Follow Up: Toys R Us Comeback / Mergers Roundup

In a follow up to a recent post, bankrupt Toys R Us may make a comeback under a new plan outlined by a former CEO of their company, Jerry Storch, who is working to revive the brand.

Mr. Storch, according to CNBC, has been in talks with Credit Suisse and Fairfax (the group which successfully bid for the Toys R Us Canada division) to put together financing and a strategic plan to bring back a “few hundred” Toys R Us stores. The chain had 800 locations in the U.S. that are all in the final stages of shutting down at this time.

The plan being formulated by Mr. Storch would include former executives from the company in a new leadership team. It would, according to reports, place Toys R Us and Babies R Us in the same physical retail space under one large floorplan. The original way that the company operated was with two separate physical retail locations for each of those brands.

This would streamline operations, shipping, and receiving. It would also streamline hiring and provide other cost controls which were lacking in the original version of the brand.

The former Toys R Us corporation will be holding the final piece of business before it fully dissolves: an auction for their intellectual property. That auction will be held next week, and Mr. Storch plans to win the auction so that he can utilize that intellectual property in the “reboot” of the brand.

This situation merits watching as the entire toy industry would benefit from some sort of presence from Toys R Us in the future. The impact of the revival of Babies R Us would be helpful to parents, particularly new parents, and toddlers throughout our country.

Mergers Roundup

In other mergers and acquisitions news, the rumor that Kraft Heinz was looking to purchase Campbell Soup sent the share price of Campbell up significantly on Tuesday. The analysts on Wall Street, for the most part, feel that this merger does not make sense for Kraft Heinz or Campbell to do at this point.

The view of “the Street” is that Kraft Heinz needs to grow internationally and should focus their next acquisition on expanding their global business presence. The expense needed to purchase and recalibrate Campbell would be better used on a different purchase in the view of many analysts.

My own perspective is very different, in my experience in the food industry and having worked for a supplier to both those major companies, Kraft Heinz has some definite synergies with Campbell that would help both parties to grow. The expertise of Kraft and their distribution system could absolutely take Campbell in a whole new direction and create some great new product innovations for the consumer.

Furthermore, I think that Kraft Heinz can do both: they could purchase Campbell and still obtain a Mondelez or another company with a large international footprint.

The other aspect to watch here is that there are powers within Campbell that may not want to sell off the entire company, it may sell a piece to Kraft instead. This rumor is worth paying attention to because then the whole other area involved is what do you call the company? Do they part ways with the Campbell name that has been around since just after the Civil War?

Campbell is in disarray and has no CEO, the company is in need of a major overhaul and Kraft Heinz could be the right fit for them to ensure their survival.

ConAgra and Pinnacle Foods merged today in a deal worth somewhere between $8 and $10 billion depending on what report you access. That proposal came up quickly to the public (no doubt the behind the scenes channels have been at work here for a while) and it became finalized relatively fast.

This merger represents an aggressive push from ConAgra to keep expanding into the frozen foods area. They have made other smaller consolidation moves to support this new strategic growth area, but this Pinnacle move is a major gain by ConAgra.

I have watched ConAgra closely the last several months as they look to recalibrate their brand portfolio. They are chasing Nestle in the frozen food space, and this supports demographic trend data that reflects that millennial consumers are more likely to purchase frozen products.

Pinnacle has some other brands that make this move interesting from shelf stable products, and gluten free options because they purchased Boulder Foods recently who is a big producer of bread for those seeking gluten free alternatives.

The final merger rumor in the roundup today is the news of CBS and Amazon potentially joining forces. The news comes as a surprise to some, as no surprise to others, and as a “long shot” to still others with knowledge of that situation.

The “face value” of the proposal makes sense, Amazon needs more video content it is losing out to competitors for that reason. CBS has some of the most watched TV content in the mainstream broadcast categories, and would be the most cost effective merger target. CBS wants to merge with someone in “new media” to survive in the new TV landscape.

The acquisition of CBS would be the largest deal Amazon would have done to this point, if it does indeed ever come to fruition. The roadblock is the court activity surrounding the lawsuit between CBS and their parent company, National Amusements, (which I have covered previously on Frank’s Forum) over the Viacom merger.

The general industry sentiment is that CBS is going to have a hard time winning that suit to get out from under National Amusements in order to negotiate their own deal for acquisition.

The alternative way this could go is that the situation gets so acrimonious between CBS and their parent company (we are basically there now) that National Amusements may choose to sell off CBS. They would then take that money and invest it either into Viacom and their other holdings or make a series of other smaller moves to restructure their holdings.

The CBS – Amazon potential, in my view, has some merit to it. I still maintain though as I have for a while now that CBS is still more likely to become part of Verizon. That could be a very good merger for both parties involved.

These and other mergers will be covered as the summer rolls on. I can express one sentiment most will agree with me on: I am rooting for Toys R Us to come back for the next generation of kids.

Follow Up: Larian Ditches Bid To Buy Toys R Us

In a follow up to earlier posts here on Frank’s Forum the news on Tuesday is that billionaire Isaac Larian has ditched his bid to buy Toys R Us. The bid would have saved some of the store locations in the once-iconic chain and would have saved some of the several thousands of jobs being lost in the liquidation.

