TLG's disappointing 2017 financial performance

[Lyichir]

9 hours ago, BrickJagger said:

Lego is in trouble. Between pretty much all of what @Maple said being true and TLG's slumping financial performance, they need a big change, and quick. Personally, if they were to stop acquiring the newest garbage licenses just to pump out a wave or two and leave it at that, they would be selling more than they are now. None of Jurassic Walls: Fallen Walls interests me, nor do the Powerpuff Girls or Unikitty's brick-built series of manufactured creativity. This is going to bite them in the long run, and I wish more people took notice of that fact.

They've gotten so far away from their company message and values that 2003 is beginning to look like a company renaissance. If near-bankruptcy for a second time is what it takes to right the ship, so be it. Not trying to be a downer but even TLG still looks to be okay at the current moment, all signs are pointing to a sharp downward spiral.

What exactly is your basis for assuming those themes won't perform well (other than "me no likey")? It's ridiculous to look at three whole themes that haven't even come out yet and assume that they're a mistake, especially when at least one of them has a pretty strong precedent in its favor (with the previous Jurassic World sets being surprisingly popular). And as for Unikitty and Powerpuff Girls... no telling how those will perform, but based on the success of Friends I'd say male AFOL skepticism toward anything colorful and girly has little bearing on how successful a theme actually will be.

Lego is definitely going to be facing challenges in the current toy market, same as any other manufacturers. But they have a lot going in their favor. The loss of Toys R Us will hit hard but not as hard as it hits their biggest competitors, who had even more invested in that sinking ship. Two of their biggest themes, Ninjago and Friends, have just gotten a sort of refresh that will hopefully put some new wind in their sails and keep them going for many more years. High-profile licensed themes like Star Wars, Disney, and Super Heroes are also still performing admirably. All in all the situation is nowhere near as dire as it was in 2003, when they had hardly any successful themes and they were making boneheaded decisions like eliminating popular themes like Duplo and Technic. And I really don't see how anyone could perceive things as going in that direction unless they had a monumentally poor understanding of what led Lego down that road the first time and how they learned from those mistakes.

[MAB]

29 minutes ago, Lyichir said:

What exactly is your basis for assuming those themes won't perform well (other than "me no likey")? It's ridiculous to look at three whole themes that haven't even come out yet and assume that they're a mistake, especially when at least one of them has a pretty strong precedent in its favor (with the previous Jurassic World sets being surprisingly popular). And as for Unikitty and Powerpuff Girls... no telling how those will perform, but based on the success of Friends I'd say male AFOL skepticism toward anything colorful and girly has little bearing on how successful a theme actually will be.

Lego is definitely going to be facing challenges in the current toy market, same as any other manufacturers. But they have a lot going in their favor. The loss of Toys R Us will hit hard but not as hard as it hits their biggest competitors, who had even more invested in that sinking ship. Two of their biggest themes, Ninjago and Friends, have just gotten a sort of refresh that will hopefully put some new wind in their sails and keep them going for many more years. High-profile licensed themes like Star Wars, Disney, and Super Heroes are also still performing admirably. All in all the situation is nowhere near as dire as it was in 2003, when they had hardly any successful themes and they were making boneheaded decisions like eliminating popular themes like Duplo and Technic. And I really don't see how anyone could perceive things as going in that direction unless they had a monumentally poor understanding of what led Lego down that road the first time and how they learned from those mistakes.

Plus the current high (2016) is way higher than way back then. They have admitted it is disappointing but that is based on them expecting to continue the massive growth of recent years. There was always going to be a correction to that rapid growth at some stage. The fan base now is bigger than it was prior to the almost collapse of around 2003.

[AmperZand]

6 hours ago, Maple said:

I hate TRU, it's run horribly. However we got store exclusives there, like the Brick-tober sets, the creepy giraffe about to eat the children set. Now what happens to that? Does Target or Walmart get the exclusive sets planned for this fall and next year or do we really get in trouble and now the sets will only be at S@H and never go on sale.

Polybags used to be exclusively or predominantly TRU's gimmick (apart from newspaper promos). I have just discovered that the Entertainer has moved full-square into that space. Didn't take the vultures long to swoop in!

It wouldn't surprise me if the Entertainer or some other chain, e.g. Argos, filled the exclusives void. Of course, the LEGO brand shops/S@H will continue to carry those, too.

