Toys “R” Us SWOT & PESTLE Analysis

Strength

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Weakness

1. Lack of differentiated or unique offerings: Toys “R” Us lacks sustainable competitive advantage, other than the brand value. In the US, the company has lost its number one position as the largest toy retailer, to Wal-Mart offering attractive packages to its customers. Amazon's attractive discounts, slashed prices and global home delivery model is eating into the market share of major brick-and-mortar stores. In order to competently face Amazon, Target, Kmart and Walmart, Toys R Us will have to work out lower pocket friendly pricing models to rope in traffic to its stores. Being large is not enough when customers can go to another large retailer and buy the same or similar goods, sometimes getting a better deal.

2. Bankruptcy filing due to online competition: Toys “R” Us filed bankruptcy protection in 2017 after suffering losses since 2013. The bankruptcy filed in Richmond, Virginia, approximated the company to have over $5 billion in debt. The company was late in entering the e-commerce platform and could not stave off the onslaught of the major online player such as Amazon. The company is undertaking a financial restructuring to ensure the iconic Toy'R'Us and Babies'R'Us thrive. This has also resulted in loss of confidence in vendors who have become tight fisted on supplies to the company besides lowering credit cycles.

3. Heavy dependency on seasonal sales: Toys “R” Us is heavily dependent upon successful sales which in turn depends on the season. They aim to make profit from Christmas. In fact, it could be argued that since, toys are a key Christmas present product, so the Company is even more likely to be dependent upon seasonal sales. Their global business is highly seasonal as major revenue only comes in the 4th quarter, thus the financial performance heavily relies on the outcome of the last quarter which could adversely impact operating results if sales targets are not met as expected before and during the holiday season. This trend has been witnessed since 2010, wherein approximately 43% of Net sales happens in the last quarter of the financial year. This is met with challenges of meeting and delivering high sales volume, items sourcing and distribution and customer service during peak business periods.

4. Lesser flexibility with sponsors controlling ownership: As approximately 98% of the ownership is in the hands of sponsors which wield control of the organization in decision making and vetoing any transactions that requires the approval of stockholders, there might arise conflict of interest where decisions might be made which involve risks to the Company. Investment funds or groups affiliated to the Sponsors or the sponsors themselves might have personal interests and might also get involved in business of investing in their own accounts in companies and may acquire or withhold stakes in businesses that compete directly or indirectly with Toys R Us.

Opportunity

1. Joint Ventures and Strategic Alliances: There are numerous opportunities for joint ventures and strategic alliances. Toys "R" Us works closely with its online competitors in baby products category. Toys "R" Us will use its buying power, but ultimately carries the risk of physical stacking (i.e. if it doesn’t sell its products, its money is tied up in physical inventory)

2. Charitable associations: Toys "R" Us has been very helpful in the sense that in 2005, it went out of its way to help the Louisiana victims struck down by hurricane Katrina and donated six trucks full of toys and baby supplies like diapers, wet wipes, medicines, baby formulas, batteries and water to multiple locations housing evacuees.

3. Expansion to emerging economies like India: The citizens of emerging nations such as China and India are getting more educated and wealthier every day. In that case, consumers have more disposable income and leisure time, and these could increase over the coming years. So, the types of goods and services retailed by the company could be marketed more aggressively overseas to capture the international market. The diversity of locations if expanded to Asian countries like China and India, that are emerging economies of the world and have huge potential for toy market, too would enhance the revenue of the company.

4. Expansion of Private Label Merchandise: Toys R Us already enjoy the reputation of housing some very popular private label brands that earn them higher revenues and maintain exclusivity as these are not available elsewhere. There is huge opportunity to develop a platform to showcase and expand product offerings of private label merchandise comprising BABIES “R” US, JOURNEY GIRLS, IMAGINARIUM, FAST LANE, YOU & ME, JUST LIKE HOME, TRUE HEROES, TOTALLY ME!, DREAM DAZZLERS and FAO SCHWARZ. This will allow the Company to spike margins and increase profitability.

Threat

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Political

1. Impact of Brexit: With UK exiting from Europe, trade agreements will be re-established. With this, it is expected that the import duties will spike, resulting in cost increase of toys. On the other hand, Toys R Us cannot raise prices immediately because of the printed prices in catalogues, etc. and even if prices are raised, volumes are bound to fall and the profile of consumer demand will move towards cheaper toys.

2. High Labor Cost:Labor Costs have risen in the US and Europe in recent years. Tight government mandated labor markets, increase in minimum wages and a higher proportion of full time employees are resulting in an increase in labor costs for employers in the U.S. The current federal minimum wage rate in the US is $7.25 per hour. Increase in labor wages increases the overall costs and affects the Company’s margins.

3. Increasing tensions in US - China relations: Lion's share of the products of Toys R Us are sourced internationally from suppliers in China. Apart from this a good number of Company stores are located in China and the business is increasingly dependent on revenues from China. Trade restrictions, political and financial unrests, unfriendly national laws, rising labor costs, labor unrest in China has direct adverse impacts on business. Prolonged tense relations between US and China and the added control of Chinese government over foreign investments and business operations in China poses great risks and uncertainties for US businesses.

Economic

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Social

1. Decline in target sector: There are a number of factors affecting the target sector of the company. In the first instance there is an overall decline in the birth rate across the world, which directly translates to a reduction in the potential customer count. Also, with digitization, children and teens are spending more time on the internet and social media websites like Facebook, Instagram, etc. and less time playing with toys. The only age group that still moderately interacts with toys is the age group below 5 years. The target segment which involved children from five to twelve year is one that has sharply declined. This has a negative impact upon the revenues of the company. .

2. Licensed products to increase profitability: Licensing toys and games (Star Wars, Minion, Lego, etc.) has become extremely profitable for retailers, who readily agree to pay large sums to acquire the licenses to sell toys portraying well known or popular characters. Characters from movies, web series, event mascots and cartoons are gaining a lot of popularity with consumers specially children as they can readily connect to them. Thus retailers can capitalize on this surging demand by licensing toys and games of popular characters.

3. Shifting of consumer preferences away from materialistic purchases: There is a slow but steady trend of consumers shifting their spending habits from materialistic goods toward traveling and dining out which are more experience related and give greater pleasure. In 2016, for the first time Americans spent more money in vacationing, restaurants and bars than at retail and grocery stores. These shifting social trends are worrying indicators for retailers like Toys R Us.

Technological

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Legal

1. Stringent regulations and guidelines: There are many laws to be followed before a new toy is introduced in the market. United States currently has the strictest laws and safety guidelines for toys compared to anywhere in the world. Whether imported or exported, the toy must undergo various safety tests. ASTM F 963-16 is the safety standard that is usually followed by the countries to ensure that their toys are safe for the intended users.

2. Safety Measures: The main users within the toy industry are children. While considering the safety regulations, it comes to materials used to make the toys and playing conditions. The National Authority has a major role in ensuring the safety of the toys. The latest standards help in improving the rules for marketing the toys produced or imported.

3. Rampant counterfeiting: Toy manufacturers face counterfeit toys. In 2013-14, several cases of infringement of toys and games with a retail value of millions of euros were reported in China and Hong Kong. IPR (Intellectual Property Rights) protection works properly in US & Europe, but lacks in other countries like China, India. Thus, strong government intervention and regulation to combat IPR infringement will offer direct benefits to the toy industry and its ability to innovate and compete.

Environmental

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