The original offer was believed to be made for around $675 million and the negotiations broke down when the court refused the offer on the table. Larian also found out this week that his bid to purchase the mammoth toy maker, Mattel, has also failed.

The toy industry is bracing for a U.S. industry landscape that does not include Toys R Us, which averaged $11 billion in toy sales which is a 50% market share of the $22 billion domestic toy business. Mattel and Hasbro have both seen tremendous losses in value since the announcement of the liquidation of Toys R Us.

Hasbro spent money in recent days to purchase the Power Rangers brand name and retail rights. The other toy manufacturers are quickly adjusting their distribution patterns and working with brick and mortar retail giants such as Wal-Mart and Target, which are both increasing their toy orders.

The emergence of toys in other more obscure regional chains will increase as well to fill the void left by Toys R Us. The major players mentioned earlier and Amazon will also be working together to grab larger pieces of the pie in the industry space.

Meanwhile, the last of the Toys R Us store locations are winding down their operations to close in the next few weeks. The future for the Toys R Us brand is completely unknown at this point, if there is a future at all. The bid from Larian was the only major bid for the business that is even known to be out there and that has fallen apart. The entry of another group of investors is certainly plausible but the amount of capital it will take to reinvent the brand and create a significantly better customer experience are two big mitigating factors in my view which could doom the brick and mortar presence of the brand.

The one viable potential opportunity for Toys R Us to get a reboot is if it is purchased by one of the major toy brands, such as Hasbro. The major toy makers have a great deal to lose in the reality of Toys R Us leaving the U.S. toy industry space. Mr. Larian, as I previously wrote about believes that the toy industry will collapse without Toys R Us. These toy makers have a big stake in the situation and could decide to try their hand at rebuilding the brand.

The other alternative is that Toys R Us will be purchased by another entity to be used as an online only retail presence. In my perspective, I have felt since this news broke on the liquidation of the once-dominant chain, that this route was the most likely scenario for the future of the brand. The shifts in the retail space toward the online shopping experience could make a lot of sense to an investment group or private equity group.

The Toys R Us name still has a value and a consumer visibility that would translate well into a strictly online presence. The potential investors would be far more likely to go that direction than to take on the significant costs of rebuilding a brick and mortar chain. The sad reality is the loss of jobs, and that is why I was rooting for Mr. Larian to be successful in his bid.

The next five to six weeks will be critical to the future of the Toys R Us brand, in that time period another bid could emerge, or the business may be sold off in pieces until there is nothing left but the memories most of us have from our childhood. It is a sad narrative that those memories could not be passed on to future generations.

Follow Up: Toys R Us Buyout Bid From Larian Revisited

The fallout from the liquidation of the iconic toy retailer, Toys R Us, is back in the news cycle. The news about a week ago was that billionaire toy retail brand owner, Isaac Larian, the man behind the Bratz franchise; placed a bid to purchase about 270 stores in the former Toys R Us chain plus their operation in Canada.

The bid was rejected by the courts that oversee the liquidation of the once premiere toy retailer because they deemed the valuation was too low. The court and the management of Toys R Us have an obligation to get the best value for their creditors in selling the business. They deemed that the offer from Larian was not the best value they could obtain at this point.

In the past couple of days, Larian is back in the news stating that he will put another bid into play for the U.S. stores that he has targeted that are viable for his new concept for the rebooted brand.

Larian was outbid for the Canadian operation of Toys R Us by another investment group. His new bid is focused on saving a portion of the U.S. stores, would involve retaining the U.S. corporate headquarters in New Jersey, and would save between 7,000 and 10,000 workers according to CNN Money.

Toys R Us originally had 735 stores and 31,000 workers in the United States and the potential liquidation of the chain is already showing signs of impacting the toy industry in a deleterious manner. Hasbro, according to CNN Money, has just reported a 16% drop in sales based on the absence of Toys R Us from the equation.

Mr. Larian has a theory that the job losses at other toy companies and vendors that marketed products with Toys R Us will be significant if the company is not rebooted in some form. He has a vision for the company where each location will be renovated to be a type of “mini-Disney World” in each neighborhood. The visits to the store will be very experiential for the children and their parents and family members.

This plan may sound great on paper especially because it addresses some of the core issues behind the precipitous decline of Toys R Us; customer feedback in recent years centered on the shopping environment being cold, sterile, and not inviting. The renovation of the stores and the focus shifting to one of experiences and interactivity is necessary to breathe new life into a once prominent brand.

However, that plan will have to overcome some barriers, namely a brand that has been tarnished by underperformance and a liquidation proceeding. It is similar to any brand that struggles or fails the public perception of that brand is very powerful. The public could have made a decision in their mind about Toys R Us based on past experiences which will be difficult for Mr. Larian and his group to overcome.

The perception of the consumer public has doomed many other brands throughout the course of history. In the case of Toys R Us the brand does have value because it is the only retailer which focused solely on toys. The Larian group or whomever gains the winning bid for the brand has to refocus their business around the core niche of toys.

