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Swot analysis

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Nizar Harakat
Nizar Harakat

TRU is a specialty retailer of toys and baby products headquartered in New Jersey. It operates stores globally and employs around 68,000 people. In FY2013, TRU reported revenues of $13.5 billion, though profits declined from the previous year. TRU differentiates itself through integrated store formats combining toys and juvenile products. However, increased competition has intensified price wars and affected TRU's margins. TRU has also faced regulatory issues over anti-competitive practices with suppliers.

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COMPANY PROFILE Toys “R” Us, Inc. REFERENCE CODE: E07857C1-BCAF-48B6-8716-34C0569D04B8 PUBLICATION DATE: 31 Oct 2013 www.marketline.com COPYRIGHT MARKETLINE. THIS CONTENT IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED OR DISTRIBUTED.
TABLE OF CONTENTS Company Overview..............................................................................................3 Key Facts...............................................................................................................3 SWOT Analysis.....................................................................................................4 Toys “R” Us, Inc. Page 2 © MarketLine Toys “R” Us, Inc. TABLE OF CONTENTS
COMPANY OVERVIEW Toys “R” Us, Inc. (TRU or ‘the company’) is a specialty retailer of toys and baby products. The company has presence across various countries in North America, Europe and Asia. It is headquartered in Wayne, New Jersey and employed about 68,000 people as of February 2, 2013. The company recorded revenues of $13,543 million in the financial year ended January 2013 (FY2013), a decrease of 2.6% compared to FY2012.The operating profit of the company was $556 million in FY2013, a decrease of 4.5% compared to FY2012.The net profit was $38 million in FY2013, a decrease of 74.5% compared to FY2012. The company’s financial year ends on the Saturday closest to January 31. FY2013 was a 53-week period and FY2012 was a 52-week period. KEY FACTS Toys “R” Us, Inc.Head Office One Geoffrey Way Wayne New Jersey 07470 2030 USA 1 973 617 3500Phone Fax http://www.toysrus.com/Web Address 13,543.0Revenue / turnover (USD Mn) JanuaryFinancial Year End 68,000Employees Toys “R” Us, Inc. Page 3 © MarketLine Toys “R” Us, Inc. Company Overview
SWOT ANALYSIS TRU is a specialty retailer of toys and baby products. What sets apart the company from its competitors are its integrated store formats. By leveraging its integrated store formats, TRU can not only obtain the sales benefits but also attain a competitive edge over other companies in the industry. However, the growing competition in the toys retailing industry can make TRU's results of operations more sensitive to the competitive pricing practices and adversely affect its margins. WeaknessesStrengths Involvement in anti-competitive practicesIntegrated store formats provide a competitive edge over other companies International market presence facilitates large customer base and diversified revenue stream ‘Pop-up’ stores to tap the increase in customer spending during holiday season ThreatsOpportunities Competition intensified from non-specialists and new entrants leading to price wars Increased influence by children on spending will boost kids-focused businesses Declining retail sales of toys in the USPrivate label portfolio enhances exclusivity, margins and pricing power Rising labor costs Creating a niche for itself in the toys market for differentially abled children Innovative services to increase convenience for customers Strengths Integrated store formats provide a competitive edge over other companies TRU's integrated store formats differentiate the company from its competitors. The company's SBS stores combine the Toys "R" Us (comprising toy and entertainment offerings) and Babies "R" Us (comprising juvenile offerings) merchandise offerings under one roof. The integration of juvenile merchandise with toy and entertainment offerings has enabled the company to create a ‘one-stop shopping’ experience for its customers. The product assortment offered by SBS stores allows the company to tap the needs of new parents as customers during pregnancy, and later become a resource for infant products such as baby formula, diapers and solid foods. The opportunity to establish first contact with new parents enables the company to further develop relationship with Toys “R” Us, Inc. Page 4 © MarketLine Toys “R” Us, Inc. SWOT Analysis
customers as their children grow and transition to become consumers of its toy products. Additionally, juvenile merchandise such as baby formula, diapers and infant clothing mitigates the inherent seasonality in the toy business.In comparison, Build-A-Bear Workshop, the company's key competitor, is solely engaged in the sale of toys, with stuffed toys being its main offering. The company has been increasing the number of SBS stores both domestically and internationally. In FY2013, the company converted 281 existing stores into SBS store format. Additionally, TRU also opened 93 SBS stores (51 of which were relocations of existing stores) during the year. TRU also continued to implement juvenile integration strategy with its Babies "R" Us Express and Juvenile Expansion formats which devote additional square footage to the company's juvenile products within its traditional TRU stores.The company has so far improved 100 existing TRU stores with these layouts since the implementation of these integrated store formats. Thus, by leveraging its integrated store formats, TRU can not only obtain