15 Sept 2016
Four Challenges Set to Rewrite the Rule Book for the UK Toy Sector
The Argos acquisition, changing staff and profit priorities, the inexorable rise of online retailers and the looming Lego/Hamleys turf war set to ignite in London are all making for hugely interesting times for the UK toy industry.
The 21st century retail sector is facing myriad challenges. While some are on a global scale, others are more specific to individual countries. Taking a quick overview of some of the recent developments and announcements affecting UK-based retailers gives a clear indication of the challenges and opportunities that toy retailers are currently having to contend with.
The Future of Argos
Unquestionably the event that is set to have the greatest impact on the UK toy retail sector for many years is the acquisition of Argos, the UK's largest toy retailer, by Sainsbury's, the grocery giant. With the deal recently completed, the process of integrating the two retail empires has already begun. John Rogers, the newly appointed Chief Executive of the combined operation, has sent an email to suppliers, reassuring them that existing agreements – as well as current contracts and trading relationships – will remain in place. Many, though, have added a mental postscript to his memo – "for now".
In truth, the process of change has clearly begun. It has already been announced that Sainsbury's will be opening 30 new in-store Argos outlets by the end of the year, a development that will more than double the number currently in existence. A key element in the merger was always going to be the opportunity to synergise the respective retail estates, with the new owner unsurprisingly wasting little time putting this into practice.
There are also strong rumours that, across the two teams, up to 600 head office jobs are now at risk. This is despite the fact that Sainsbury's has gone on record with its commitment to maintaining both the Home Retail Group's head office in Milton Keynes and Sainsbury's non-food management office in Coventry. Again, there is something of the "for now" subtext to its promises. Although the rumours and the public statements are clearly at odds with one another, it is safe to assume that – as with the Brexit negotiations – there is far more going on behind the scenes than we're being told about at present.
According to a number of toy companies that currently supply both retailers, there is a view that Sainsbury's quality control policy is far stricter than that of Argos. It will be fascinating to see how this particular mismatch pans out over the next year. It has to be assumed that one strand of the business will adopt the methodology of the other, rather than separate working practices being maintained across the group. Whichever approach ultimately finds favour, however, it will inevitably have ramifications for any supplier doing business with the combined operation.
Turnover is Vanity, Profit is Sanity
While Argos is embroiled in internal restructuring, other major toy retailers remain focussed on ensuring that their bottom line stays as healthy as possible. Toys 'R' Us, for instance, recently announced its preliminary figures for the second quarter. While these showed that its turnover was marginally down, more importantly they also indicated an increase in profitability.
For many years, toy suppliers across the world have adhered to the old adage "Turnover is vanity, profit is sanity", with Toys 'R' Us clearly having taken the maxim to heart. It is not the only retailer to have done so by any means. The latest results from Asda, the UK-based subsidiary of Walmart, mirrored those of Toys 'R' Us, showing both a reduction in turnover and a growth in profits.
In part, its performance has been attributed to a slashing of overheads and a shrinking of staff numbers – a reduction in its number of senior directors alone knocked some £1.6 million off its payroll. Indeed, reducing head office head-count is now a clear trend among a number of retailers. Marks & Spencer recently revealed that it is to cut 500 head office jobs, while Sainsbury's/Argos is yet to give a firm indication as to how many staff will lose their jobs as the combined operation is streamlined.
Dispatching high-level staff, however, is not the only trend emerging. There also seems to be a change in the kind of roles that retailers are looking to fill. John Lewis, for example, recently announced that it is to create 500 jobs at two new regional distribution centres, while Amazon has recently opened several additional distribution centres, creating thousands of jobs in the process. It could be that we are witnessing the start of a subtle shift in retail staffing priorities. This could see such areas as fulfilment and logistics receiving greater investment, while head office administration roles are continually pared back.
Online: The Fastest-Growing Retail Sector
In other developments, online retail sales continue to grow at a substantial pace. Amazon remains the biggest player in the UK online market overall, although there are now a number of other major players in the toy sector. Of particular interest here is Shop Direct, a business that recently posted record profits in its first financial year as a purely online concern. Originally established as a mail-order business back in 2005, it then evolved into a catalogue-driven operation before finally emerging as one of the UK's leading online retailers.
Intriguingly, over recent weeks there have been rumours that Alibaba, the Hangzhou-based online business that out-Amazons Amazon across China, is looking to increase its presence in Europe. Given that there is an historic relationship between Alibaba and Sainsbury's, it wouldn't be at all unlikely that any such move could involve the combined Argos/Sainsbury's operation. At present, it's purely a matter of speculation, but things tend to move fast in the world of online retailing.
The Battle for London
Over recent years, central London has proved itself a fascinating battleground for toy retailers. The UK capital has long been dominated by Hamleys, the world's oldest toy shop, although a number of other retailers – with varying degrees of success – have attempted to take its crown over the years.
One of the more recent contenders is Nickelodeon, which last year opened a flagship store in Leicester Square. While offering far more than just toys – with its range extending to homewares, stationery and many other categories of merchandise – it has definitely made an impact. This has, no doubt, been helped by the massive success of its Paw Patrol brand.
Less successful was The Toy Store, which opened on Bond Street last Christmas amid a tremendous fanfare, only to close its doors early this summer. In hindsight, it seems that the location just didn't lend itself to the Middle East retailer's tried and trusted business model. It is no surprise then that The Toy Store is to revert to its traditional approach, with all future UK outlets to be sited in major shopping malls.
Hamleys, meanwhile, is facing a challenge almost entirely of its own making. C.banner International, the Chinese footwear company that acquired the prestigious toy retailer in 2015, recently announced its half-year results, which contained some interesting details for seasoned toy observers.
Although the majority of the company's business remains in the shoe sector, toys now accounts for 16% of its turnover. While Hamleys made what was described as a "seasonal loss" in the first half of the current trading year, its parent company maintains it is on track to deliver profit in the second half of 2016. It also revealed plans to open 29 further stores across the world in the next six months, including the October launch of a new flagship store in Nanjing. It will also be collaborating with a number of department stores and shopping malls in order to extend its footprint across China over the course of the next year.
While all of this is great news, conspicuous by its absence was any mention of its London flagship store – an outlet that many UK suppliers have suggested is in dire need of investment, both in terms of fixtures and stock. Whether London is in any way a priority for the new owner seems very much open to debate.
Complacency, however, is really not an option, with Hamleys about to face what is arguably the biggest challenge yet to its central London dominance. On 17 November, Lego will be opening its own UK flagship store in Leicester Square. Something of a landmark outlet, this new outlet will be the biggest Lego store in the world, covering a total area of 914 square metres, ranged over two floors.
The new store – the company's 37th European outlet – is to feature new technology all within a Lego retail environment. This is said to include exclusive product sets, hands-on building areas, building demonstrations, a Pick and Build Brick Wall and new Lego experiences. It is a reflection of the fact that, as a brand, Lego is on fire. It has experienced double-digit growth in Europe over the last year, despite this being a hugely mature market for the brand. Seemingly, everything Lego touches at the moment turns to gold and it is highly likely that the new store will follow the brand's relentlessly upward trajectory.
While Hamleys may have fended off stiff competition from interlopers over the past couple of years, it has never had to compete head-on with a juggernaut from the likes of Lego. What happens over the coming months will give a clear indication as to Lego's power as a stand-alone retail brand, while also providing a real test of C.banner's commitment to maintaining Hamleys' position as London's pre-eminent toy retailer.
John Baulch is the Publisher of Toy World,
the leading trade title for the UK and European toy trade