Sup­pli­ers to stump up for Toys R Us

As Toys R Us drowns un­der $5bn of debt and Lego is forced to cut 1,400 jobs, Ash­ley Arm­strong re­ports on the sec­tor’s grown-up woes

The Sunday Telegraph - Money & Business - - Front page - By Ash­ley Arm­strong

THE toy mak­ing in­dus­try has thrown the em­bat­tled Amer­i­can chain Toys R Us a life­line by vow­ing to con­tinue sup­ply­ing it af­ter tum­bling into bank­ruptcy pro­tec­tion.

The bosses of Bratz doll maker MGA En­ter­tain­ment, Hatchi­mals man­u­fac­turer Spin Mas­ter and Syl­va­nian Fam­i­lies owner Epoch have told The Sun­day

Tele­graph that they are con­fi­dent Toys R Us will sur­vive with their sup­port.

Michi­hiro Maeda, chief ex­ec­u­tive of Epoch, said the US was the big­gest mar­ket for Syl­va­nian Fam­i­lies and he did not be­lieve Chap­ter 11 was “game over” for Toys R Us: “We think the com­pany can turn around and grow again with fresh money.” He said the com­pany was work­ing closely with Toys R Us and the for­mal bank­ruptcy pro­ceed­ings had pro­vided cer­tainty it would be paid for Christ­mas or­ders.

Mr Maeda, who grew up test­ing pro­to­type Syl­va­nian char­ac­ters and has in­her­ited his fa­ther’s busi­ness, re­vealed that it was on track to make $380m (£281m) this year af­ter sales of its col­lectible an­i­mal-themed toys grew by 150pc over the past five years. The com­pany is now fo­cused on im­prov­ing ef­fi­ciency at its Chi­nese fac­to­ries.

The Ja­panese boss said that de­spite a grow­ing trend for dig­i­tal toys and de­vices, Epoch was en­joy­ing a boost from a new gen­er­a­tion of chil­dren whose par­ents had played with the minia­ture wood­land crea­tures. Mr Maeda stressed there was still de­mand for tra­di­tional toys that “ex­pand chil­dren’s imag­i­na­tion”. Syl­va­nian Fam­i­lies is set to launch a town-themed play­set next year where the only bat­tery re­quired is for a street lamp.

Bank­ruptcy fil­ings don’t usu­ally start with a theme tune. But the sub­mis­sion from Toys R Us to a Vir­ginia court be­gins with an up­beat jin­gle: “I don’t wanna grow up, I’m a Toys R Us kid.” The line is the opener from the re­tailer’s long-run­ning US com­mer­cials and was swiftly fol­lowed by its un­usual mis­sion state­ment: the chain de­liv­ers “chil­dren their big­gest smiles of the year” and gives par­ents “an op­por­tu­nity to ful­fil their chil­dren’s wildest dreams”.

Since 1948 Toys R Us has been tug­ging on heart­strings by ap­peal­ing to par­ents’ guilt-rid­den fears that the only way their child can be happy is if they buy that lat­est doll, bike or play­set. It has been a multi­bil­lion dol­lar mas­ter­class in emo­tional ma­nip­u­la­tion.

How­ever, the warm and fuzzy child­hood feel­ings that Toys R Us has gen­er­ated for the past 69 years were re­placed last week with grown-up anx­i­ety as its US op­er­a­tions tum­bled into bank­ruptcy pro­tec­tion. The re­tail be­he­moth had drowned un­der the weight of $5bn of debt. The hang­over from a debt-fu­elled pri­vate eq­uity takeover in 2005 had left the chain lurch­ing from one re­fi­nanc­ing to the next – a move that boss David Bran­don called “short-term Band-aids”.

While its bank­ruptcy fil­ing in­cluded florid lines about chil­dren’s “glee­ful smiles and bounc­ing feet”, the de­tails painted a much grim­mer pic­ture about life be­hind the cur­tain of the world’s big­gest toy re­tailer.

The debt pile that had been en­gi­neered by buy-out firms KKR, Bain Cap­i­tal and real es­tate firm Vor­nado had left Toys R Us with an in­ter­est bill of around $400m a year, which had dras­ti­cally im­paired its abil­ity to in­vest in the busi­ness.

