The Supply Side: Post-Toys R Us era, toy category quickly moving online

Toys are one of the latest retail categories to quickly move online in the post-Toys R Us era. Toys R Us exited the market following its January 2018 bankruptcy and liquidation, leaving retailers like Amazon and Walmart to double down on efforts to win the up-for-grabs market share.

A recent report from Boston-based Profitero looked at the category and the vacuum created from the absence of Toys R Us. The 41-page report concluded while Walmart was an early winner with 43% of respondents who previously shopped Toys R Us now shopping Walmart, the industry overall is gravitating online.

Amazon ranked second in the Profitero survey with 33% of respondents saying they have previously shopped Toys R Us. Target was third at 17% and specialty toy stores garnered just 6% of the respondent’s share.

In the toy category, e-commerce sales are expected to grow from 31.4% in 2019 to more than 47.9% by 2023, according to eMarketer. Profitero said Amazon is well-positioned to take advantage of the $12 billion in annual sales that Toys R Us once generated.

According to Euromonitor, the only channels with positive share growth in the last decade for U.S. toy sales have been e-commerce and supercenters, highlighting the importance of price and product variety when deciding where to shop for toys. Euromonitor also predicts e-commerce will be the only channel to see growth in the toy category through 2022.

In the short term, Walmart appears to have succeeded in gaining some of the Toys R Us share. Walmart U.S. CEO Greg Foran recently told the media that toys was one category the retail giant focused on heavily last year, buying deeper and broader ahead of the holidays. That’s a gamble he said has paid off.

Profitero notes Amazon likely wins longer term, as 51% of shoppers are already beginning their shopping online and 77% start that search with Amazon.

“We expected a large number of shoppers to research products online but then purchase in-store, particularly for a category like toys, where kids and parents alike may want to try it before they buy it. But this doesn’t seem to be the case. Our survey shows just 16% of U.S. consumers prefer to research a toy online before buying in a physical store,” noted Andrew Pearl, vice president of strategy & insight at Profitero and author of the report.

He said the ability to see, touch and play with a toy before buying is clearly less important versus the online benefits of convenience, price and assortment. It’s less of a differentiator and protective moat for brick-and-mortar retailers. Pearl notes it could be one of the reasons why Toys R Us lost influence, and it should be a warning sign to other brick-and-mortar-only retailers. The Profitero report said online toy sales are growing two to three times faster than at brick-and-mortar. Amazon represented 81% of all U.S. online toy transactions in 2018, Pearl wrote.

“As with nearly every other category it has disrupted, Amazon holds the lion’s share of online toy sales. Analysis from Jumpshot across four major toy brands — Nintendo, LEGO, Hasbro and Mattel — reveals that Amazon captured more than 83% of online sales for each of these brands in 2017,” Pearl wrote.

AMAZON THE DISRUPTOR
Amazon is a disruptor on many levels, and toys are no different.

“The endless assortment and ultra-competitive pricing to dynamic merchandising and next-day Prime delivery is quite different than any other retailer,” Pearl noted.

More choices for products is a big reason consumers turn to Amazon for toy purchases, the report states.

“Traditional retailers such as Walmart provide a limited assortment of products for the shopper to choose from. If we take the example of a popular toy keyword such as ‘construction toys’ on Amazon, the search results return more than 50,000 listings. This compares to the 13 SKUs [items] available in a Walmart store in Rogers, Ark.,” Pearl wrote.

For toy suppliers, Pearl said the list of competitors is multiplied exponentially on Amazon, and those winning on Amazon may not be the same ones found in traditional retail. Pearl said toy brands have to be available online because if they are not, smaller challenger brands will dominate share.

“One of the most common comments we hear from our clients is: ‘Who are these challenger brands selling online? I just don’t recognize them from the brick-and-mortar world,’” Pearl noted.

He explained that’s likely because the virtual aisles online are indeed endless. Low barriers to entry for selling on Amazon empower small brands to reach more shoppers and defy the distribution moats large brands enjoy at brick-and-mortar stores. He said these challenger brands could easily steal away market share and gain ground if brands are not there — or are present but are not paying attention.

Pearl said the proliferation of small challenger brands and low-priced imports are going after legacy brands toy share on Amazon. At brick-and-mortar, legacy brands control the shelf space making it hard for challengers to get in. But that’s not the case online.

The report also goes over several differences toy brands will encounter when moving the majority of their business online. Pearl said third-party marketplaces react quickly to market demand and they can unleash a whole set of challenges against brands selling directly on Amazon, or even Walmart.com.

Pearl said out-of-stocks are also a big deal on Amazon, and this is playing directly into the hands of third-party sellers.

“If you run into stock issues, there’s likely a [third-party] marketplace seller waiting to pick up the slack. This underscores the importance of having the ability to regularly and routinely monitor your assortment and the marketplace situation for your products. If you don’t, you’re in danger of losing control of your distribution and sales on Amazon,” Pearl wrote.

Pearl said brands selling on Amazon also have to be ready for competitive price changes more quickly than at traditional retail.

“In a brick-and-mortar store, promotions have to be planned months in advance. But Amazon has its own advertising program built into its platform that virtually allows brands to sponsor keywords and bump up their search position, and sales, at will. You can run a promotion or drop a coupon and affect a change on Amazon anytime you want … but guess what? So can your competitors,” Pearl noted in the report.

He explained unlike brick-and-mortar retailers, Amazon has the ability to de-list products overnight if they become unprofitable to ship, which is known as CRaP (Can’t Realize any Profit), even if they sell at high volumes.

“These kinds of ongoing dynamic activities can massively swing sales and market share away from — or toward — your favor,” Pearl added.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.