the sales benefits but also attain a competitive edge over other companies in the industry. International market presence facilitates large customer base and diversified revenue stream TRU has, over the years, diversified from the US market and established presence across several countries. In FY2013, revenues from the company’s international operations accounted for 39.8% of the company's consolidated net sales. The company's international segment sells a variety of products in the core toy, entertainment, juvenile, learning and seasonal categories through 828 owned and licensed stores that operate in 35 countries and through the internet. TRU has wholly-owned operations in Australia, Austria, Brunei, Canada, China, France, Germany, Hong Kong, Japan, Malaysia, Poland, Portugal, Singapore, Spain, Switzerland, Taiwan, Thailand and the UK. The company has online presence in Australia, Austria, Canada, France, Germany, Japan, the Netherlands, Portugal, Spain, Switzerland and the UK.The company also expanded its global reach through the introduction of its Chinese website during FY2013. TRU also introduced international shipping for on-line orders to more than 60 countries across Asia, the Caribbean, Central America, Europe, North America and South America. Furthermore, the company’s licensing business helps it to foray into new markets and take advantage of the local expertise with low investments in fixed assets. The company had 163 “R” Us branded retail stores ranging in various sizes at the end of FY2013. International presence reduces the business risk as TRU is not exposed to vagaries of a single economy. Additionally, it gives global scale and increases the customer base. Toy industry has very few global players, and therefore, the company's international presence facilitates large customer base and diversified revenue stream. ‘Pop-up’ stores to tap the increase in customer spending during holiday season The company's business is highly seasonal in nature. During FY2013, FY2012 and FY2011, approximately 43% of the net sales from the company's worldwide business and a substantial portion of its cash flows from operations were generated in the fourth quarter comprising the holiday season. Even in times of downturn, Christmas still is the most important season as it is the period that Toys “R” Us, Inc. Page 5 © MarketLine Toys “R” Us, Inc. SWOT Analysis
witnesses highest consumer spending. In order to maximize its sales during the fourth quarter, TRU makes use of pop-up stores typically ranging in the size of 2,000–7,000 square feet. TRU opened its first pop-up store in FY2009, with nearly 90 TRU Express locations across the US. During FY2013 holiday season, the company operated 303 Express stores of which 125 were still open as of February 2, 2013. The company's pop-up stores drive revenues during the Christmas season and enable it to capture a large share of the increased consumer spending. Weaknesses Involvement in anti-competitive practices TRU was found to be involved in several anti-competitive practices in the recent times. In 2010, antitrust investigators from the Japan Fair Trade Commission raided the head office of Toys ''R'' Us-Japan for possible violation of the Antimonopoly Law by the company by allegedly underpaying its suppliers. The company was suspected of paying low prices to its suppliers for toys and baby products on the grounds that the company sold the suppliers' unsold items at discount prices. The toy store chain was also suspected to have forced suppliers to take back unsold items. Toys ''R' 'Us-Japan's activities could be viewed as an abuse of dominant bargaining position, an unfair trade practice as per the Antimonopoly Law. The law prohibits large-scale retailers, such as department stores and supermarket chain operators, from abusing their dominant position in trade with suppliers. Surcharges are imposed on those who abuse dominant bargaining position. In December 2011, the Japan Fair Trade Commission issued a cease-and-desist order, and a surcharge payment order to Toys ''R'' Us-Japan of approximately $5 million. Previously, in 2009, the Federal Trade Commission (FTC) in the US started probing the company's practices for a possible violation of the 1998 FTC order. The order prohibits TRU from asking any of its suppliers to curb the supply of products or refuse to sell to discounters. It also bars the company from asking its suppliers about their respective sales to any toy discounter. The order also requires the company to preserve and maintain a record of communication made with its suppliers related to the latter's sales and distribution. The probe by the FTC found that the company had used its dominant position to extract agreements from toy manufacturers to stop selling the same toys to warehouse clubs. This practice was in violation of the 1998 FTC order. As a result, in May 2011, the company paid $1 million in the form of civil penalty and settled the FTC charges. Involvement in such practices exposes the company to investigations and penalties which are counter-productive expenses. Most importantly, TRU's relationships with the suppliers will be strained and this could impact the availability of products for the company. Opportunities Increased influence by children on spending will boost kids-focused businesses Toys “R” Us, Inc. Page 6 © MarketLine Toys “R” Us, Inc. SWOT Analysis