As a re­sult, the toy gi­ant, which was once a “cat­e­gory killer”, has fallen be­hind its ri­vals. Its stores have been in des­per­ate need of mod­erni­sa­tion, the chain has been woe­fully un­pre­pared for the ram­pant rise of on­line shop­ping, and it has failed to meet a grow­ing de­mand for sub­scrip­tion ser­vices for baby items, which the su­per­mar­kets and other ri­vals now de­liver.

There were signs two years ago that all was not well at Toys R Us when the re­tailer took two bru­tal, fi­nan­cial­ly­driven de­ci­sions to shut the larger than-life New York stores that drew in crowds of chil­dren. In 2015, six years af­ter buy­ing 155-year-old toy store FAO Sch­warz, the com­pany closed down the Fifth Av­enue em­po­rium, made fa­mous for the gi­ant key­board fea­tured in Big in which Tom Hanks uses his feet to bang out Chop­sticks and Heart and Soul. Just five months later, and days af­ter Christ­mas, Toys R Us shut­tered its vast Times Square store, which had for years at­tracted cus­tomers with an in­door Fer­ris wheel and gi­gan­tic 20-ft T-rex statue, af­ter rental costs soared to $42 mon the site. Toys R Us still had 1,600 stores af­ter the clo­sures, but few of them had the same “wow” fac­tor and were in ur­gent need of re­fur­bish­ment.

“You have to be par­tic­u­larly in­ept to make a toy store bor­ing, but Toys R Us man­aged it,” com­ments Neil Saun­ders at Glob­al­data. “Their shops have very lit­tle ‘pester-power’ be­cause very few chil­dren de­mand to be dragged around aisles and aisles of shelves of prod­ucts. The shops are no longer ex­cit­ing for chil­dren, and for par­ents it’s more con­ve­nient for them to buy toys along with their gro­ceries at Wal­mart or on­line.”

The com­pany, which was orig­i­nally started by Charles Lazarus, who re­turned home af­ter serv­ing in the Sec­ond World War and no­ticed a ris­ing de­mand for cots as the baby boom took hold, lost its en­trepreneurial spirit a long time ago, leav­ing it short of the agility and fi­nan­cial fire­power re­quired to stay at the fore­front of a chang­ing mar­ket.

The rapid growth of on­line sales has put sig­nif­i­cant pres­sure on Toys R Us, with Ama­zon last year mak­ing dou­ble the amount in sales of toys and baby prod­ucts in the US.

“Toys R Us once dis­rupted the high street with gi­ant out-of-town stores,” said Dan But­ters, part­ner at Deloitte. “But now the great dis­rupter has been dis­rupted, pro­vid­ing more ev­i­dence of the power of Ama­zon over tra­di­tional re­tail­ers. Cou­pled with the im­pact of be­ing so highly lev­er­aged and the ne­ces­sity to re­fi­nance the moun­tain of debt it has buck­led un­der.”

In the 12 years since the com­pany’s pri­vate eq­uity takeover the value of on­line re­tail­ing has soared from $2.7bn to $12bn. Mean­while, Toys R Us’s sales have flat­lined as it has failed to in­vest in its web­site or on­line de­liv­ery ser­vices. And as in­ter­net sales have grown, the com­pany’s vast store es­tate has be­come less prof­itable as shop­pers switch bricks for clicks.

Toys R Us has also had to face the rapid changes in toy re­tail­ing, which now sees chil­dren in­creas­ingly trade-in their ted­dies, Scalex­tric and dolls for ipads and other elec­tronic de­vices. Around 40pc of chil­dren now own their own elec­tronic tablets. And while the fash­ion mar­ket might be no­to­ri­ously fickle, it is noth­ing in com­par­i­son to the world of toys where chil­dren’s short at­ten­tion spans have been ac­cel­er­ated by the in­ter­net.

“In the first half of 2017, we saw the im­pact of so­cial me­dia in caus­ing vi­ral toys suc­cesses. While in years past it would have taken some­thing like fidget spin­ners months to travel in­ter­na­tion­ally, to­day, so­cial me­dia out­lets are al­low­ing con­sumers around the world to dis­cover new toys at the same time,” com­ments Fred­erique Tutt, a toy an­a­lyst at NPD Group.

