• EDITORIAL: The Best, Mostly Likely, and Worst Case Scenarios for Toys R' Us Liquidation

    Unless you were traveling without access to internet, cable, or television news yesterday, you're probably aware of the worsening of the financial situation Toys "R" Us has found itself in. Namely that they are considering filing for Chapter 7 Bankruptcy: Liquidation. And the earliest this could possibly happen is next week.

    I won't go into the long history of how the company was saddled with a ton of debt after being acquired by private equity firms and a retail company back in 2005, or how the rise of Amazon and the dawn of online shopping no longer made Toys "R" Us the premiere destination for kids. Forbes has a nice article which covers that from back in TRU filed for Chapter 11 Bankruptcy Protection back in September. If you want the full background details, please go read that.

    However, to the latest news from the bankrupt company hasn't been the signs of improvement they were hoping for after the busy holiday season. After the 2017 Holiday Shopping  season came and went, TRU missed every single projection they had for that quarter. Which means they didn't move anywhere near enough product or bring in anywhere near enough money for the company to deal with its massive amount of debt.

    After the break, I'll go into some pretty deep speculation about what I see as some of the possible outcomes of this situation. Be sure to grab a sandwich and a soda or something. This is going to be a long one.

    The Worst Case

    I won't sugarcoat this. No matter what happens, or which scenario plays out, there will be a ton of people who will lose their jobs. 64,000 employees across 698 locations if the current numbers on Wikipedia are accurate. The absolute worst possible scenario is the company just straight up goes out of business. No ifs, ands, or buts. Those jobs will be gone. Those store fronts will be empty. And all that retail shelf space will just vanish.

    TRU owns a decent amount of their retail locations. Pretty much any location which is a stand alone TRU retail store is owned outright buy the company, with the remaining locations in various types of malls being leased/rented from their landlords. For those locations in malls… TRU is what is commonly known as an anchor store. The whole point of an anchor store is to draw in retail traffic that would result in visits to the smaller stores in the mall.

    TRU shutting down completely would leave a massive hole in shopping complexes. Not just in the financial engines they are for the mall, but also literally in the layout of the buildings. Those retail locations will be empty. And in this day and age—where retail giants like JC Penny, Macy's, Best Buy, Nordstrom, Target, etc. are bleeding out profits each and every single quarter—those locations will not be filled quickly or easily.

    That will result in a loss of foot traffic to the malls with former TRU locations. Which in turn will lead to lower income for the smaller businesses in those malls. Which could eventually lead to even more job losses as those businesses have to cut back on positions just to stay afloat, or even more businesses going down the toilet.

    Generally this is why malls have more than one anchor store—but once again the odds of finding another tenant to fill those locations are not particularly good.

    As for the stand alone locations, those are probably going to end up as nothing more than abandoned warehouses. They will be left to rot until they are either condemned and torn down by the municipalities they are located in, or the land they are located on will be bought up by a developer who will redevelop the land. Considering all the locations where TRU are located are zoned for commercial operations, I highly doubt we'll be seeing condos built out of them.

    The end result will be the same however: Toys "R" Us will be nothing more than a distant memory. That is tragic for the "Toys "R" Us" Kids who have fond memories of making a trip to the toy store with their parents. For toy companies like Hasbro, Mattel, Lego, and Funko: this is devastating.

    Toys sold at Toys "R" Us account for 10% of the annual revenue for both Hasbro and Mattel. To put that in actual numbers: For Hasbro that is $501,000,000. For Mattel that is $545,000,000. Both of them combined would account for $1.046 Billion in lost revenue for the entire US toy industry.

    Which means there will be $1.046 Billion worth of product originally destined for Toys "R" Us having no where to go. New York Toy Fair was less than a month ago. Toys R Us was there placing orders for new products from a decent number of toy manufacturers who were at the show. Those products are currently being produced right now. Where the product is going to end up is anybody's guess.

    The Most Likely Case

    TRU will go out of business, liquidate all their existing assets in the stores, and then will sell all of their retail locations (both outright owned stores and rental agreements for leased propertied) to Amazon for pennies on the dollar.

