ECO740 ECONOMICS ANALYSIS

BUSINESS ISSUES

Presented by:
Ain Nadia Zailan (2017884868)
Hazwani Hashim (2017420346)
 COMPANY BACKGROUND

Toys “R” Us
was opened in
1957

#22 on Forbe’s
Washington D.
America’s
C. United
Largest Private
States
Companies List

Founded by
Charles Lazarus

1,690 stores Toy & baby

worldwide retail company

Domestic &
International

Source: Toys “R” Us (2018)


1948 - Charles Lazarus
opens a baby furniture
store, Children’s Bargain
Town in Washington, D.C
1957 – Expanded into toys,
using the Toys R Us name
1966 - Lazarus sells his
company to Interstate Sales
and becomes head of its
toy division, overseeing the
Toys R Us stores
1974 - Interstate files for
bankruptcy and the court
puts Lazarus in charge of
the restructuring.
Source: Toys “R” Us (2018)
TIMELINE
2005 - Bain Capital,
Kohlberg Kravis Roberts,
and Vornado Realty Trust
buy Toys R Us, taking it
private in a $6.6 billion
leveraged buyout deal
1998 - Walmart beats Toys
R Us for the title of top U.S.
toy seller for the first time
1994 - Lazarus steps aside
as chief executive
1978 - Toys R Us becomes
a public company, trading
on the New York Stock
Exchange
2010 - The company
registers for an initial public
offering in May
2013 - With sales declining
and the IPO market stalled,
Toys R Us withdraws its
IPO registration
2015 - The Times Square
flagship and the landmark
FAO Schwarz store on Fifth
Avenue close.
2016 - The company 2018 - Toys R Us files
continues to struggle under documents with Bankruptcy
the debt incurred as part of Court indicating plans to
the leveraged buyout close 182 stores

Toy Industry in the Global Scenario
1.- Global toy industry sales grew by 1
percent in 2017 across the 12
countries tracked by The NPD Group
(The NPD Group, 2018)
- On par with the world’s collective
performance, toy sales in the United
States, the world’s largest toy market,
grew by 1 percent to $20.7 billion in
2017 (The NPD Group, 2018)
- While China’s total exports dropped
by 7.7 percent and imports by 5.5
percent in 2016, toy exports rose by
9.5 percent and imports by 23 percent
(Koty, 2017)
FUNNEL CONCEPT
Toy industry in the Malaysian Scenario
- In 2016, the sales value of
manufactured games and toys in
Malaysia was approximately 330.1
million Malaysian ringgit.
- Revenue in the "Toys & Baby"
segment amounts to US$56m in 2018.
- Revenue is expected to show an
annual growth rate) of 10.5% resulting
in a market volume of US$83m in
2022.
- The average revenue per user
(ARPU) currently amounts to
US$26.21. (Statista, 2018)
Toys “R” Us
- 1,690 stores worldwide (Schultze,
2017)
- Operated a network of over 400 brick-
and-mortar stores and 8 web-stores
that span across Brunei, China, Hong
Kong, Japan, Macau, Malaysia,
Philippines, Singapore, Taiwan and
Thailand (Toys”R”Us, 2018)
- 40 stores in Malaysia (Toys”R”Us, ,
2018)
- Toys R Us Inc in the third quarter
2017 recorded net loss of $ -622.00
millions. (Toys “R” Us, 2018)
 BUSINESS ISSUE
Bankruptcy Protection
• In September 2017, the chain filed for Chapter 11
Bankruptcy Protection, $5 billion debt (Capetta, 2018)
• The proceedings will not include the company’s
European, Asian, or Australian operations, and stores in
the US and Canada will remain open.

Debt
• The children’s toy retailer was burdened with a hefty $5
billion of debt, which became difficult to pay down as
online competitors drew in more customers. Same-store
sales in its latest quarter fell 4.1% year-over-year (YoY),
and resulted in $164 million in losses (Pandolph, 2017)

Shutting Down
• Closing 735 stores in US, leaving 33,000 people without
jobs and wrap up a 70-year business (Verdon & Jones,
2018)
• Closing 100 stores in UK, leaving 3,000 people without
jobs (Goldman, 2018)

Reorganization
• Asia and Central Europe stores will undergo
reorganization and sale process (The Star, 2018)
 BUSINESS ISSUE

Amazon, Walmart, and Target

slashed prices on toys so
Perfect steeply in November and
Storm December 2017 at low-
margins that Toys R Us could
not compete

Toys R Us relies exclusively

on toys for profit, whereas
Amazon, Walmart, and Toys for
Target sell a broad array of Profit
merchandise to make up for
profit losses on toys