The influence that children have on family purchasing decisions has been increasing in the US. According to industry estimates, direct spending by children in the US is over $50 billion annually while parents and family members spend an additional $170 billion annually on children. In addition, children influence billions of dollars in other family spending. A key reason for this has been the change in the advertising strategies adopted by the industry. The advertisements for toys and other products for children were previously mainly targeted towards parents, and with a direct message. However, the advertisements are now more sophisticated, and aimed at children directly. Additionally, these advertisements are less recognizable as a sales pitch. While eating at a child oriented fast food restaurant, a child may receive a toy. That toy may also be tied to a movie, a cartoon, a video game, or to a website that offers additional games, toys, and related products.There are a seemingly endless number of products that are presented to the child. In such a scenario, the growing number of children in the US would facilitate the market for child oriented products. According to the US Census Bureau, in 2009 there were over 62 million children aged 14 and under in the US. The size of this population group is projected to remain relatively stable over the next decade.This is expected to benefit TRU and boost its revenues. Private label portfolio enhances exclusivity, margins and pricing power The growing penetration of private labels market-wide indicates increased acceptance of these private label brands. Private labels scored strong gains across the major US retail channels in the recent years as consumers increasingly switched from national brands and drove store brands growth in both volume and total revenue, according to industry sources. According to industry estimates, among all major US retail channels, private label sales increased by approximately 3% to exceed $107.5 billion in 2012. Since 2009, the annual growth of store brand sales has averaged approximately 5%, compared to 2% for national brands. The trend is estimated to continue as there has been a basic shift in the consumer preference towards value products. Increased penetration of private labels offers several advantages to the retailers. Private label goods are priced low compared to the national brands, this helps in attracting value oriented customers. Besides, due to the lack of advertising and marketing expenses they provide double advantage to the retailer when it comes to the profit margins. Not only they give a higher margin to the retailers, private labels have also changed the balance of power between brand manufacturers and retailers, giving the latter an advantage when negotiating terms with the brand manufacturers. As the private label offerings increase and the quality is assured, a high sense of loyalty is cultivated among the company's customer base. This customer loyalty is the result of an affinity with the retailer brand which implies that the development of private label brands can tangibly enhance the retailer's brand itself. Thus, in the long run, private labels can become an important tool for the retailer to establish its positioning and strategically attract the target customers to its outlet. TRU has built a strong private label portfolio which includes merchandise under the names such as Babies "R" Us, Journey Girls, Imaginarium, Fast Lane, You & Me, Just Like Home, True Heroes, Totally Me!, Dream Dazzlers, and Fao Schwarz. TRU opened a sourcing office in China in FY2011 to work with vendors and expand its private label product offerings further. The company's focus on expanding its private labels offering will help it to attract more value oriented customers. Toys “R” Us, Inc. Page 7 © MarketLine Toys “R” Us, Inc. SWOT Analysis
Creating a niche for itself in the toys market for differentially abled children Autism is a kind of developmental disorder which causes impaired communications and social interaction in a child. As a result, the requirements of these children are very different. TRU offers several toys suited for autistic children. It also releases an annual guide giving in-depth information about how each of its autistic toys can be used to develop certain skills in a differentially abled child. The company, through its merchandise focused on the needs of differentially abled children, can establish itself in the niche market, which has very few players besides TRU, including Able Play, and Discover Toys. Few players in the market reduce competition and price wars and will help TRU to grow its presence in a new target market. Innovative services to increase convenience for customers The company has launched several innovative services in the recent times, to increase convenience for customers. In line with its long term growth strategy in China, TRU introduced its own gift card program in its stores throughout the country, in August 2013.The gift cards, which are made available for purchase in the company’s 41 locations, can be redeemed in any TRU store in the country.These gift cards are available in two categories, fixed-value and open-value gift cards. Fixed-value cards are available in CNY200 (approximately $33), CNY500 (approximately $82) and CNY1,000 (approximately $163) denominations, and open-value cards can be loaded with any amount a customer chooses between CNY100 (approximately $16.5) and CNY1,000 (approximately $163). In March 2013, BRU entered into a strategic partnership with WhatToExpect.com, Heidi Murkoff’s pregnancy and parenting website, to offer expectant moms convenient access to their combined content and retail resources. As part of this collaboration, the Babies“R”Us Registry was made available on WhatToExpect.com. Additionally, the content from WhatToExpect.com will be featured through various BRU channels. Previously, in October 2012, the company launched Pay In Store, a new payment option for