China Consumer

Toys ‘R’ bust?

Toys ‘R’ Us remains bullish on China despite going under in US


Growing up can be hard

“I don’t wanna grow up,” was a slogan Toys ‘R’ Us used in the 1980s. Unfortunately the US toy seller appears to have grown to adulthood and it’s not turned out so well: it filed for Chapter 11 last week.

As the firm sought bankruptcy protection in the United States and Canada, there was much speculation about what went wrong for “the world’s greatest toy store” – to pluck another one of its slogans.

Naturally the usual suspects were e-commerce giants such as Amazon, which have been eating away at physical stores’ profits. However the New York Post reports that only 16% of toy and hobby sales in the US are made online, as opposed to nearly 50% for the electronics market, suggesting the explanation isn’t so simple.

China’s online retail sales, for instance, are roughly twice the size of those in the US. Yet China has been the fastest growing market for Toys ‘R’ Us. The toy merchant opened 100 stores there between 2006 and 2016 and over the last year it has quickened the expansion with 34 new stores in the country. Roy Sammartino, the head of the American firm’s China unit, said in April Toys ‘R’ Us will open 30 to 40 stores every year, mostly in second and third-tier cities.

The good news for Sammartino’s China division: it has been relatively unaffected by the trouble facing its North American franchise.

Toys ‘R’ Us’ China falls under the banner of Toys ‘R’ Us Asia, which is 85% owned by the US-headquartered firm and 15% by Fung Retailing (part of the Hong Kong-listed merchandiser Li & Fung). Responding to concerns their local stores would be shutting down, Toys ‘R’ Us Asia’s president Andre Javes said, “We are a financially robust and self-funding retail operation, which continues to significantly grow and invest in this region”.

Toys ‘R’ Us’ China is betting on a bumper generation of newborns following China’s lifting of its One-Child Policy and a growing middle-class consumer base.

Department stores and malls are also giving more consideration to brands targeted towards children, Jiemian reports. However, Du Bin, the general manager of consultancy RET, told the news website that retailers that combine things like kids gyms with toy sales are more popular with customers and malls than standalone toy stores like Toys ‘R’ Us. This has added challenges to the store’s search for locations, with rivals taking more innovative approaches to combining retailing with ‘experiences’ (a buzzword for Chinese parents these days).

Competition is also intense. Chinese retailer Kidsland already occupies 14% of the market, with over 2,500 locations (including outlets at department stores). At Toys ‘R’ Us’ current rate of expansion it would take close to a century to catch up in outlet numbers.

Toys ‘R’ Us does have an online presence in China, through its own website as well as its store on Tmall. However, Sammartino insists that physical stores are fundamental to toy sales because children need to be able to interact with the products.

If e-commerce eats away more at toy sales (as analysts predict), [Perhaps Toys ‘R’ Us will be forced to adopt more of a “new retail” business model, akin to that now advocated by Alibaba (see WiC375) which today combines bricks and mortar outlets with e-commerce.

Already the toy company is experimenting with integrating its online and offline offerings. In March, for example, it used its Tmall account to livestream the launch of the limited-edition Optimus Prime toy from the latest instalment of the Transformers movie franchise.

Whether Optimus Prime will be superhero enough to boost the retailer’s lofty China expansion remains to be seen.

Jiemian reported that two of its stores – one in Beijing and one in Shanghai – closed earlier this year, indicating Toys ‘R’ Us is not always picking the right locations in its rush to grow in China.

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