Online
Pricing & Toys R us couldn’t compete
with its rivals’ online pricing
Shipping and shipping offers
Offers
 ECONOMIC FACTORS
Increase in Translation of
Economic Growth
China Economy Currency
Toys “R” Us outsource
Toys “R” Us has translated its
Chinese factories to
business to 37 countries - any
manufacture their product
changes in the economic
due to the combination of
condition and currency will
cheap labour & undervalued
directly impact their revenues.
currency.
According to Toys “R” Us third
The labor costs have risen
quarter 2017 report, they
rapidly as the average hourly
experienced a $6 million
wages hit $3.60 in 2016,
negative impact from foreign
spiking 64 percent from 2011
currency translation (Toys “r”
(Yan, 2017)
Us, 2018)
Children toys and amusement
that Toys “R” Us are selling
are sometimes viewed as
additional costs to a family,
and therefore many people
cut on their cost during
economic depression times.
U.S. economic growth slowed
in the first three months of the
year to a 2.3 percent annual
rate, down from 2.9 percent
at the end of last year (Ydstie,
2018)
Demand and
Supply
During holiday seasons,
demand for toys spiked up.
One third of the annual sales
for toy makers are made in
the holiday season. The
global market itself amounts
to $90bn and is led by the US
who produces $21bn of this
total revenue (Leech, 2016)
During the 2015 holiday
season, Toys”R”Us ran out of
stock due to the company's
policy of considering stores
being in-stock if they had
three units of a particular
SKU, which in turn leads to
shelves looking half empty
(Tradegecko, 2017)
 MEASURES TO SOLVE THE PROBLEMS
Effect of Demand Curve on Substitute Goods

With decrease in price of substitute goods,

demand for the given commodity also
decreases from OQ to OQ1 at the same
price of OP. It shifts the demand curve of the
given commodity towards left from DD to
D1D1.
 MEASURES TO SOLVE THE PROBLEMS

Price Leadership
In this form of coordinated behaviour of oligopolists one firm sets the price and the others follow it
because it is advantageous to them or because they prefer to avoid uncertainty about their
competitors’ reactions even if this implies departure of the followers from their profit-maximizing
position.

Barometric Price Leadership Dominant Firm Price

The characteristic of the traditional price leader is
that he sets his price on marginalistic rules, that is, at
the level defined by the intersection of his MC and
MR curves. For the leader the behavioural rule is MC
= MR. The other firms are price-takers who will not
normally maximise their profit by adopting the price
of the leader. If they do, it will be by accident rather
than by their own independent decision.
Leadership
In some oligopolistic markets, one large firm has a
major share of total sales, and a group of smaller
firms supplier the remainder of the market. The large
firm has power to set a price that maximizes its own
profits. A dominant firm exists because it has lower
marginal cost than the other fringe firms.

Source: Chilet (2017)

MEASURES TO SOLVE THE PROBLEMS
The Kinked Demand Curve

• If a firm increases
price, others won’t go
along, so demand is
very elastic for price
increases.
• If a firm lowers price,
other firms match the
decrease, so demand
is inelastic for price
decreases
• When there is a kink in
the demand curve,
there has to be a gap in
the marginal revenue
curve.
MEASURES TO SOLVE THE PROBLEMS
MEASURES TO SOLVE THE PROBLEMS
The Kinked Demand Curve
Increase in Price
• Increases the price above
the prevailing price then
other competition firms will
not follow its increase in price
• This will lead to substantial
reduction in its sales as its
customers will withdraw from
it and go to its competitors
• The competitors will have no
motivation to match the price
rise
• Thus an oligopolist who
raises the price will loose a
great deal and refrain itself
from increase in price
Decrease in Price
• If firm lowers the price below
the prevailing price, the
competitors will immediately
follow
• This is because when firm
lower the price of its products
its competitors will feel that if
they do not follow the price
reduction then their
customers will move away
and buy from the firm which
has lowered the price
 MEASURES TO SOLVE THE PROBLEMS

Economies of Scale

• A fall in the long run average

costs because of an increased
Economies scale of production
of Scale
• As firms grow in size, they can
become more efficient

Source: Agarwal (2018)

 MEASURES TO SOLVE THE PROBLEMS
External Economies of Scale
Technology
• A larger firm may be able to adopt
technologies of production that a smaller firm
cannot.
Buying Power
• A large firm can purchase its factor inputs in
bulk at discounted prices if it has greater
buying power. They can buy more from
suppliers at a lower price.
Financial
• Larger firms tend to be more creditworthy and
have access to credit with favorable rates of
borrowing.
Source: Agarwal (2018)
Internal Economies of Scale
Transportation
• Better transportation and communication may
develop because of the presence of larger
firms.
Skilled Labor
• Concentrated areas of skilled labor force may
appear as they get better trained and
educated to serve these firms.
R&D
• Able to afford large R&D because of the ability
to reduce average costs per unit by creating
effective and efficient tactics of productions,
which will result in overall revenue rise.
 SWOT ANALYSIS
Strengths (S) Weaknesses (W)
1. Excellent global brand recognition and market 1. Toys “R” Us is heavily dependent upon successful
Internlal value sales during the final quarter of the year as the range
2. Has 1,690 stores worldwide and in 37 countries of the products that it offers is not attractive during
all over the world other seasons apart from Christmas
3. Owns the baby brand, Babies R Us which adds 2. Days inventory is high compare to the competitors
another 200 stores 3. Not very good at product demand forecasting
4. The store has toys from all the best brands and a 4. It does not offer unique toys because you can find
collection of exclusives as well similar items in better packages with different brands
5. Highly skilled workforce through successful
training and learning programs