The unfortunate reality is that it is going to take a great deal of time and money to bring back Toys R Us in a form that will be relevant and competitive in today’s consumer marketplace. The competition from Target, Amazon, Wal-Mart, and other online retailers is very fierce. Those are the barriers that any rebooted form of Toys R Us must be ready to contend with in the future.

The demise of Toys R Us was a very sad side effect of a much larger issue that faces retailers today: the consumer today has different expectations from a brick and mortar shopping experience than they did even five years ago. Toys R Us in their original form could not afford to change with the times due to the debt load they were carrying on loans from private equity investors.

The potential for Mr. Larian or the next group to submit a bid to reinvent the brand should have one central theme: they can be the niche “go-to” place for toys. This is an important attribute in an increasing focus on specialization. They can be the experts on toys and the showcase area for people to experience toys. It can still be a place where children can go to dream.

The next few weeks will be critical in the future of the Toys R Us brand in the U.S. and the decisions made will then take several months to determine the progress or the chances of success for the revamped concept. In my own personal view, if the reboot of the store experience fails, I still stand behind the idea that the brand has definite value as an online only presence. This is substantiated by the visibility and nostalgia components of the brand and the connectedness with a variety of age demographics.

This is just another chapter in what could be a long story: whether it will be one of redemption is what time will reveal.

Follow Up: Toys R Us to Close 180 Stores

In a follow -up to a prior article on Toys R Us entering Chapter 11 bankruptcy protection back in the Fall of 2017, the company announced on Wednesday that they will be closing 180 stores by April.

The beleaguered toy retailer has been consistently losing market share and foot traffic due to stiff competition from Amazon, Wal-Mart, and Target. The Chapter 11 filing was due to a heavy debt load of $5 billion and the need to reorganize the company to emerge a more streamlined organization.

However, while most experts and industry analysts understood the Chapter 11 filing, and my prior article covered the necessity of the timing of the decision, consumer perception was that the chain was “going under”.

The chain had to file when they did for bankruptcy protection because they had to be able to pay the suppliers to get the shelves stocked for the Christmas and holiday season (where the chain makes 90% of their annual sales).

The plan backfired because they failed to market the promotional items properly during the holiday season, and the toy seller neglected to properly provide a concise and simple explanation of the Chapter 11 decision.

Therefore, in survey results from customers the top reason why the company struggled at the holidays was because the public perception was that the chain was going to close their doors, so any gifts for the holidays were perceived to be not returnable merchandise. This perception caused shoppers to avoid the purchase decision at Toys R Us and to purchase those gifts elsewhere.
The company made a statement Wednesday regarding the store closures and cited “operational missteps” during the holiday season as the reason behind the closings. The company now has to move fast to salvage the future of the entire chain.

The competition from Target, who has placed many of their store locations near current Toys R Us locations as well as expanded their toy product offerings, has definitely cut into the revenue capture for Toys R Us. This competition is heightened by aggressive marketing campaigns from Amazon and Wal-Mart that are convenient places for customers to get a wider range of products as well.

The main issue with Toys R Us, in the survey results from consumers, is that they are not easy to shop either in-store or on-line. The company has recognized that both of these areas are a major source of the downward spiral they find themselves within at this point.

The ability to succeed in retail today in an increasingly competitive marketplace is to be an easy place for the consumer to make a purchase. The products must be easy to find and priced to move, and the omnichannel approach: in-store, over the phone, store pickup for large items, and a robust on-line presence are all essential to survival.

Toys R Us is apparently struggling in all of these areas, and they have to hope that this decision today will be approved by the bankruptcy court. They have to hope that they can restore confidence in both the toy suppliers and the consumers. The company has to improve operationally and become aggressive in promoting in-store and on-line product offerings which create a sense of urgency for the customer.

The unfortunate reality of the announcement today is that most likely the chain will announce more store closings in the future. The strategy is to focus on their best performing stores or their best potential locations, which is the path that other retailers have taken at this point in their life cycle.

A personal note, here amidst all of this is my own memories of going to Toys R Us as a child, and getting so excited about a new toy or game that just was released. It was a place you could go and be happy because they sold toys and that nostalgia for a different time makes this article really bittersweet.

The resources I consulted mentioned a rift between the company and toy suppliers because Toys R Us was still giving out executive bonuses before they paid the suppliers, and they were behind on payments. The argument can be made for both sides of that situation: the company does not want to lose quality executives to competitors over a compensation gap, but you also have to pay your bills.

The consolidation of stores, especially the elimination of underperforming stores, is a logical first step. The unfortunate consequence is the lost jobs involved, which in their statement the company did not address the actual number of eliminated jobs. The company needs capital to run a more streamlined operation, so executive bonus pay probably should be suspended until they emerge from Chapter 11 protection.

In the end, as one who has covered the retail space and bankrupt companies in the past, this is a familiar pattern which usually results in the end of the chain in question. The biggest issue here with the potential demise of Toys R Us is that some industry experts maintain that the toy business cannot survive without the presence of Toys R Us. The validity of that analysis may be tested in the near future.