The chal­lenges have even prompted Lego to slash 1,400 jobs af­ter re­cently suf­fer­ing its first drop in sales in more than a decade. The Dan­ish toy gi­ant, which es­caped bank­ruptcy 15 years ago and has since en­joyed a dra­matic turn­around on the back of a push into tech­ni­cal prod­ucts and Lego films, is now “press­ing the re­set but­ton” in a rad­i­cal ef­fort to ad­dress de­clin­ing sales.

Re­ports sur­faced at the start of this month that Toys R Us was on rocky ground, which started a “dan­ger­ous game of domi­noes”, ac­cord­ing to boss Bran­don. Within a week, nearly 40pc of its sup­pli­ers re­fused to ship prod­ucts to the re­tailer with­out cash on de­liv­ery or tighter pay­ment terms. The com­pany would have needed $1bn in cash to meet those de­mands. The tim­ing could not have been worse for the re­tailer as it al­most quadru­ples its or­ders to en­sure there are no empty shelves in the peak hol­i­day sea­son, when it gen­er­ates 40pc of its an­nual sales.

One of the sav­ing graces for the busi­ness is that it has se­cured a whop­ping $3.7bn “debtor in po­si­tion” fa­cil­ity to guar­an­tee sup­pli­ers they will be paid in full for their stock in the run-up to Christ­mas.

“The ben­e­fit for Toys R Us fil­ing be­fore the hol­i­day is it draws a dis­tinct line be­tween what they owed be­fore and the ad­min­is­tra­tive claims now, so toy man­u­fac­tur­ers know they will be paid 100pc of what they are owed and con­tinue to sup­ply them,” ex­plains Ted Gavin, man­ag­ing part­ner at Gavin Sol­monese, a con­sul­tancy firm.

Gavin ex­pects Toys R Us’s Chap­ter 11 to last “for around a year, but no more than two” and be­lieves that a debt-fore­quity swap will be the most likely route for the com­pany to ad­dress its groan­ing debt pile. “Sort­ing out and re­duc­ing the $5bn of debt will be the linch­pin of any exit be­cause dis­pos­ing of that li­a­bil­ity needs to hap­pen. I don’t think any­one is ter­ri­bly con­cerned that Toys R Us will dis­ap­pear for­ever. Once it’s ex­ited Chap­ter 11 it could even re­turn to the pub­lic mar­kets,” Gavin adds.

Toys R Us will be partly saved from the scrap-heap be­cause of its im­por­tance to the toy gi­ants. The re­tailer ac­counted for 11pc of Bar­bie maker sales last year, 9pc of Play-doh maker Has­bro and 9.4pc of ac­tion fig­ure busi­ness Jakks, ac­cord­ing to Wells Fargo an­a­lyst Ti­mothy Con­der.

Mat­tel has called Toys R Us “one of our most im­por­tant re­tail part­ners”. Mean­while, Ben Gad­bois, global pres­i­dent of Spin Mas­ter, maker of Etcha Sketch, Hatchi­mals and Paw Pa­trol, told The Sun­day Tele­graph it would “con­tinue to sup­port Toys R Us as they re­struc­ture their busi­ness.” “Toys R Us is an im­por­tant part of the toy in­dus­try and we wish them the best”, said Gad­bois.

Isaac Lar­ian, the boss of Bratz dolls maker MGA En­ter­tain­ment, is also sup­port­ive: “We be­lieve their pres­ence as a toy des­ti­na­tion is im­por­tant and their voice as a cham­pion of play is needed in this in­dus­try. They cur­rently have a num­ber of MGA prod­ucts in their stores, and we plan to con­tinue our long-stand­ing re­la­tion­ship with Toys R Us,” he said.

With just three months to go un­til Christ­mas, the toy gi­ants will be want­ing to en­sure that the doors to Toys R Us re­main open wide.

‘You have to be par­tic­u­larly in­ept to make a toy store bor­ing, but Toys R Us have man­aged it’

Epoch, the owner of the Syl­va­nian Fam­i­lies range, above, is among the man­u­fac­tur­ers plan­ning to throw Toys R Us a life­line

Trou­ble in store: re­tail be­he­moth Toys R Us has filed for bank­ruptcy pro­tec­tion in the US

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