[MAB]

1 hour ago, AmperZand said:

It wouldn't surprise me if the Entertainer or some other chain, e.g. Argos, filled the exclusives void. Of course, the LEGO brand shops/S@H will continue to carry those, too.

 

In the UK, a lot of the TRU exclusives were just regular retail sets which presumably will no longer be exclusives, or LEGO might try to do a deal with other stores to carry them as exclusives. John Lewis also does it already (for example, Winter Village Station and loads of the current NK sets are JL exclusives). As to the other made for TRU type exclusives, I guess they just disappear unless another store really wants to do that type of thing. But then, I doubt there was any reason the other stores couldn't have done that type of exclusive set when TRU was around - Hamley's are doing their soldier exclusive set, for example - so they will probably just disappear.

[TeufelHund]

With reflection, and looking at my own kids, I think the toy market in general is in trouble at the moment. Screen time is the preference for most kids and if they do play with toys, then their interest tends to fall on the latest craze rather than on building a collection of similar toys over time (so fidget spinners - > beyblades -> slime etc over acquiring and building up a collection of Lego, Star Wars figures, Barbies etc). My oldest son actually gave me back a polybag Santa gave him this year because he wasn't interested anymore. Established toy companies are going to have to change to keep up with it.

One good thing that might happen if Toys R US goes under in Australia is at least we might finally get official Lego stores here which would be nice.

[BrickJagger]

11 hours ago, Lyichir said:

What exactly is your basis for assuming those themes won't perform well (other than "me no likey")?

........

And I really don't see how anyone could perceive things as going in that direction unless they had a monumentally poor understanding of what led Lego down that road the first time and how they learned from those mistakes.

I have no basis for anything. Every post in this thread is subjective outside of basic facts. I don't think either of us is going to convince the other of anything, so continuing this discussion is counterproductive.

[Artanis I]

17 hours ago, Maple said:

There is only one state that is a group of islands and not shipping there isn't as uncommon as you might thing.

If you were paying attention, you would realise I was talking about Australia and Tasmania (which is less than an hour from a major city like Melbourne, unlike the place you are thinking of)

 

 

Turns out TRU Australia is not closing for now. But they aren't doing well so it may well be curtains for them before long, too.

[Aanchir]

21 hours ago, BrickJagger said:

They've gotten so far away from their company message and values that 2003 is beginning to look like a company renaissance.

This is the point that your argument descended into nonsensical raving. LEGO is in a FAR better place than they were back then. To quote Brick by Brick, "in early 2004, an internal survey of the company's entire product portfolio revealed that 94 percent of LEGO sets were unprofitable. Only Star Wars and Bionicle kits were making money. Not only had LEGO sustained the largest losses, on a percentage basis, among toy makers, but it was by far the industry's least profitable brand". Now, maybe they might have had more products that YOU liked back then, but if anything that indicates how little impact your individual perspective has to the overall health of the company and then community. Because even a product that everyone loves isn't going to make any money if it's being sold at a loss.

Toys 'R' Us's collapse will be a big blow to most of the toy industry, but honestly LEGO is one of the BEST equipped companies to weather that storm. The "big three" toy companies (LEGO, Hasbro, and Mattel) have much more secure distribution channels beyond Toys 'R' Us than many smaller companies might and much more ability to sustain losses without going under. And as of last year, Toys 'R' Us's unfulfilled debts to Hasbro and Mattel (i.e. the amount of purchases already made that those companies might never see payment for at this rate) were MUCH higher than their unfulfilled debt to LEGO.

The LEGO Group is certainly no longer in the cushy position they were in during their growth years from 2005 to 2016, but they're hardly in free-fall.

1 hour ago, TeufelHund said:

With reflection, and looking at my own kids, I think the toy market in general is in trouble at the moment. Screen time is the preference for most kids and if they do play with toys, then their interest tends to fall on the latest craze rather than on building a collection of similar toys over time (so fidget spinners - > beyblades -> slime etc over acquiring and building up a collection of Lego, Star Wars figures, Barbies etc). My oldest son actually gave me back a polybag Santa gave him this year because he wasn't interested anymore. Established toy companies are going to have to change to keep up with it.

One good thing that might happen if Toys R US goes under in Australia is at least we might finally get official Lego stores here which would be nice.

