Toys R Us: New China Toy Story? 玩具反斗城：新的中国玩具总动员？
It’s Friday and almost the weekend, so I thought I’d take a break from all the e-commerce price wars and woes at solar panel maker Suntech (NYSE: STP) that have dominated headlines this week to take a look at something a little more fun, namely toys. Specifically, leading US toy store operator Toys R Us has announced its first big China expansion since buying out a majority stake from the partner in its Asia operations about a year ago. (company announcement) While I have fond memories of this retailer, I’m predicting this new push will ultimately fail due to a poor game plan and lack of brand recognition.
Let’s take a look at the company’s latest news, which will see it open 4 new stores in the next 2 months, including its first 2 in Beijing and ones in nearby Tianjin, bringing its total China store count to 30. The company is taking an unusual strategy of spreading out its presence with just 1 or 2 stores in a wide range of cities, a contrast with most other big foreign retailers that often take a more focused approach by opening multiple stores concentrated in the country’s top 5 or 6 cities.
From a personal perspective, I like the Toys R Us name and can still remember looking forward to trips to the store as a child so I could walk up and down the aisles stacked high with colorful toys. But all that said, the chain has struggled in recent years under an image as an aging provider of cheap toys made in China and other developing markets.
Chinese parents, similar to parents from any country, want to buy nice toys for their kids and aren’t afraid to spend significant money to keep their children happy. But many of those same parents seem less interested in the cheaper, simpler toys that Toys R Us is famous for, and most would also probably balk at buying anything with a “made in China” label.
Another problem the chain will face in China is a lack of brand recognition, and its strategy of opening just 1 or 2 stores in each city certainly won’t help to establish its name among Chiense consumers. Mattel (NYSE: MAT), the world’s biggest toymaker, learned that lesson the hard way in China, after discovering that its Barbie dolls enjoyed little or no brand recognition in the country despite their high popularity in its home US market. Mattel quietly shuttered its 2-year-old flagship House of Barbie in Shanghai last year, meant to be a place where young girls and their mothers could go for the ultimate Barbie experience. (previous post)
In fact, one of the only foreign toy brands to do well in China to date is probably Disney (NYSE: DIS), and that’s because the company’s name and characters have enjoyed widespread recognition in China for decades now. Unfortunately, Toys R Us doesn’t have any reputation at all in China, and its colorful but cheap toys aren’t likely to attract much attention from image-conscious Chinese consumers. All that said, perhaps the company’s China experiment will last for the next 4 or 5 years, but I expect we’ll see a major pullback or complete withdrawal from the market by 2020 or even earlier.
Bottom line: Toys R Us’ recent China push is likely to fail due to its lower-end product line-up and lack of brand recognition, with the company likely to retreat from the market by 2020.
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