LEGO Group and Toys R Us showing signs of toy industry trouble?

The toy industry is going through troubled times, as demonstrated by the difficulties that both the LEGO Group and Toys R Us are going through, according to a new article.

The Guardian has published an article analysing the state of the toy industry, pointing towards the LEGO Group and Toys R Us as evidence of troubled times. The piece additionally cites UK toy shop sales down in favour of online spending.

The article highlights the underlying issues that have led to Toys R Us’ potential bankruptcy:

“The toy market has been under pressure for quite some time,” says Neil Saunders, an analyst at retail consultancy GlobalData. “Profit margins are being squeezed by excessive discounting – especially around holidays.”

The recent woes of Toys R Us, which is the only dedicated toy chain left in America, took root more than a decade ago when the retailer was taken over by a consortium of private equity firms. It has since run up a $5bn debt mountain, a chunk of which must be repaid or refinanced in 2018.

“The killer for Toys R Us is high debt,” continues Saunders. “This and the associated interest payments give the company very little room for manoeuvre and change at a time when it needs it most.” Its problem is not just debt, however. It’s sizeable physical presence has become an issue in the age of internet shopping. Toys R Us has nearly 900 stores in the US – and another 600 in overseas markets including the UK – which analysts say are an expensive burden at a time when Amazon and Walmart are discounting toys to steal their shoppers.

Brick Fanatics understands that the UK arm of Toys R Us is in particular dangerous territory, with suppliers set to stop supplying the big box toy chain. The Guardian article paints a similar picture occurring in the USA:

Bloomberg, the financial newswire, has reported that some suppliers are already reducing the size of their shipments to Toys R Us. Gaps on shelves would be a disaster for the retailer which, like other toy specialists, rings up 40% of its sales between now and Christmas.

The picture painted about the LEGO Group is less pessimistic:

This time around Knudstorp’s language was more prosaic, stating the toy giant was “pressing the reset button”. Lego was the first to admit that it had lost track of what it was building. Knudstorp pointed to a company that had grown flabby and complicated while the good times rolled. However, many industry voices are confident that it will be able to reboot – not least because The Lego Ninjago Movie arrives in cinemas in time for October half-term.

“Whatever you think about John Lewis, Lego is that and more,” says Gary Grant, managing director of The Entertainer, the UK’s biggest independent toy chain. “It’s one of the very few toys that goes into the loft and is then passed down from generation to generation.”

“The problems at Lego and Toys R Us are not connected,” he continues. “Lego is an outstandingly well-run company but it is a battleship and today you need to be a speedboat.”

New leadership at the LEGO Group due to the slowdown in growth suggests that course correction may indeed be possible, while the woes of Toys R Us will be more challenging to turn around – although it is not the first time that the retailer has been counted out, only to stick around.