Toys R Us is the largest independent toy seller in the U.S. When the company announced its bankruptcy filing late last year, tremors were felt across the entire toy industry. The revelation earlier this month that the company went before a judge seeking liquidation turned those tremors into quakes.
Toy makers like Hasbro, Inc. (NASDAQ:HAS) and Mattel, Inc. (NASDAQ:MAT) have already been trying to mitigate the effects of the changing landscape and shifting play habits of kids, who have increasingly opted for electronic devices instead of traditional toys. Toy companies have taken a number of steps to adapt to this changing paradigm by embracing new distribution methods, developing digital play components, and exploring ventures with other industries.
With Toys R Us looking to sell or close all 700 remaining stores in the U.S., how will toy makers make up for these lost sales?
Toys R Us was the last major chain devoted solely to selling toys, generating more than $11 billion in revenue in 2017, and selling roughly one-fifth of the toys in the U.S. Its closing will result in significant challenges for the $27 billion U.S. toy industry. It's important to note that not all players will be affected the same way.
Toys R Us has unpaid bills with the two toy makers. Currently, Mattel is owed more than $135 million, while Hasbro is on the hook for $59 million -- amounts they will likely never recoup.
Toy makers will need to find new outlets for their wares. Last year, an estimated 9% of Hasbro's revenue was derived from transactions at Toys R Us, while about 11% of Mattel's business came from the chain. A greater percentage of future sales will be channeled through other retailers, like Walmart, Target, and Amazon.com.
In an interview last month, Hasbro CEO Brian Goldner pointed out that the company had "more different retail channels then we've ever had ... whether it's dollar stores, drug stores, or big mass market retail ... we have the retail footprint globally to get it done." He also pointed to the company's online strategy, which includes interactive content and virtual immersive experiences that allow consumers to click through and buy those products.
Mattel will be hit harder than its now larger competitor, and has been surprisingly quiet. The company was slow to react to declining sales of its flagship Barbie and its over reliance on U.S. sales. The turmoil at the company resulted in multiple CEO changes in recent years and the loss of the prized Disney Princess and Frozen lines to Hasbro. Mattel has been struggling to right the ship, suspending its dividend and slashing costs. Declining sales have led to a commensurate fall in the stock price, which is down 45% over the last year.
Toys R Us was Mattel's second-largest customer, handling between 15% and 20% of the company's domestic sales, and 11% globally.
A tale of two toy companies
Over the past five years, Hasbro's business has continued to grow, while Mattel has experienced revenue declines. Hasbro adapted more quickly to changing market conditions, allowing the company to prosper, while Mattel fell further behind. The drama injected into the industry by the fall of Toys R Us will initially create challenges for both companies.
I have no doubts that Hasbro will ultimately come through this unscathed. As Mattel is already struggling to regain its momentum, I'm less sure about it's fate.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon, Hasbro, Mattel, and Walt Disney and has the following options: long January 2019 $85 calls on Walt Disney. The Motley Fool owns shares of and recommends Amazon, Hasbro, and Walt Disney. The Motley Fool is short shares of Mattel. The Motley Fool has a disclosure policy.