Toys R Us, the premier toy retailer in the US and abroad, filed for bankruptcy on September 18, 2017. Although the announcement was not a surprise, it was nevertheless stunning. Most families with children shopped there at least occasionally, and in some cases, company “spokesanimal” Geoffrey the Giraffe was like one of the family. Toys R Us also sold brand-name baby supplies through its Babies R Us stores.
A lot more than nostalgia is at stake here. The ripple effects of the bankruptcy announcement are being felt from Wall Street to Main Street, and lots of businesses are holding their collective breaths as they await the final verdict.
The situation is changing quickly, but this much is certain: Toys R Us, once the biggest toy seller in the US, has become the third largest retailer to go bankrupt. According to documents filed with the bankruptcy court, the company is planning to close or sell all of its 735 locations in the US and most of its 750 stores overseas.
Also certain is that if the company does in fact go under, retail competitors will be thrilled, the toy industry will get walloped, and shareholders will be forced to accept the reality that their shares are worthless.
Will a white knight emerge and save the company? Despite the late hour, serious efforts are underway to keep the doors open, and while a long shot, this just may happen.
Toys R Us has announced plans to close all of its stores
in the US and overseas except for those in one country: Israel.
And there is a very simple reason for this
How did this once-mighty firm plummet so dramatically? So far, the usual suspects are being fingered: expensive toys, still-tight family budgets, the weak retail environment in general, and online competition in particular. Also, a great deal of debt weighed heavily on finances. The combination of all of these, compounded by disappointing year-end sales in 2017, proved to be overwhelming.
But some believe that an even more important factor has led to the company’s impending demise: declining birth rates in the US and other countries in which it did business.
How are the two connected? The answer is very simple. All of Toys R Us’s merchandise is related to children, so there is a clear correlation between the company’s profits and the birth rate. When more children are born, their market increases; however, it shrinks if there are fewer children.
Today, the birth rate in the US and most other countries is declining, and that spells bad news for everyone selling products for children. Here’s how The Washington Post put it:
“Toys R Us’s fortunes rise and fall with the number of children. With the current birth rate falling in most countries, so have the company’s fortunes.”
Harbinger Of The Future?
But if these trends continue – and there is no indication that they are changing – the lower birth rate will soon affect other companies, too; first those that cater to teens, then young adults, and ultimately the impact will spread to the rest of the industry. Some believe that Toys R Us is the canary in the coal mine and that other companies will have to learn a lesson from them in order to survive.
As noted above, serious efforts are underway to rescue Toys R Us, and Isaac Larian, head of MGA Entertainment, is leading one of these. Larian wants to purchase part or all of the company, and together with other investors has come up with $200 million toward this goal. However, he will need to raise an additional $800 million by May 28 to accomplish this.
Should those efforts fail and Toys R Us shutters its stores, there will be some big winners, and Wall St. firm Credit Suisse expects that Target will be one of them. The firm notes that 90 percent of Toys R Us’s stores and 96 percent of Babies R Us stores are located within 5 miles of Target stores, allowing that company to “take a fair share of their business.”
Credit Suisse expects Target to capture $600 million in additional sales. Amazon and other firms also could pick up additional business. And another winner could be KB Toys; this company is not only back in business but has announced an accelerated plan to open new stores by year’s end.
But there will also be losers. Industry giants like Hasbro, Mattel, and Lego stand to lose big bucks because of the large quantities of unpaid inventory. It’s expected that rather than being returned to them, this merchandise will be sold and the proceeds used toward bankruptcy expenses; many small toy makers also will not be paid for inventory and may be forced to go out of business.
As things stand now, Toys R Us has announced plans to close all of its stores in the US and overseas except for those in one country: Israel. All of the 53 franchised stores there will remain open, and there is a very simple reason for this.
The average Israeli woman has approximately three children – the highest birth rate in the developed world. This is clearly above the 2.1 children per family replacement rate, and nearly double the birth rate of the average American woman.
The opportunity to shop at Toys R Us stores is not a thing of the past after all – we’ll just have to travel a little farther to do so. Now there’s one more reason to take a trip to Israel.
Gerald Harris is a financial and feature writer. Gerald can be reached at email@example.com