‘They’re fighting for scraps’: Retailers adjust strategies to a shrinking toy industry

The fall of Toys ‘R’ Us in June led to a retail rush, as retailers like Kohl’s, Walmart and Target sought to position themselves to cash in on the void in the toy world ahead of the holiday season.

But it may have been the wrong track: What’s happened since underscores Toys ‘R’ Us as a harbinger of the decline of the U.S. toy industry as a whole. Customers no longer want what Toys ‘R’ US long sold: Barbies, roving miniature jeeps and remote-controlled helicopters. They want iPads and Kindles, smart watches and Playstations. Old-schools toys are still big business to retailers, but they’re losing shelf real estate to electronics, the latest holiday frontier.

Toys are not keeping pace with the growth of the broader industry: Projected to clear $27 billion in revenue in 2018, according to Forrester data, toy sales are up $1 billion from $26 billion in sales in 2017. The National Retail Federation expects overall retail growth to rise at least 4.5 percent this year, up from $3.53 trillion last year.

Retailers have made some investments in rethinking how they sell toys. At Target, there is an expanded in-store toy section for the holidays, with 250,000 square-feet in 500 stores for toys, and a ramped up selection to include more than 2,500 new and exclusive items.

Kohl’s struck a deal with Lego to sell the plastic bricks in-store, as well as a new partnership with the toymaker FAO Schwarz. Kohl’s is also beefing up its staffing to deal with the holiday rush, hiring more than 90,000 seasonal employees.

But the play is less about vacuuming up market share, and more about shifting their strategies to compete in an industry that’s shrinking.

Toys ‘R’ US didn’t fail on its own accord, said Sucharita Kodali a former company employee. Kodali, now an analyst with Forrester who studies the toy industry, said the collapse was a barometer of sorts for a toy industry in turmoil. The retailers now looking to make money in a tough market are refining their strategies by holding onto less inventory, striking exclusive partnerships with popular toymakers and leveraging experiential store strategies.

Kohl’s, Walmart and Target are less at risk because they have different business models — they sell more than just toys, and so are able to shift inventory stockpiles as needed.

Toys ‘R’ Us, meanwhile, never fully capitalized on its online store, betting its business instead of on big physical locations that drew in shoppers attracted to the allure of finding the perfect present.

What other retailers have done well, Kodali said, is keep their toy inventory low. By refusing to fall into the pitfalls of Toys ‘R’ Us and stockpiling excess product year-round, they’re able to devote valuable store space to evergreen items such as clothes and electronics. Though most all major retailers have a section devoted to toys year-round, they’re able to keep it in check outside of the fourth quarter, because inventory is spread across categories. Toys are worth less now than they once were.

While Target is touting 2,500 new toys this holiday season, it would be logistically and cost-prohibitive to stock them in stores, meaning the vast majority will be available online. Target is also playing into customer preference for the experiential in the storefront. The retailer says it will feature more than 25,000 hours of “programming” this holiday season — in other words, chances for kids to drag their parents into their local Target to test out whatever is at the top of their Christmas list.

Sona Chawla, Kohl’s president, said that launching new products is only part of the equation for the retailer this year. It ultimately all comes down to personalization, whether that’s in a store or online, she said. Online, that means launching a Pinterest tool designed to serve as a gift-giving guide. “We have to win there, and so we’ve been constantly innovating in stores,” said Chawla.

Marlene Towns, adjunct professor of marketing at Georgetown University’s McDonough School of Business, said 2018 might just put an exclamation point on the death of the traditional toy industry. Kids for years now have shifted their preferences toward electronics, to the woe of toy manufacturers such as Mattel and Hasbro.

When it comes to Lego and other toy brands that operate their own physical retail stores and sell direct-to-consumer, the Toys ‘R’ Us closure and the bifurcation of the toy business represents an opportunity for expansion, according to Kodali.

Lego has long had to balance its growing direct retail business with keeping prices level with its retail partners, she said. One giant partner disappearing is an opportunity for the company to further cut out the middleman. “It should mean more margins for them,” said Kodali. “They can now sell direct, and they can capture all of the margins because people now don’t have Toys ‘R’ US anymore.”



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