Australia / Analyst Insights
Toys "R" Us to close Australian stores due to parent bankruptcy

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by Alex Wu
Jul 24 2018

fter failing to secure a buyer, Toys “R” Us Australia is set to close its doors. The company has struggled globally against intense online competition.

After failing to secure a buyer, Toys “R” Us (Australia) Pty Ltd will close all of its 44 toy and baby goods stores, affecting approximately 700 employees. The closure has come as no surprise following the parent company, Toys “R” Us Inc., filing for bankruptcy. The company’s online store was shut down in June, and although retail stores are still trading, they are expected to close in coming weeks after an inventory clearance sale.

The demise of Toys “R” Us can be attributed to the company’s inability to adapt to changes in the Toy and Game Retailing industry. Industry operators have faced intense competition from online retail giants over the past five years. Amazon has dominated the US online toy sales market, doubling Toys “R” Us’ revenue in 2016. Toys “R” Us Inc. outsourced its online business to Amazon in 2000. While Amazon grew rapidly, Toys “R” Us never managed to catch up with the online trend. After Toys “R” Us was acquired by private equity firms in 2005, the company accumulated significant debt and consequently lacked the resources to invest in building robust online infrastructure.

The Australian Toy and Game Retailing industry has struggled in recent years, with revenue only increasing at an annualised 1.4% over the five years through 2017-18. However, Australia Post’s Inside Australian Online Shopping report shows that online game and toy sales have increased strongly, including a rise of 19.2% in 2017. Toys “R” Us’ offline operations have also been challenged over the past five years. Department stores represent a significant source of competition for operators in the Toy and Game Retailing industry. Department stores such as Kmart and Big W offer a wider range of products at lower pricepoints, due to their strong bargaining power and economies of scale. Being a specialised retail chain has limited Toys “R” Us’ potential sales.

However, the exit of Toys “R” Us represents a significant opportunity for Associated Retailers Limited, the owner of Toyworld, which is the major competitor of Toys “R” Us in Australia. Toyworld has adopted the same traditional strategy as Toys “R” Us, which focuses on bricks-and-mortar stores. There are currently over 120 Toyworld stores across Australia. Many parents that frequented Toys “R” Us are expected to turn to Toyworld’s retail chain.

Associated Retailers Limited’s revenue in the Toy and Game Retailing industry has declined in recent years, from a peak of $230 million in 2014-15 to an estimated $190 million in 2017-18. Intense competition from online operators and department stores has affected the company’s performance. These challenges are expected to continue for the overall industry in the current year, with industry revenue anticipated to decline by 0.5%. However, the exit of Toys “R” Us represents a significant opportunity for Associated Retailers Limited, if the company can avoid the same challenges that led to the closure of their main competitor.

Toys "R" Us Pty Ltd

Associated Retailers Limited