Toys R Us' Second Act: Does It Have a Chance?

A new company that owns the Toys R Us brand says it hopes to open new retail stores in the United States. That's a difficult proposition because Amazon, Target, and Walmart have moved into the space that was once served by Toys R Us, so any ground a new Toys R Us hopes to win back would require fighting with major retailers that can operate on low margins.

In this segment from Industry Focus: Consumer Goods, host Dylan Lewis and Fool.com contributor Daniel Kline discuss the toy retailer.

A full transcript follows the video.

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This video was recorded on Feb. 12, 2019.

Dylan Lewis: The news that we have now, Dan, with Toys R Us, is that they're trying to come back. Let's take it to present with this company and then talk a little bit about the retail landscape broadly.

Dan Kline: A company called TRU Brands now owns all of the remaining Toys R Us assets. That includes actual stores in Europe and some of the rest of the world. In the U.S., it's really just intellectual property, the Toys R Us brand. Their intent is to launch new stores. They've been very vague about that, so it could be pop-ups at first, it could be more like what they did with Kroger, store-within-a-store, but they intend to have a stand-alone retail presence. That's where things get a little bit scary when you look at the current retail marketplace.

Lewis: Particularly as you see what has happened in the wake of Toys R Us leaving the retail landscape, right? We've seen all of these very big companies with very deep pockets all of a sudden scoop up all the market share that was left behind by Toys R Us.

Kline: There was a land grab. Toys R Us had about 19% of the toy market, about $4 billion in sales. Pretty much the second they showed any weakness, Walmart and Target started ramping up their toy efforts for the holiday season. If you walk into most Targets now, they still have much larger -- I'd say maybe by a third, and that's anecdotal based on visiting some Targets -- toy selections. More aisles, more stuff.

Amazon went full into it. They did a digital toy circular, sort of like what you used to look forward to as a kid from Toys R Us before Christmas, when the big book of toy sales would come out, and you'd circle for your parents what you wanted, and of course mostly wouldn't get.

This market is gone. The overall toy market shrunk a little bit, by a couple of percentage points, through the holiday season. The major players in it -- Mattel and Hasbro -- were both down. Now, they were down partially because they put a lot of their eggs in the Toys R Us basket. When you look at the selection at, say, a Target, Target has Melissa & Doug, it has more independent toy store brands, a wider selection of things like collectible trading cards. You've lost some market share. But there's really no obvious place for a new Toys R Us to step in. Basically, they moved out of the apartment and now, they're going to have to fight the new tenants to get back in.

Lewis: Right. And once consumers get used to the idea that there's a robust toy selection at some of these big box retailers where they're shopping anyways, all of a sudden, you don't really feel the need for a Toys R Us.

Kline: And your kids don't know there's going to be a new Toys R Us. As a parent -- I know you're not a parent -- from maybe the age of three to the age of 10, Toys R Us was a bribe. "Will you go to the grocery store with me? We can go to Toys R Us after."

Lewis: I distinctly remember being on the kid side of that, Dan.

Kline: [laughs] Right. Once there stopped being a Toys R Us, it became, "Hey, do you want to go to Target? The grocery selection isn't as good, but we could kill two birds with one stone." If I had a young kid -- I don't, I have a 15-year-old -- the last thing I would do is reintroduce Toys R Us into the routine. There's that lost opportunity part of it.

The other piece -- we've talked about this a little off camera -- is, if Toys R Us is going to come back, they would have to offer a different experience than what Target and Walmart do. That's very expensive. I used to run a toy store, that's been talked about a lot on this show. My toy store competed with Toys R Us, Walmart, Target, who knows what else, lots of other things. We had tons of interactive areas. We had a huge model train that people could come to see. You had to work really hard to be something very different, and that requires paid experts. We've talked about this with Barnes & Noble. You walk into a Barnes & Noble where they sell upscale $50 to $100 board games, and you ask someone, "Why should I buy Ticket to Ride for $60 or Settlers of Catan for $75?" or whatever the numbers are, and there's no one there that can tell you anything about how those games play, you're not going to buy them. You're going to go to a specialty toy store. There might be some niche for that with Toys R Us, but it's a very expensive game to play.

Lewis: Right. I think so much of the conversation now with retail is, it's got to be more than the goods. You can't just be giving me the product. If you have brick-and-mortar, you need to be giving something else to customers. You look at some of the companies that have very successfully navigated the e-commerce revolution, the ones that do that are the ones that still stand. The easiest examples of that are the Lowe's and Home Depot of the world, where you go there and, very similar to your board game example, you're getting expertise in addition to the goods. Those stores in particular really benefit from the fact that people sometimes come in not really sure what they need, and they can defer to someone who knows a lot more about, say, flooring or wood paneling than they do.

Kline: Absolutely. It's the same way at a specialty toy store. I can walk into any place that sells toys and buy Candyland and know the basic way that game plays. I can't walk into most toy stores and figure out how to play maybe a more specialized game, Apples to Apples or Bananagrams. And I'm talking some very mainstream games. When I used to run the toy store, the gaming companies would come in and we'd have game days with all our employees where they would learn how to play different games. A customer could come in and describe their kid and we could say, "Oh, this game would be perfect for them," or, "No, don't buy that. It's a word-based game and your kid doesn't like words, we know the kid because he comes into the store." And those employees generally couldn't be minimum wage employees. They had to be pretty highly paid. Even the hourly people that were subject experts had to be compensated, they had to be trained. That's not something Toys R Us in its previous iterations did. You could walk into a Toys R Us and ask, "Hey, where's the game aisle?" You could not necessarily walk in and ask any questions about specific games.