Toys ‘R’ Us relaunch faces uphill battle in hotly contested retail market. Will it succeed?

The return of Toys ‘R’ Us to the Australian market brings brand power back to toy retailing, but its revival is slated to further disrupt the retail categories it once led, raising the likelihood of an uphill battle against established competitors.

Yesterday it was announced the Toys ‘R’ Us and Babies ‘R’ Us brands will return to Australia about a year after the bankruptcy of its American parent forced local operations to wind up.

The expected revival — flagged back in February by the new owner of Toys ‘R’ Us’ intellectual property Tru Kids Brands — has been welcomed by industry suppliers and independents who believe the return of a big brand will help them do battle against generalist department stores.

Toys ‘R’ Us was the single largest toy retailer in Australia at the time of its collapse. It was shuttered owing over $90 million to creditors but commanded a network of 44 stores and a fast-growing online store.

The business was chasing ambitious expansion plans under then-chief executive Dianne Guerreiro and had planned on opening a raft of stores in Home Consortium’s former Masters sites, which were being offered to big box brands at attractive rates.

But it was not immune to the pressures its American parent and other legacy retailers in Australia have faced in recent years, including the rise of online shopping and cost pressures in the form of commercial rents.

Despite its undeniable brand appeal, administrators were unable to find a suitor for the company last year, with industry sources saying at the time there was concern about its exposure to competitors and the future of the brand overseas.

It wasn’t a stellar time to be looking for a saviour either, with the sector mired in uncertainty over Amazon’s emerging presence, concern which has somewhat subsided since.

Stepping up to the plate to take a tilt at returning the brands to their former glory is family-owned operator Hobby Warehouse, which has opted for a cautious online-only strategy over the next 18 months before approaching landlords.

Kevin Moore, a commercial advisor on the Hobby Warehouse deal, yesterday revealed the retailer has plans to open “some experience centres” on the east coast in 2021 before jumping into large-format opportunities.

Hobby Warehouse chief executive Louis Mittoni is targeting 25-30% of Australia’s $740 million toy retail market over the next six years, and also wants to launch in New Zealand, identifying an opportunity across the ditch.

Is Australia ready for Toys ‘R’ Us 2.0?

Toys ‘R’ Us and Babies ‘R’ Us are returning to a very different retail market than they left just 12 months ago, with tough market conditions prompting a contested land grab in their categories.

Competitors such as Toymate have sought to capitalise, jumping into former Toys ‘R’ Us locations in earnest, while discount department stores such as Kmart and Big W have scooped up market share.

Meanwhile, ASX-listed Baby Bunting has consolidated its position at the top of Australia’s baby retail category after several years of market disruption driven by the Babies ‘R’ Us exit and the collapse of several independent chains.

The retailer has jumped into premier former Babies ‘R’ Us tenancies in Cannington and Bankstown, emerging from a tumultuous year with a 17.2% increase in top-line sales for the first half of the financial year 2019 and a whopping 27.8% increase in profits.

IBISWorld senior industry analyst Liam Harrison says Toys ‘R’ Us won’t need a massive marketing campaign to get its name out there but will have to put in the hard yards to claw back customers.

“The biggest issue they’re going to have is whether they can claw back the customers that may have switched to other stores,” he tells SmartCompany.

“We’ve seen a substitution to discount department stores, while physical toy stores seem to have declined.”

Toys ‘R’ Us’ biggest asset is its brand, which experts say still holds sway with Australian consumers, although the new online-only approach will curtail any big-box toy store nostalgia for the moment.

E-commerce no less competitive

E-commerce is a lower-cost way to dip a toe back into the market, but is no less competitive than shopping centres, with sophisticated players such as eBay, Amazon and Catch offering compelling prices and delivery windows.

It’s not the first time the idea has been tested — Catch Group bought Pumpkin Patch out of administration and relaunched it online early last year, but soon after sold the business to private equity firm Alceon, which packaged it into Ezibuy.

Queensland University of Technology retail expert Gary Mortimer says Toys ‘R’ Us’ ability to go toe-to-toe with what its online competitors are offering will be necessary for success.

“If it’s going to be a pureplay relaunch, speed of delivery will be vital, as will an effective and efficient returns or exchange policy,” he tells SmartCompany.

Mittoni has the advantage of a relatively blank slate, free from the lease arrangements and legacy retail issues the old business was dealing with, but that also means starting over.

Initial indications are the Australian rebirth of Toys ‘R’ Us and Babies ‘R’ Us will focus on principles of experiential retail in physical locations backed by a strong online model — a strategy that’s become mainstream over the last five years for prominent brands.

Brand power will help the new venture along, as brands like LEGO, Barbie and Disney line up to get a slice of the new Toys ‘R’ Us venture globally.

Party People chief executive Dean Salakas says he was considering investing in the brand himself and believes there’s a market for Toys ‘R’ Us to return to.

“There’s absolutely a market, they’ve got to do it well though,” Salakas tells SmartCompany.

“Online is the place to start, but if you don’t have bricks-and-mortar you are missing a big opportunity … it’s a super commoditised price-based business and it’s really hard to differentiate.”

Should initial trading prove positive, there’s certainly retail space to fill in Australian shopping centres following the demise of businesses such as Roger David and Ed Harry over the last 12 months, particularly if Hobby Warehouse reimagines the concept to work across a smaller format.

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