orders placed through Toysrus.com and Babiesrus.com. This allows customers to shop online and pay for them in any one of the company’s stores across the US. It serves as a convenient alternative payment option for customers who do not have a credit card or do not want to use their credit card online. Through various innovative services, TRU can cater to the demands of the growing customer base that prefers to shop online and increase the average spend by customers on its offerings. Threats Competition intensified from non-specialists and new entrants leading to price wars TRU operates in one of the toughest competitive environments. Children's and infant products are favorites of all the retailers especially during downturn as they are resilient and attract high customer spending.Strong competition in the toy retailing business is therefore a concern as strategies adopted by peers can impair the growth of the company. TRU competes with a number of retailers, including Toys “R” Us, Inc. Page 8 © MarketLine Toys “R” Us, Inc. SWOT Analysis
other toy retailers, discounters, and catalog and internet businesses. In recent times, price wars have been the most prominent of the competitive strategies. Especially during the holiday season, price wars in the toy retailing market become more intense. For instance, in 2011, Wal-Mart announced layaway (a service where customers can purchase a product without paying the entire cost at once) on toys during the holiday season.This is the first time Wal-Mart announced this since 2006. In addition, Wal-Mart also cut prices on a number of toys during the holiday season. Also, Target has aggressively slashed prices on toys during holiday season to lure shoppers. Target slashed prices on a number of hot toys, undercutting Wal-Mart by nearly 19%. These price wars have been forcing TRU to also adopt an aggressive pricing strategy to avoid customer attrition. Furthermore, several non-specialist retailers have also increased the space for selling children and infant products. According to industry sources, mass merchants were the most popular channel for toy purchases, with a market share of approximately 49% in 2011.This indicates that these channels are increasingly attracting the customers to these non-core products. Additionally, these multi-line retailers have an advantage of a larger customer base which is hard to beat.The entry of new players in the industry is also expected to further fuel the competition.The book store chain Barnes & Noble, which has been dedicating more space to hobby items and educational toys. The growing competition in the toys retailing industry can make TRU's results of operations more sensitive to the competitive pricing practices and adversely affect its margins. Declining retail sales of toys in the US The retail sales of toys in the US witnessed a decline in recent times. According to industry estimates, the retail sales of toys in the US totaled $16.5 billion in 2012, a decrease of 0.6% compared to $16.6 billion in 2011. The growing digitalization of the media and entertainment industry poses a threat to the traditional toy market. Online and wireless games categories are gaining popularity. One of the reasons for the decline in traditional toys in the US is the growing popularity of mobile devices used by children aged two to 12 for gaming, music and taking pictures. As per industry sources, children use mobile devices such as smartphone, tablet or iPod Touch approximately five days a week, with an average session lasting just under one hour. Going forward, traditional toys will have to assert themselves increasingly in a more digital world. Thus, growing usage of mobile devices for gaming and other purposes as well as growing preference for electronic games could adversely impact the sales of traditional toys offered by TRU. Rising labor costs Labor costs have risen in the US and Europe in recent years.Tight labor markets, increased overtime, government mandated increases in minimum wages and a higher proportion of full-time employees are resulting in an increase in labor costs for employers in the US. The federal minimum wage rate in the US, which remained at $5.15 per hour since 1998, increased to $5.85 per hour in 2008. It further increased to $6.55 per hour in 2009 and to $7.25 per hour in 2010. Furthermore, many states and municipalities in the country have minimum wage rate even higher than $7.25 per hour due to higher cost of living. The minimum wage rate has increased in the states of Arizona (from $7.65 in 2012 to $7.80 in 2013), Colorado (from $7.64 in 2012 to $7.78 in 2013), Florida (from $7.67 in 2012 Toys “R” Us, Inc. Page 9 © MarketLine Toys “R” Us, Inc. SWOT Analysis
to $7.79 in 2013), Ohio (from $7.70 in 2012 to $7.85 in 2013), Oregon (from $8.80 in 2012 to $8.95 in 2013) and Washington (from $9.04 in 2012 to $9.19 in 2013) in the recent past. Similarly, hourly labor costs in the Euro area increased by 0.9% in the year up to the second quarter of 2013. In the EU, the annual rise was 0.9% up to the second quarter of 2013. As of February 2, 2013, TRU employed approximately 68,000 full-time and part-time individuals worldwide, with approximately 43,000 in the US and 25,000 internationally. Increase in labor wages may increase the overall costs and affect the company's margins. Toys “R” Us, Inc. Page 10 © MarketLine Toys “R” Us, Inc. SWOT Analysis
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  • 1. COMPANY PROFILE Toys “R” Us, Inc. REFERENCE CODE: E07857C1-BCAF-48B6-8716-34C0569D04B8 PUBLICATION DATE: 31 Oct 2013 www.marketline.com COPYRIGHT MARKETLINE. THIS CONTENT IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED OR DISTRIBUTED.
