAME CHANGER

Col­lectible toys maker, The Loyal Sub­jects’ Chief Ex­ec­u­tive Of­fi­cer Jonathan Cathey said he has seen an in­crease in in­ter­est since the bank­ruptcy, and has had at least two po­ten­tial buy­ers pur­sue his Cal­i­for­nia-based com­pany. Chief Ex­ec­u­tive Of­fi­cer Jay Fore­man of Florida-based toy maker Ba­sic Fun! said talks of consolidation be­tween his firm and smaller play­ers have “eas­ily tripled” since Septem­ber.

“Toys ‘R’ Us is re­ally a huge game changer,” Fore­man said, whose firm bought K’nex and Ge­oworld since Toys ‘R’ Us went bust. The toy re­tailer’s bank­ruptcy and sub­se­quent liq­ui­da­tion of its over 700 US stores in March was the largest col­lapse in a year that saw record store clo­sures and a fun­da­men­tal shift in once-re­li­able brick-and-mor­tar re­tail mod­els.

“More com­pa­nies are now ques­tion­ing, where are the big­gest op­por­tu­ni­ties to sell toys,” said Kate Clark, founder and pres­i­dent of Padding­ton bear toy maker, Yot­toy Pro­duc­tions Inc.

“Un­for­tu­nately, some toy com­pa­nies may strug­gle greatly and some may not sur­vive.”

Ac­cord­ing to mar­ket re­search firm NPD Group, US toy sales topped $20 bil­lion last year. Mat­tel and Has­bro to­gether ac­counted for 25 per cent and small play­ers made up as much as 40 per cent.

Toys ‘R’ Us alone had ac­counted for 12 per cent of all toy sales na­tion­wide, ac­cord­ing to NPD Group.

But toy sales in the US have been slow­ing and with Toys ‘R’ Us gone, toy mak­ers have lost an in­cu­ba­tor for new and ex­per­i­men­tal toys that other re­tail­ers were not will­ing to bet on.

“As an en­tre­pre­neur who was start­ing a toy com­pany, they (Toys ‘R’ Us) were al­ways the one that were will­ing to take chances and buy a broader ar­ray of prod­ucts,” said Michael Rin­zler, founder of Wicked Cool Toys that makes Cabbage Patch Kids and Teddy Rux­pin bears.

In­dus­try ob­servers say that points to the power ly­ing firmly with a hand­ful of big play­ers in the sec­tor.

“When you’re a smaller sized com­pany... do you say that maybe it’s a bet­ter strat­egy (to) merge with an­other com­pany or to per­haps to be ac­quired so that you get more scale?” said Bob Wann, who is the chair­man of the Toy As­so­ci­a­tion in the United States and the CEO of toy com­pany Play­mon­ster. “I think more com­pa­nies will think about con­sid­er­ing that than per­haps they did in the past.”

Who knew that the beloved Ge­of­frey the Gi­raffe mas­cot had a price tag? In ad­di­tion to the 735 US stores that are be­ing closed as part of its bank­ruptcy pro­ceed­ings, the 70-year-old re­tailer is also sell­ing off much of its in­tel­lec­tual prop­erty, in­clud­ing its Toys R Us name, the Ba­bies R Us brand and its mas­cot and logo, Ge­of­frey the Gi­raffe, along with a num­ber of do­main names it owned, ac­cord­ing to le­gal fil­ings. The sale pro­ceed­ings are geared to pay off $200 mil­lion debt to cred­i­tors and to cover le­gal fees an­tic­i­pated to be as high as $348 mil­lion.

The com­pany’s do­main port­fo­lio in­cludes the ma­jor­ity of site ad­dresses with an “r us” in it. The fam­ily-friendly brand didn’t want to open it­self to sala­cious as­so­ci­a­tions, such as a cus­tomer typ­ing in “adult­toys­rus.us” or “sex-toysr-us.com” into the search bar and find­ing some­thing very dif­fer­ent than they were an­tic­i­pat­ing.

But, the brand’s do­main buy­ing didn’t just in­clude the more risque do­main names. They, also, in­cluded a va­ri­ety of oth­ers rang­ing from Burg­ers-r-us.net, cell­phones-r-us.com, movies­rus.com, pool­srus.com, trade­mark­srus. com and even ihate­toys­rus.com. Most likely the do­mains and the rest of the in­tel­lec­tual prop­erty will be sold at auc­tion, but the par­tic­u­lars of when and who the po­ten­tial buy­ers might be have not been made avail­able as of yet.

And even though the com­pany has filed for bank­ruptcy, it goes to show that while the com­pany was in busi­ness, part of its busi­ness model was ded­i­cated to due dili­gence pro­tect­ing the brand.

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