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

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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

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Technological

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Legal

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Environmental

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