The Power of Licensing #8: Billions of Dollars in Toy Sales Seeking a Home

November 12, 2018 | By: Michael Stone, Co-founder and Chairman, Beanstalk

FAO Schwarz is reopening in mid-November. It sure is interesting observing the toy category these days. Toy sales are robust (although slightly down from last year), an iconic retailer liquidated, retail brands are rising from the dead, new retail formats are being tested, online and offline sales are blurring, and there’s disruption everywhere in the category. It’s been a while since I had so much fun with toys!

Of course, there is retail disruption ongoing in many product categories (think about what used to be considered a boring category, like mattresses). But, in the toy category, there are billions of dollars of sales out there that need to find a home, and retailers are all scrambling to get a piece of the pie. That’s a lot of white space. Let’s take a look at what’s going on.

The vacuum, of course, was recently created by the liquidation of toy retail giant Toys "R" Us (TRU) earlier this year. Consider these facts: TRU was #38 in Internet Retailer’s 2017 Top 100. In 2016, it had $1.7 billion of online sales and was #37 of ranked online toy retailers, growing by double digits over several years. It had 13.6% market share in the toy category (online and offline combined). It was #62 in the National Retail Federation’s 2017 rankings of top 100 retailers. It was the biggest and only nationwide specialty toy retailer.

With over $11 billion in sales in fiscal year 2016 (ending January 28, 2017) the toys and playthings that all those sales represent must go somewhere. Admittedly, TRU had been losing shares for several years to Walmart, Target and Amazon. That being said, a lot of players are stepping up to the plate or stepping up their game. But there’s some fascinating recent history when it comes to brick-and-mortar toy specialty retailers.

Perhaps a decade or so ago, there were three iconic specialty toy retailers—KB Toys, Toys "R" Us and FAO Schwarz. There were, of course, other players such as Etoys (purchased by TRU in 2009). KB Toys was born in 1922 and died in 2009. Toys "R" Us acquired the KB brand name and website in 2010. KB Toys was then bounced to Bain Capital and then to Strategic Marks in 2016.

FAO Schwarz, which was founded in the 1870s, had, at one time, 40 stores around the U.S. It closed its iconic New York City Fifth Avenue flagship store in 2015, its last store. In 2009, FAO Schwarz had been acquired by Toys "R" Us, which opened FAO boutiques inside its TRU stores as well as an online store. Following the demise of FAO, the intellectual property was acquired by a consumer products company, ThreeSixtyGroup, in 2016. And Toys "R" Us, of course, founded in 1948, went out of business in 2018.

So there you have it. Consumers are now largely consigned to buy their toys at Walmart, Target and Amazon. But wait! There may yet be some hearts still beating in those “dead” brands.

FAO Schwarz was known for the experiences that it delivered to its customers (long before experiential retail became de rigueur). ThreeSixtyGroup will be opening a new FAO store in New York City’s Rockefeller Center on November 16, 2018, just in time for the holiday season. The 20,000-square-foot store will be experiential, even more so than before. Of course, the life-size piano, made famous by Tom Hanks in the movie Big, will be there, along with magic shows, a play grocery store and a station to construct a remote-controlled car. Other stores (a smaller one at LaGuardia Airport and one in China) as well as pop-ups in department stores around the world are also planned.

KB Toys, once the second-leading national toy retailer in the U.S. with 1,300 stores at its height, was purchased by Bain Capital in 2000. Bain took KB into Chapter 11 bankruptcy in 2004, and it went out of business in 2009. Strategic Marks, which acquired the KB IP in 2016, has announced 1,000 pop-ups for Black Friday and the holiday season this year and has said that some of the pop-ups might become permanent. Stay tuned on this one; there’s not much time left to accomplish that goal. And I’m not seeing those pop-ups popping up.

And, finally, there’s Toys "R" Us. We all watched TRU slowly die over several years (a bit like the Sears deathwatch). As consumers were increasingly demanding new reasons to visit brick-and-mortar specialty retailers, TRU was giving them less and less reason to visit its stores. But is it gone for good? Not so fast.