    If you haven't been paying attention to the third largest company on the planet over the last few years, you might not be aware they have been slowly but steadily making strides into the physical retail market. Amazon is doing this for one reason, and one reason only: to put them in a better position to compete with Walmart.

    Walmart currently has 5,000 retail locations throughout the United States. And all of those locations double as product warehouses. Walmart is slowly getting its act together in the online marketplace, and when they do they will already be in a position to offer more than just same day delivery on nearly all of their products, but potentially one hour delivery. Amazon knows this, as does anyone who has even an inkling of financial market sense.

    This is the reason why several reports came out back in the beginning of January in support of the idea Amazon will purchase Target at somepoint this year. Toys "R" Us's potential demise could be an unexpected windfall for Amazon's expansion plans. Purchasing all the retail locations of TRU would accelerate those expansion plans. Drastically.

    Combine the potential purchase of all former TRU locations with the potential acquisition of Target and the already completed purchase of Whole Foods, and Amazon would have over 2,500 retail locations at their disposal.

    The purchase of those former TRU retail locations would eventually generate jobs in those communities. Whether it is as many, more, or less than what TRU currently employees is up for debate, but the negative economic impact to the community will be far less than just a straight up TRU liquidation.

    However, this would still be a huge blow to Hasbro and Mattel. These new retail locations will not be dedicated toy stores. They will be carrying a wide variety of products to offer to their local communities. This would be to facilitate faster delivery times, with the potential of 1 hour delivery for a decent number of products. So the shelf space which was previously allocated exclusively for toy products will no longer be dedicated to them.

    Will there still be toys? Probably, but the competition for the retail shelf space will be even tighter than it is right now. And retail lives or dies by selling the products on their shelves. As such, These new Amazon Retail locations will only be placing product on their shelves which they know will move and not sit.

    This would mean a small selection of My Little Pony brushables, a small selection of Transformers Toys, a small selection Barbie, a small dedicated space to Star Wars, a small dedicated space to lego, and the latest summer movie blockbuster tie-in toys (Marvel, DC, Star Wars 20XX). So not only would Hasbro and Mattel's revenue streams shrink considerably, it would be almost impossible for other toy manufacturers to get products on the shelves.

    Funko Pops maybe everywhere, and a decent number of them sell at a quick clip, but a vast majority of them just sit taking up shelf space. These new Amazon Retail Stores won't take a chance on a product which hasn't been proven to sell. This is bad for innovation in new toy designs. This is bad for creating new product lines for existing IPs (Guardians of Harmony and the Fan Series would have never launched under this model).

    This is bad for the toy industry. As for how bad, I don't have enough information to even speculate beyond the bare surface of what I listed above.

    The Best Case

    I will not lie, this is my personal preference for this situation. Hasbro and Mattel jointly purchase Toys R Us and split the retail locations right down the middle. This would allow Hasbro and Mattel to create retail store fronts for their online toy stores. Contrary to initial gut reactions, this is not a bad development. It would be extremely good. Like creating and saving jobs good.

    You know, all those people who would be out of work the second TRU liquidates would still have their jobs. That would be a massive public relations boost for both Hasbro and Mattel. They would touted by the media as the companies who "saved the toy industry". They saved 68,000 jobs. They value not just the welfare of their employees, but the welfare of the employees who partner with them for selling their products. It is very difficult to buy good press, but the two largest toy manufacturers in the United States are potentially in a position to do just that. All they have to do is move fast enough to prevent TRU from liquidating.

    In addition to the good PR campaign the likes of which has never been seen in this country, this would place both Mattel and Hasbro in position to compete with the largest toy company on the planet: LEGO. LEGO already has a direct to consumer product pipeline with both their online store fronts and their 145 worldwide store front locations. These storefronts offer their patrons unique brand experiences (like being able to play with new products or seeing them on display prior to purchasing them) and offer exclusive items which cannot be found anywhere else (Hello! Lego Set 75192). With Hasbro's recent launch of their crowd funding platform Haslab, advertising for these dream products could happen in other locations besides the internet.

    Heck, these products could be placed on display at the retail locations throughout the world, with in store sign-ups ready for the next project.

