Toys R Us: Debacle at HQ?

One of the favorite pass times over weekends for most parents in Lusaka is having to take their kids to the shopping mall. One of the retail shops that has benefit from this pastime is toy shops. There are many players in the toy game in Zambia catering to different spending profiles. The players can either be categorized as entry, medium or premium. On the premium end is Toys “R” Us. The franchise finally came to Zambia and its flagship store is domicile at the vibrant East Park Mall. Being in this location is perfect for the outlet because shoppers there are on the medium to premium end of the shopping scale.

Like with any franchise, we are often curious about the performance of the parent company. The company was established in 1948 with its headquarters in Wayne NJ USA. It employs over 64,000 employees and has presence in over 1500 locations worldwide. The year 2005 was a significant for the company as investors Kohlberg Kravis Roberts, Bain Capital Partners and Vornado Realty Trust purchased the company in a leveraged buyout deal for $7.5Billion.

Sadly, it has not been smooth sailing since the purchase. Laden with debt, the company flirted with the idea of an IPO for a few years. The purpose of the IPO was by and large for the purpose of paying off its indebtedness. However, their intentions for listing in 2010 were withdrawn in 2013. The company cited “unfavorable market conditions” according to an SEC filing.

With a recent report coming out of CNBC indicating that the company is now in talks with a law firm to assist in restructuring it’s nearly $400m debt that will be called in 2018 it appears the toy maker is now in the spotlight. Non performing franchises will be and should be very concerned about this. Non performing outlets are always the first victims when HQ decides to streamline operations.

The Zambian outlet currently enjoys being located in the epicenter of business and commerce for households in Lusaka. Their near rival resides across town and caters to the southerners of Lusaka (Makeni, Chilanga, etc). However, eyes must be locked on the online offerings that have hit HQ‘s global revenue share. Furthermore, the Chinese outlets that have sprung up in Lusaka offering entry level toys that last a week (if the kids are nice to the toy) should be enough to alert the management team of the Zambia outlet to ensure they protect their market share. They compete on scale and economies of scope with low margins that make third party resellers also attracted to their offering. So the push will be to protect the premium market, but diversifying and ensuring that the medium market is consolidated will be crucial as we run up to the high spend Christmas period.

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