Market Overview

Toys 'R' Us Bankruptcy Leaves Retailers Anxious To Pick Up The Slack

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Toys 'R' Us Bankruptcy Leaves Retailers Anxious To Pick Up The Slack

At the end of June, retail giant Toys ‘R' Us closed its last remaining retail stores, ending a process that began with last September's declaration of bankruptcy. The closing of over 700 brick and mortar retail locations over the past several months served as an emblematic reminder of the struggle that traditional retailers face in a world dominated by e-commerce.

It also presents a significant opportunity for other retailers. Even with weak results over the past several years, Toys ‘R' Us remained one of the largest players in the retail space, both in terms of online and physical store sales. Its exit means that rivals such as Walmart, Target, and Amazon will now be competing more aggressively to capture this missing slice of the market. In addition, many consumers may find themselves pushed into the online space, accelerating the shift towards e-commerce.

A history of e-commerce struggles

Like many brick and mortar stores, Toys ‘R' Us was faced with the challenge of trying to draw customers into its physical locations in an era when customers were increasingly moving online to make purchases. The company took an unorthodox approach to e-commerce initially, entering into a decade-long partnership with Amazon to manage their e-commerce platform and fulfill online orders.

That partnership dissolved after lawsuits were traded between Toys ‘R' Us and Amazon, leaving the company to develop its own e-commerce strategy. However, Toys ‘R' Us found itself years behind its competitors in the online space after having relied on Amazon for so long. As late as 2016, the company was still struggling with high thresholds for free shipping and complicated user interfaces.

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In addition, Toys ‘R' Us often found itself outmatched on price for many of the toys it sold. While competitors such as Amazon and Walmart had long established other streams of revenue and could afford to offer toys and hobby items at or near-cost, Toys ‘R' Us relied predominantly on toy sales for profit and needed to establish decent margins to maintain profitability. And while the company managed to enjoy some growth in online sales, it was not enough to keep pace with a market that saw e-commerce grow by around 15 percent every year.  

Still a giant

Despite the challenges, the company remained a behemoth in the retail space, accounting for nearly $6 billion in retail spending in 2017. This was enough to make Toys ‘R' Us the largest pure toy and hobby retailer in the US and earned the company the #72 rank on the National Retail Federation's top 100 retailers of 2018.

Even in the online space, Toys ‘R' Us remained a major player up until the end. According to Internet Retailer, Toys ‘R' Us raked in nearly $1.7 billion in online sales in 2017, and its exit leaves a significant hole in the market.

The question then becomes, what will happen with all of those sales now that Toys ‘R' Us is not around for customers? As households adjust and retailers compete for these toy purchases, the result could pose some challenges for shipping and logistic companies, particularly during the all-important holiday shopping season.

Online competition gets fiercer

In the online space, the analysis seems pretty straightforward. Customers that used Toysrus.com to find and place orders are likely to shift their purchases to other online merchants that sell toys and hobby items. Mass merchant retailers such as Amazon and Walmart have already established dominance in the online toy sales arena, and the absence of Toys ‘R' Us really means that there is some additional online market share to fight over.

As a result, competition in e-commerce is likely to intensify in upcoming months, particularly during the holiday season. Early discounts and enhanced omnichannel solutions are likely to be a theme towards the end of the year as retailers try to win over Toys ‘R' Us' portion of e-commerce. Amazon, in an effort to jump on these potential sales, is reportedly planning to issue a holiday toy catalog this year, directly addressing customers who were used to shopping at Toys 'R' Us.

Accelerated e-commerce growth and the impact on shipping patterns

Of far greater interest is what happens to the majority of Toys ‘R' Us retail sales, which still took place in physical locations. Is it as simple as shoppers finding the next closest physical store to visit, or will the Toys ‘R' Us bankruptcy accelerate the move towards online shopping among US consumers?

On one hand, many customers who visited Toys ‘R' Us physical locations did so because they prefer the in-store shopping experience. They first decided that a physical store is where they wanted to shop, then chose Toys ‘R' Us as their preferred store. With those locations now closed, these types of customers are likely to simply shift their purchases to other brick and mortar stores that sell toys.

On the other hand, the absence of a large specialty retailer like Toys ‘R' Us is likely to drive many customers to online shopping in an effort to find a wider variety of toys and hobby items. For customers, one of the major advantages that Toys ‘R' Us had over the physical stores of mass merchants is that Toys ‘R' Us carried a wide array of toys in the physical location. Mass merchants typically offer a similar variety through their online channels, but only have a small portion of their inventory for sale in physical locations.

As a result, some customers who might prefer to shop in store may be driven online anyway, if for no other reason that they simply can't find the toy they're looking for in stores. This should lead to slightly accelerated growth in e-commerce, beyond the already-rapid pace of growth of online sales. This will lead to additional demand for last-mile delivery as residential shipments see an additional boost.

In turn, this puts additional pressure on parcel companies like FedEx Corporation (NYSE: FDX) and United Parcel Service, Inc. (NYSE: UPS), who typically handle residential deliveries of this nature. This shift from commercial deliveries for retail locations to residential deliveries for households has been a theme within the parcel industry for several years now, and the Toys ‘R' Us closures should only further this trend.

Again, these effects will be most pronounced during the holiday season, when retail spending on toys is at its peak. Parcel companies already struggle with meeting holiday delivery expectations due to the expansion of e-commerce in general. Hopefully, they are gearing up for even bigger challenges in 2018, because the Toys ‘R' Us bankruptcy will likely add more fuel to the fire.  

Ibrahiim Bayaan is FreightWaves' Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.

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