More than a fifth of Australia’s toy and game retail market could be opened up in the coming months if a buyer is not found for collapsed retailer Toys ‘R’ Us Australia, with discount department stores and online players slated to be key beneficiaries.
The future of 44 stores and hundreds of employees across the country have been put into doubt after Toys ‘R’ Us Australia and sister brand Babies ‘R’ Us fell into administration on Monday, following an unsuccessful effort to sell the business.
Administrators for McGrathNicol plan to commence an “urgent” process to sell the retailer as an independent operating unit, but the business has struggled for several years and concern is mounting that there may not be room for a specialist of its scale in the market.
Australia’s toy and game retailers have struggled in recent years amid mounting competition from discount department stores like Kmart and emerging online players.
“Toy and game retailers have long been warned that being a simple shop for toys would not be enough to compete, and Toys ‘R’ Us was not able to adapt fast enough to changing market conditions,” IBISWorld analysts said.
IBISWorld has forecast annualised revenue growth for the $943 million sector at just 1.4 per cent for the five years through to 2017-18 and only 1.8 per cent for the five years through to 2022-23.
Toys ‘R’ Us, which according to IBIS is the largest single player in the market with a 20.4 per cent share, has not been immune to competitors like E-bay and Kmart selling key brands like Lego at lower prices.
ASIC filings show that the business has generated millions in losses over the last few years, despite embarking on an expansion strategy under managing director Dianne Guerreiro.
Queensland University of Technology associate professor Gary Mortimer said that in addition to competitive pressures Toys ‘R’ Us has also been contending with broader changes in the way children play.
“We’ve seen a lot more digital toys and online gaming and a move away from traditional games and outdoor activities,” Mortimer said.
“The market has moved away from standalone toy stores.”
Substantial risk is likely to follow any suitor as competition heats up in the discount-department store space amid Woolworths’ efforts to turn around Big W and Amazon finds its feet in Australia.
Mortimer believes there are limited options for a potential buyer to purchase and turnaround the business, but that the business could still be valuable as an online-only offer.
As for many traditional retailers, online has been a bright spot for Toys ‘R’ Us in recent years and according to former management was growing well last year.
It would also not be the first time a collapsed local retailer was revived as an online-only business. Catch Group bought Pumpkin Patch’s intellectual property last year and relaunched the brand online.
But while Catch has form, it is understood that the business is not interested in a potential purchase.
Collapse could kick other retailers into gear
IBISWorld analysts said the administration of Toys ‘R’ Us was likely to spur other legacy retailers in the sector into action and could result in a pick-up in competition in the sector.
“Toys ‘R’ Us’ fall is expected to revitalise the way other retailers operate their brick-and-mortar stores. Existing retailers are anticipated to learn from Toys ‘R’ Us’ failures,” IBIS analysts said.
“These retailers will likely review their product ranges to reduce cluttered inventory and start focusing on niche markets.
“Most importantly, many of these incumbent operators are anticipated to shift their emphasis towards creating experience-based destinations for consumers, such as creating instore play areas to generate brand value,” the analysts said.
In the baby goods category, where four of the five largest players in the market have now collapsed in the last 18 months, leader Baby Bunting is expecting near-term pressure on earnings.
It is expected that the listed specialist will emerge from the period of elevated discounting with an unprecedented grip on the baby goods category though, a reality that prompted investors to boost its share price by 1.7 per cent on Tuesday.