    Furthermore, a hypothetical retail Hasbro/Mattel Toy Shop would be the perfect location for IP media and fan events. Want to hold "The Friendship Run" in the United States? With these retail locations the run could start and stop at these stores. With the stores located in the communities where the race will happen, working with the municipality's governing body is simplified significantly. There won't be a corporate entity from another state/city disrupting the daily events in the city. It will be a local business, with local employees, servicing the community they live and work in.

    Want to have a meet and greet day with Optimus Prime and his heroic team of Autobots? Hasbro can literally send the Autobots on a tour of the country, and don't have to do anything expect advertise the dates of the event and inform the store manager. Heck, these stores could easily have a dedicated space for special promotional events sent to them from Hasbro Corporate.

    They could even open up temporary themed cafe's in these retail locations. Hello My Little Pony themed ice cream and sweets, like we saw over in japan last year!

    Store signings with the stars/writers/staff of the cartoons could easily become a valid possibility. You wouldn't have to go to a Brony/Comic Convention—though there are still plenty of reasons why you should go to them—to meet Tara Strong (Twilight Sparkle), Peter Cullen (Optimus Prime), Jessica DiCicco (Hanazuki), Rebecca Shoichet (Sunset Shimmer), Steven Blum (Starscream), and a slew of so many other talent I can't possibly name them all.

    You could have toy designers (both past and present). Authors and artists who have worked on the licensed literary materials. Executives who want to do a "meet and greet" day with their main customer base (kids) to see not just how well their products are selling, but also see how their toys are being played with. Hosting fan days at these retail stores would create another avenue of market research for the toy company to explore. That in turn could lead to innovative new products for their intellectual properties which would otherwise never exist!

    Speaking of products which would otherwise never exist, there could be unique products created and available for purchase just for these events. It would allow for not only the creation of cherished childhood memories for both kids and their parents to enjoy, but it would also create a whole new line of collectibles the likes of which have only been glimpsed at smaller events around the globe.

    And that's not even touching upon what having a retail arm for a toy company could their licensee partners. Just imagine how the MLP: Collectible Card Game from Enterplay could be doing right now if it didn't have to rely on comic/game shops around the world to be sold and played at. Wizards of the Coast is launching a brand new Transformers Trading Card Game this year. Imagine how easy that product could be to find at Hasbro Toy Stores. Heck, there could be store exclusive promo cards for the MLP and Transformers Card Games which can't be found anywhere else. Not even in comic shops.

    To go one step further, Hasbro Toy Shops could differentiate themselves by bringing in products licensed from Hasbro IPs but are either only found online (the My Little Pony: Blankie Tails immediately come to mind) or were created specially for the Hasbro Top Shops.

    There is a Ferengi Rule of Acquisition which feels appropriate for this situation. It's rule number 57: "Good customers are as rare as latinum. Treasure them." In the modern retail age, what gets a customer and keeps them coming back to your store is by creating a unique environment/experiences which cannot be found or replicated anywhere else. Customer Service is the key. Toys "R" Us failed to learn this lesson fast enough and as a result they are about to not only disappear from the face of the earth, but also inflict a massive wound on the toy industry which will be felt for year if not decades to come.

    Hasbro and Mattel are not only in a position to undo this mistake, but they are in a position to capitalize on it and usher in a new era for the toy industry. An era the likes of which has never been seen before. The potential for success here is only limited by the imagination of who dare to dream.

    I can only hope and pray Hasbro and Mattel can dream big.

    The Hasbro/MLP Bottom Line

    The retail toy landscape is going to change a lot over the next few weeks. If the current course for Toys "R" Us is not corrected in the few days/weeks that change is going to be the equivalent of an iceberg broadsiding the Titanic. It will be catastrophic.

    Hasbro's offerings for all of their entire product lines will shrink. Lines that are not performing as well as Transformers, MLP, and Star Wars might even be cut entirely. Less revenue for Hasbro would mean far fewer resources to invest in entertainment tied into the toy lines. Which could mean animated projects for cartoon featuring colorful magical talking ponies (and their human counterparts) are cut short.

    One would think $501,000,000 is a drop in the bucket for a company the size of Hasbro. But half a billion dollars is 10% of their revenue. That not even counting how much their stock is going to plummet, and that is really going to hurt their bottom line.

    So buckle up folks. Cause unless something is done soon, we're going to be in for a very bumpy ride.