On Monday 18 September 2017, Reorg Research, a news service focused on bankruptcy and distressed debt, reported Toys R Us could file for bankruptcy.
Toymakers have come under pressure from cheaper off-shore imports, margin squeezing big-box retailers and children who increasingly prefer tablets to toys.
Toymaker Lego announced plans to lay off 8 percent of its workforce earlier this fall. Mattel has watched its stock drop near 60 percent over the past five years, hurt by the loss of the Frozen toy license agreement to Hasbro and a shift in popularity of one of its core toys, Barbie.
On news of the imminency of Toys R Us’ potential bankruptcy, Mattel and Jakks shares fell about 6 percent, while Hasbro shed more than 1 percent.
Toys R Us made up 11 percent, 9 percent and 15 percent of Mattel, Hasbro and Jakks Pacific on 2016 global sales respectively, according to Jefferies analyst Stephanie Wissink.
A Toys R Us bankruptcy does not necessarily mean the company will close stores, and retailers such as Macy’s have operated through bankruptcy before.
For the major toy companies, there may be vested interest in Toys R Us successfully coming out the other end of a debt restructuring.
Beyond offering the toy companies a place to sell their products, the retailer often does so without marking their prices down as much as big box retailers like Target. The retailer’s vast space and toy-centered raison d’etre give toy companies a unique venue to sell their product.
“They’re the only true showroom the industry has,” said toy industry analyst Richard Gottlieb.
The showroom is also important to movie studios, which use toys to market their movies. For example, Force Friday on Sept. 1 was a chance to debut all the toys inspired by the newest Star Wars movie, “Star Wars: The Last Jedi.” Star Wars is produced by Walt Disney-owned Lucasfilm.
“If I want to run a major TV campaign with a product, I need to have Toys’ support,” said Gottlieb.
To be sure, the toy industry could wean their dependence off Toys R Us in the same way sports brands have moved from the struggling sporting good retailers, building up their own websites and direct-to-consumer business. Direct-to-consumer sales are more profitable than going through a third-party retailer.
Toy companies could also narrow their assortment of goods, so they are less reliant on Toys R Us’s vast shelf-space.
“Industry demand is resilient to these types of impacts, given growing alternative channels for purchase,” said Jefferies’ Wissink.
The e-retailer is the “beneficiary of the millennial parent,” said Wissink, as Amazon is “quickly becoming the No. 2 toy retailer behind Wal-Mart.”