  • 2. TABLE OF CONTENTS Company Overview..............................................................................................3 Key Facts...............................................................................................................3 SWOT Analysis.....................................................................................................4 Toys “R” Us, Inc. Page 2 © MarketLine Toys “R” Us, Inc. TABLE OF CONTENTS
  • 3. COMPANY OVERVIEW Toys “R” Us, Inc. (TRU or ‘the company’) is a specialty retailer of toys and baby products. The company has presence across various countries in North America, Europe and Asia. It is headquartered in Wayne, New Jersey and employed about 68,000 people as of February 2, 2013. The company recorded revenues of $13,543 million in the financial year ended January 2013 (FY2013), a decrease of 2.6% compared to FY2012.The operating profit of the company was $556 million in FY2013, a decrease of 4.5% compared to FY2012.The net profit was $38 million in FY2013, a decrease of 74.5% compared to FY2012. The company’s financial year ends on the Saturday closest to January 31. FY2013 was a 53-week period and FY2012 was a 52-week period. KEY FACTS Toys “R” Us, Inc.Head Office One Geoffrey Way Wayne New Jersey 07470 2030 USA 1 973 617 3500Phone Fax http://www.toysrus.com/Web Address 13,543.0Revenue / turnover (USD Mn) JanuaryFinancial Year End 68,000Employees Toys “R” Us, Inc. Page 3 © MarketLine Toys “R” Us, Inc. Company Overview
  • 4. SWOT ANALYSIS TRU is a specialty retailer of toys and baby products. What sets apart the company from its competitors are its integrated store formats. By leveraging its integrated store formats, TRU can not only obtain the sales benefits but also attain a competitive edge over other companies in the industry. However, the growing competition in the toys retailing industry can make TRU's results of operations more sensitive to the competitive pricing practices and adversely affect its margins. WeaknessesStrengths Involvement in anti-competitive practicesIntegrated store formats provide a competitive edge over other companies International market presence facilitates large customer base and diversified revenue stream ‘Pop-up’ stores to tap the increase in customer spending during holiday season ThreatsOpportunities Competition intensified from non-specialists and new entrants leading to price wars Increased influence by children on spending will boost kids-focused businesses Declining retail sales of toys in the USPrivate label portfolio enhances exclusivity, margins and pricing power Rising labor costs Creating a niche for itself in the toys market for differentially abled children Innovative services to increase convenience for customers Strengths Integrated store formats provide a competitive edge over other companies TRU's integrated store formats differentiate the company from its competitors. The company's SBS stores combine the Toys "R" Us (comprising toy and entertainment offerings) and Babies "R" Us (comprising juvenile offerings) merchandise offerings under one roof. The integration of juvenile merchandise with toy and entertainment offerings has enabled the company to create a ‘one-stop shopping’ experience for its customers. The product assortment offered by SBS stores allows the company to tap the needs of new parents as customers during pregnancy, and later become a resource for infant products such as baby formula, diapers and solid foods. The opportunity to establish first contact with new parents enables the company to further develop relationship with Toys “R” Us, Inc. Page 4 © MarketLine Toys “R” Us, Inc. SWOT Analysis
  • 5. customers as their children grow and transition to become consumers of its toy products. Additionally, juvenile merchandise such as baby formula, diapers and infant clothing mitigates the inherent seasonality in the toy business.In comparison, Build-A-Bear Workshop, the company's key competitor, is solely engaged in the sale of toys, with stuffed toys being its main offering. The company has been increasing the number of SBS stores both domestically and internationally. In FY2013, the company converted 281 existing stores into SBS store format. Additionally, TRU also opened 93 SBS stores (51 of which were relocations of existing stores) during the year. TRU also continued to implement juvenile integration strategy with its Babies "R" Us Express and Juvenile Expansion formats which devote additional square footage to the company's juvenile products within its traditional TRU stores.The company has so far improved 100 existing TRU stores with these layouts since the implementation of these integrated store formats. Thus, by leveraging its integrated store formats, TRU can not only obtain the sales benefits but also attain a competitive edge over other companies in the industry. International market presence facilitates large customer base and diversified revenue stream TRU has, over the years, diversified from the US market and established presence across several countries. In FY2013, revenues from the company’s international operations accounted for 39.8% of the company's consolidated net sales. The company's international segment sells a variety of products in the core toy, entertainment, juvenile, learning and seasonal categories through 828 owned and licensed stores that operate in 35 countries and through the