Opportunities (O) Threats (T)

1. Toy sales in the United States, the world’s largest 1. Intense competition due to the increased number of
toy market, grew by 1 percent to $20.7 billion in players in the industry such as Amazon, Walmart,
External

2017 Target
2. North American Free Trade Agreement (NAFTA) 2. Change in consumer preferences in the digital era
3. Currency volatility – low currency exchange rate 3. Technology advancement – electronic device &
4. Holiday season gadgets
4. Low cost toys from Chinese manufacturers
RECOMMENDATIONS

Concept reinvention

Toys “R” Us should reduce

R&D for product
its price according to the
differentiation
Kinked Demand Curve

Reduce number of stores The firm should benefit from

and focus on strategic the economies of scale to
location be more efficient

The firm should revamp its

website and follow current
trend of online pricing and
free shipping fee
 REFERENCES
1. NPD. (2018). Toy Sales Globally and in the U.S. Both Grow by 1 Percent in 2017, Reports The NPD Group. The NPD Group. Retrieved on June 1, 2018 from
https://www.npd.com/wps/portal/npd/us/news/press-releases/2018/toy-sales-globally-and-in-the-us-both-grow-by-1-percent-in-2017-reports-the-npd-group/
2. Koty, A. C. (2017). Child’s Play: Opportunities in China’s Toy Industry. China Briefing. Retrieved May 31, 2018 from http://www.china-
briefing.com/news/2017/04/07/childs-play-opportunities-china-toy-industry.html
3. Capetta, M. (2018). Game over as bankrupt Toys R Us files for liquidation. NBC News. Retrieved May 31, 2018 from
https://www.nbcnews.com/business/consumer/game-over-bankrupt-toys-r-us-files-liquidation-n856831
4. Verdon, J. & Jones, C. (2018). Toys R Us files for liquidation, likely spelling its end in the U.S.. USA Today. Retrieved May 31, 2018 from
https://www.usatoday.com/story/money/business/2018/03/15/toys-r-us-files-bankruptcy-liquidation/427129002/
5. Toys ‘R’ Us goes out of business, leaving void for toy lovers. Retrieved May 31, 2018 from http://www.thestar.com.my/business/business-news/2018/03/15/toys-r-us-
preparing-to-close-all-us-stores/
6. Goldman, D. (2018). Toys 'R' Us to close all of its UK stores. CNN Money. Retrieved May 31, 2018 from http://money.cnn.com/2018/03/14/news/companies/toys-r-us-
closing/index.html
7. Yan, S. (2017). 'Made in China' isn't so cheap anymore, and that could spell headache for Beijing. Asia Pacific News. Retrieved May 31, 2018 from
https://www.cnbc.com/2017/02/27/chinese-wages-rise-made-in-china-isnt-so-cheap-anymore.html
8. Ydstie, J. (2018). U.S. Economic Growth Slowed To 2.3 Percent. National Public Radio. Retrieved on May 31, 2018 from https://www.npr.org/sections/thetwo-
way/2018/04/27/606078181/economy-probably-started-2018-off-slow-short-of-trumps-growth-target
9. Leech, S. (2016). The Economics Of Christmas. Market Mogul. Retrieved on June 1, 2018 from https://themarketmogul.com/the-economics-of-christmas-2/
10. TradeGecko. (2017). Toys“R”Us: How out-of-stock situations are killing the toy giant. Retrieved on June 1, 2018 from https://www.tradegecko.com/blog/toys-r-us-how-
out-of-stock-situations-are-killing-the-toy-giant
11. Pandolph, S. (2017). Here's how Amazon may have led to Toys "R" Us' demise. Business Insider. Retrieved on June 1, 2018 from
http://www.businessinsider.com/heres-how-amazon-may-have-led-toys-r-us-demise-2017-9/?IR=T
12. Agarwal, P. (2018). Economies of Scale. Intelligent Economist. Retrieved June 1, 2018 from https://www.intelligenteconomist.com/economies-of-scale/
13. Chilet, J. A. (2017). Collusive Price Leadership in Retail Pharmacies in Chile. The Hebrew University. Retrieved on June 1, 2018 from
https://economics.huji.ac.il/sites/default/files/economics/files/khvrkhh.pdf