The existing owners of TRU recently filed court documents that said it was abandoning the auction of its name and branding to retain the intellectual property instead. The IP owners have not disclosed what their plans might be, but they have said that they would like to bring the famed retailer back in “a new and re-imagined way.” As a hint of more to come, Kroger will feature Geoffrey’s Toy Box in nearly 600 stores this holiday season offering many of the TRU exclusive toys. Possibly the owners of the TRU properties will license the IP to a party experienced at online or offline retailing, in the future. Time will tell if TRU, Geoffrey the Giraffe and the jingle “I’m a Toys 'R' Us Kid” will all have a second act beyond this limited Kroger run.

What are the chances that these comeback attempts will succeed? Brands can seemingly disappear from the market easily, but not so easily from our memories. But what do they need to come back from the dead? Here are some characteristics to consider: There must be a significant amount of awareness that still exists, including emotional attachment and authenticity. There must be a market gap or consumer need that can be filled. A resurrected brand must have a good story to tell. To survive, strong brand management and marketing support must be provided. The competition must be considered; it’s likely to have changed since the time that the dead brand was at its height. And, finally, there has to be a less tangible “feeling of the power of the brand.”

Despite our memories, it’s toy retailers’ competition that could be their waterloo. Other strong retailers have not been sitting still: major suppliers like Hasbro, LEGO and Mattel have found new distributors, and consumers have also moved on to other retailers and changed their shopping behaviors.

Nevertheless, despite the growth of online toy sales, the great majority of sales still occur at brick and mortar. In 2017, online sales for toy retailers ranked in the Top 1000 was about 24% of total sales for those retailers, up from almost 15% in 2012 (Internet Retailer). And while TRU commanded a 13.6% market share in the toy category in 2016, Walmart’s was 29.4% and Amazon’s 16.3% (IBISWorld). Further, for the 2017 holiday season, Amazon scooped up 81% of online toy sales! What that all means is that Walmart, Amazon and, to a lesser extent, Target were already strong players in the toy category when TRU was still in business. And given their brick-and-mortar business, Walmart and Target stand the best chance to pick up the TRU sales.

Walmart, the biggest toy retailer in the U.S. and second-biggest online retailer, is building up its toy selection for this holiday season, including some exclusive products, claiming that it will increase its toy aisle by 30%. And its number of stores (over 4,000) make it accessible to former TRU shoppers. Target also has most of its locations very close to all of the former TRU stores, making it accessible. Target has announced that it will greatly increase its toy floor space, double the number of new and exclusive toys carried on its shelves, increase events around toys and create an online presence named “Toy Hub.” And Amazon, which already had the majority of online toy sales for the major manufacturers, is poised to pick up a good portion of TRU’s online sales (to the extent that it didn’t already have those sales), during a time when online toy purchasing is growing in any event. And, in a “what’s old is new again” moment, Amazon is publishing an ink-on-paper toy catalog this holiday season, which consumers will find in their mail and Whole Foods shopping bags.) Even before the TRU liquidation, these three retailers were already eating into the giant toy retailer’s sales (part of the reason for its demise). In addition, all three can afford to sell toys as loss leaders because they don’t rely on toy sales for their performance overall.

Although the spoils of TRU will mostly go to the big three, other retailers are not just standing by. Party City is opening about 50 Toy City temporary pop-up stores for holiday 2018 (ironically, TRU opened hundreds of mall pop-ups in 2010 to capitalize on the liquidation of KB Toys). JCPenney opened toy specialty shops in some of its stores featuring toys made by leading brands such as Hasbro, Mattel and LEGO. Even Ace Hardware, Kohl’s, Costco and Michael’s are upping their toy selections. Finally, there will be a lot of opportunity this holiday season for the smaller, specialty and neighborhood retailers (such as Fat Brain Toys), which are good at providing personalized service for shoppers.

Will online and brick-and-mortar retailers pick up all of TRU’s lost sales this year? No way. It will take a year or two for that to happen. There’s white space. So is there room for FAO, TRU and KB to return from the dead? Absolutely—if they are smart and play their cards right. That being said, FAO is the only one of the three that is poised to return in several weeks, just in time for the holiday season. I’m not seeing those 1,000 KB pop-ups yet. And as for TRU, it’s still in the “dreaming” phase, but we may see Geoffrey again soon. Fingers crossed.

As I said at the start, the toy category is a lot of fun these days.

For more on bringing dormant brands back to life, see my book The Power of Licensing: Harnessing Brand Equity (Ankerwycke 2018), Chapter 9, “Dead or Alive? Bringing Brands Back to Life”, pages 204 – 231.