internet. TRU has wholly-owned operations in Australia, Austria, Brunei, Canada, China, France, Germany, Hong Kong, Japan, Malaysia, Poland, Portugal, Singapore, Spain, Switzerland, Taiwan, Thailand and the UK. The company has online presence in Australia, Austria, Canada, France, Germany, Japan, the Netherlands, Portugal, Spain, Switzerland and the UK.The company also expanded its global reach through the introduction of its Chinese website during FY2013. TRU also introduced international shipping for on-line orders to more than 60 countries across Asia, the Caribbean, Central America, Europe, North America and South America. Furthermore, the company’s licensing business helps it to foray into new markets and take advantage of the local expertise with low investments in fixed assets. The company had 163 “R” Us branded retail stores ranging in various sizes at the end of FY2013. International presence reduces the business risk as TRU is not exposed to vagaries of a single economy. Additionally, it gives global scale and increases the customer base. Toy industry has very few global players, and therefore, the company's international presence facilitates large customer base and diversified revenue stream. ‘Pop-up’ stores to tap the increase in customer spending during holiday season The company's business is highly seasonal in nature. During FY2013, FY2012 and FY2011, approximately 43% of the net sales from the company's worldwide business and a substantial portion of its cash flows from operations were generated in the fourth quarter comprising the holiday season. Even in times of downturn, Christmas still is the most important season as it is the period that Toys “R” Us, Inc. Page 5 © MarketLine Toys “R” Us, Inc. SWOT Analysis
  • 6. witnesses highest consumer spending. In order to maximize its sales during the fourth quarter, TRU makes use of pop-up stores typically ranging in the size of 2,000–7,000 square feet. TRU opened its first pop-up store in FY2009, with nearly 90 TRU Express locations across the US. During FY2013 holiday season, the company operated 303 Express stores of which 125 were still open as of February 2, 2013. The company's pop-up stores drive revenues during the Christmas season and enable it to capture a large share of the increased consumer spending. Weaknesses Involvement in anti-competitive practices TRU was found to be involved in several anti-competitive practices in the recent times. In 2010, antitrust investigators from the Japan Fair Trade Commission raided the head office of Toys ''R'' Us-Japan for possible violation of the Antimonopoly Law by the company by allegedly underpaying its suppliers. The company was suspected of paying low prices to its suppliers for toys and baby products on the grounds that the company sold the suppliers' unsold items at discount prices. The toy store chain was also suspected to have forced suppliers to take back unsold items. Toys ''R' 'Us-Japan's activities could be viewed as an abuse of dominant bargaining position, an unfair trade practice as per the Antimonopoly Law. The law prohibits large-scale retailers, such as department stores and supermarket chain operators, from abusing their dominant position in trade with suppliers. Surcharges are imposed on those who abuse dominant bargaining position. In December 2011, the Japan Fair Trade Commission issued a cease-and-desist order, and a surcharge payment order to Toys ''R'' Us-Japan of approximately $5 million. Previously, in 2009, the Federal Trade Commission (FTC) in the US started probing the company's practices for a possible violation of the 1998 FTC order. The order prohibits TRU from asking any of its suppliers to curb the supply of products or refuse to sell to discounters. It also bars the company from asking its suppliers about their respective sales to any toy discounter. The order also requires the company to preserve and maintain a record of communication made with its suppliers related to the latter's sales and distribution. The probe by the FTC found that the company had used its dominant position to extract agreements from toy manufacturers to stop selling the same toys to warehouse clubs. This practice was in violation of the 1998 FTC order. As a result, in May 2011, the company paid $1 million in the form of civil penalty and settled the FTC charges. Involvement in such practices exposes the company to investigations and penalties which are counter-productive expenses. Most importantly, TRU's relationships with the suppliers will be strained and this could impact the availability of products for the company. Opportunities Increased influence by children on spending will boost kids-focused businesses Toys “R” Us, Inc. Page 6 © MarketLine Toys “R” Us, Inc. SWOT Analysis
  • 7. The influence that children have on family purchasing decisions has been increasing in the US. According to industry estimates, direct spending by children in the US is over $50 billion annually while parents and family members spend an additional $170 billion annually on children. In addition, children influence billions of dollars in other family spending. A key reason for this has been the change in the advertising strategies adopted by the industry. The advertisements for toys and other products for children were previously mainly targeted towards parents, and with a direct message. However, the advertisements are now more sophisticated, and aimed at children directly. Additionally, these advertisements are less recognizable as a sales pitch. While eating at a child oriented fast food restaurant, a child may receive a toy. That toy may also be tied to a movie, a cartoon, a video game, or to a website that offers additional games, toys, and related products.There are a seemingly endless number of products that are presented to the child. In such a scenario, the growing number of children in the US would facilitate the market for child oriented products. According to the US Census Bureau, in 2009 there were over 62 million children aged 14 and under in the US. The size of this population group is projected to remain relatively stable over the next decade.This is expected to benefit TRU and boost its revenues. Private label portfolio enhances exclusivity, margins and pricing power The growing penetration of private labels market-wide indicates increased acceptance of these private label brands. Private labels scored strong gains across the major US retail channels in the recent years as consumers increasingly switched from national brands and drove store brands growth in both volume and total revenue, according to industry sources. According to industry estimates, among all major US retail channels, private label sales increased by approximately 3% to exceed $107.5 billion in 2012. Since 2009, the annual growth of store brand sales has averaged approximately 5%, compared to 2% for national brands. The trend is estimated to continue as there has been a basic shift in the consumer preference towards value products. Increased penetration of private labels offers several advantages to the retailers. Private label goods are priced low compared to the national brands, this helps in attracting value oriented customers. Besides, due to the lack of advertising and marketing expenses they provide double advantage to the retailer when it comes to the profit margins. Not only they give a higher margin to the retailers, private labels have also changed the balance of power between brand manufacturers and retailers, giving the latter an advantage when negotiating terms with the brand manufacturers. As the private label offerings increase and the quality is assured, a high sense of loyalty is cultivated among the company's customer base. This customer loyalty is the result of an affinity with the retailer brand which implies that the development of private label brands can tangibly enhance the retailer's brand itself. Thus, in the long run, private labels can become an important tool for the retailer to establish its positioning and strategically attract the target customers to its outlet. TRU has built a strong private label portfolio which includes merchandise under the names such as Babies "R" Us, Journey Girls, Imaginarium, Fast Lane, You & Me, Just Like Home, True Heroes, Totally Me!, Dream Dazzlers, and Fao Schwarz. TRU opened a sourcing office in China in FY2011 to work with vendors and expand its private label product offerings further. The company's focus on expanding its private labels offering will help it to attract more value oriented customers. Toys “R” Us, Inc. Page 7 © MarketLine Toys “R” Us, Inc. SWOT Analysis
  • 8. Creating a niche for itself in the toys market for differentially abled children Autism is a kind of developmental disorder which causes impaired communications and social interaction in a child. As a result, the requirements of these children are very different. TRU offers several toys suited for autistic children. It also releases an annual guide giving in-depth information about how each of its autistic toys can be used to develop certain skills in a differentially abled child. The company, through its merchandise focused on the needs of differentially abled children, can establish itself in the niche market, which has very few players besides TRU, including Able Play, and Discover Toys. Few players in the market reduce competition and price wars and will help TRU to grow its presence in a new target market. Innovative services to increase convenience for customers The company has launched several innovative services in the recent times, to increase convenience for customers. In line with its long term growth strategy in China, TRU introduced its own gift card program in its stores throughout the country, in August 2013.The gift cards, which are made available for purchase in the company’s 41 locations, can be redeemed in any TRU store in the country.These gift cards are available in two categories, fixed-value and open-value gift cards. Fixed-value cards are available in CNY200 (approximately $33), CNY500 (approximately $82) and CNY1,000 (approximately $163) denominations, and open-value cards can be loaded with any amount a customer chooses between CNY100 (approximately $16.5) and CNY1,000 (approximately $163). In March 2013, BRU entered into a strategic partnership with WhatToExpect.com, Heidi Murkoff’s pregnancy and parenting website, to offer expectant moms convenient access to their combined content and retail resources. As part of this collaboration, the Babies“R”Us Registry was made available on WhatToExpect.com. Additionally, the content from WhatToExpect.com will be featured through various BRU channels. Previously, in October 2012, the company launched Pay In Store, a new payment option for orders placed through Toysrus.com and Babiesrus.com. This allows customers to shop online and pay for them in any one of the company’s stores across the US. It serves as a convenient alternative payment option for customers who do not have a credit card or do not want to use their credit card online. Through various innovative services, TRU can cater to the demands of the growing customer base that prefers to shop online and increase the average spend by customers on its offerings. Threats Competition intensified from non-specialists and new entrants leading to price wars TRU operates in one of the toughest competitive environments. Children's and infant products are favorites of all the retailers especially during downturn as they are resilient and attract high customer spending.Strong competition in the toy retailing business is therefore a concern as strategies adopted by peers can impair the growth of the company. TRU competes with a number of retailers, including Toys “R” Us, Inc. Page 8 © MarketLine Toys “R” Us, Inc. SWOT Analysis
  • 9. other toy retailers, discounters, and catalog and internet businesses. In recent times, price wars have been the most prominent of the competitive strategies. Especially during the holiday season, price wars in the toy retailing market become more intense. For instance, in 2011, Wal-Mart announced layaway (a service where customers can purchase a product without paying the entire cost at once) on toys during the holiday season.This is the first time Wal-Mart announced this since 2006. In addition, Wal-Mart also cut prices on a number of toys during the holiday season. Also, Target has aggressively slashed prices on toys during holiday season to lure shoppers. Target slashed prices on a number of hot toys, undercutting Wal-Mart by nearly 19%. These price wars have been forcing TRU to also adopt an aggressive pricing strategy to avoid customer attrition. Furthermore, several non-specialist retailers have also increased the space for selling children and infant products. According to industry sources, mass merchants were the most popular channel for toy purchases, with a market share of approximately 49% in 2011.This indicates that these channels are increasingly attracting the customers to these non-core products. Additionally, these multi-line retailers have an advantage of a larger customer base which is hard to beat.The entry of new players in the industry is also expected to further fuel the competition.The book store chain Barnes & Noble, which has been dedicating more space to hobby items and educational toys. The growing competition in the toys retailing industry can make TRU's results of operations more sensitive to the competitive pricing practices and adversely affect its margins. Declining retail sales of toys in the US The retail sales of toys in the US witnessed a decline in recent times. According to industry estimates, the retail sales of toys in the US totaled $16.5 billion in 2012, a decrease of 0.6% compared to $16.6 billion in 2011. The growing digitalization of the media and entertainment industry poses a threat to the traditional toy market. Online and wireless games categories are gaining popularity. One of the reasons for the decline in traditional toys in the US is the growing popularity of mobile devices used by children aged two to 12 for gaming, music and taking pictures. As per industry sources, children use mobile devices such as smartphone, tablet or iPod Touch approximately five days a week, with an average session lasting just under one hour. Going forward, traditional toys will have to assert themselves increasingly in a more digital world. Thus, growing usage of mobile devices for gaming and other purposes as well as growing preference for electronic games could adversely impact the sales of traditional toys offered by TRU. Rising labor costs Labor costs have risen in the US and Europe in recent years.Tight labor markets, increased overtime, government mandated increases in minimum wages and a higher proportion of full-time employees are resulting in an increase in labor costs for employers in the US. The federal minimum wage rate in the US, which remained at $5.15 per hour since 1998, increased to $5.85 per hour in 2008. It further increased to $6.55 per hour in 2009 and to $7.25 per hour in 2010. Furthermore, many states and municipalities in the country have minimum wage rate even higher than $7.25 per hour due to higher cost of living. The minimum wage rate has increased in the states of Arizona (from $7.65 in 2012 to $7.80 in 2013), Colorado (from $7.64 in 2012 to $7.78 in 2013), Florida (from $7.67 in 2012 Toys “R” Us, Inc. Page 9 © MarketLine Toys “R” Us, Inc. SWOT Analysis
  • 10. to $7.79 in 2013), Ohio (from $7.70 in 2012 to $7.85 in 2013), Oregon (from $8.80 in 2012 to $8.95 in 2013) and Washington (from $9.04 in 2012 to $9.19 in 2013) in the recent past. Similarly, hourly labor costs in the Euro area increased by 0.9% in the year up to the second quarter of 2013. In the EU, the annual rise was 0.9% up to the second quarter of 2013. As of February 2, 2013, TRU employed approximately 68,000 full-time and part-time individuals worldwide, with approximately 43,000 in the US and 25,000 internationally. Increase in labor wages may increase the overall costs and affect the company's margins. Toys “R” Us, Inc. Page 10 © MarketLine Toys “R” Us, Inc. SWOT Analysis
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