I don't think this tendency to hop on board the latest craze is anything new, honestly, and LEGO designs most of their themes anticipating a considerable turnover rate. I mean, when I was a kid I got into Pokémon cards, Yu-Gi-Oh cards, Beyblades, MegaMan electronic toys, and God only knows how many cartoons and video games over the course of what, in hindsight, can't have been more than a few years. Kids, especially in the tween age range, tend to be pretty fickle in their interests. There's a reason why LEGO Ninjago was originally intended to last just two or three years, why LEGO City releases new police sets every year, and why the recommended age range for many LEGO sets is fairly narrow. They know many of their buyers aren't going to be in it for the long term and that they have to keep enticing new buyers to stay competitive.

[BrickJagger]

4 minutes ago, Aanchir said:

This is the point that your argument descended into nonsensical raving. LEGO is in a FAR better place than they were back then. To quote Brick by Brick, "in early 2004, an internal survey of the company's entire product portfolio revealed that 94 percent of LEGO sets were unprofitable. Only Star Wars and Bionicle kits were making money. Not only had LEGO sustained the largest losses, on a percentage basis, among toy makers, but it was by far the industry's least profitable brand". Now, maybe they might have had more products that YOU liked back then, but if anything that indicates how little impact your individual perspective has to the overall health of the company and then community. Because even a product that everyone loves isn't going to make any money if it's being sold at a loss.

Toys 'R' Us's collapse will be a big blow to most of the toy industry, but honestly LEGO is one of the BEST equipped companies to weather that storm. The "big three" toy companies (LEGO, Hasbro, and Mattel) have much more secure distribution channels beyond Toys 'R' Us than many smaller companies might and much more ability to sustain losses without going under. And as of last year, Toys 'R' Us's unfulfilled debts to Hasbro and Mattel (i.e. the amount of purchases already made that those companies might never see payment for at this rate) were MUCH higher than their unfulfilled debt to LEGO.

As I said to your brother, we're going to disagree on this. We all have our own opinions. I have mine, you have yours. I'm all for a good discussion but needling every single person about everything they say ruins the fun of this forum. Sometimes it's just better to let people have their own "nonsensical" and "ridiculous" opinions rather than pointing them out as many times as possible.

[Aanchir]

Just now, BrickJagger said:

As I said to your brother, we're going to disagree on this. We all have our own opinions. I have mine, you have yours. I'm all for a good discussion but needling every single person about everything they say ruins the fun of this forum. Sometimes it's just better to let people have their own "nonsensical" and "ridiculous" opinions rather than pointing them out as many times as possible.

Throwing controversial claims into the void without accepting any kind of commentary on them isn't really conducive to the whole idea of a discussion forum. I'm not trying to be a wet blanket or a party pooper, but if we can't talk about each other's posts (or can only talk about posts we already agree with) then what's the point in even putting those posts someplace other people can respond to them and not on, say, a personal blog or YouTube channel?

I'm not objecting to the idea of you not liking current LEGO products or anything like that. But suggesting that it's in the LEGO Group's own best interest to do things more like they did in a year when they were plummeting towards financial ruin leaves me skeptical. And make no mistake, you are not the only person I've ever heard make such claims. I frequently hear it from Bionicle fans under the mistaken pretense that Bionicle will only "get the respect it deserves" if the LEGO Group's financial well-being hangs in the balance — never mind that Bionicle became the lifeline it was because it strategically targeted that specific generation of kids, not because the idea of magic tropical island robot action figures is some kind of miracle cure for economic calamity.

[BrickJagger]

3 minutes ago, Aanchir said:

Throwing controversial claims into the void without accepting any kind of commentary on them isn't really conducive to the whole idea of a discussion forum. I'm not trying to be a wet blanket or a party pooper, but if we can't talk about each other's posts (or can only talk about posts we already agree with) then what's the point in even putting those posts someplace other people can respond to them and not on, say, a personal blog or YouTube channel?

People can respond to anything they want to on here, but a thesis paper deconstructing why and how someone is wrong is not always required. I've already made it clear that I don't want to keep talking about this. Thanks.

 

[Faefrost]

There are a number of myths that keep circulating as facts. It is best in the discussions to keep an open mind. Especially about anything that is taken as simply being an established fact without any empirical evidence.

First major fact is the proclaimed death of toys. While tastes do change and evolve the digital will never fully replace the tactile. Also that moment when you recognize a trend ie "OMG kids only play with phones!" is typically the point where the pendulum has already begun to swing back. Video Games have long been proclaimed to be the killers of toys and toy stores. But the simple truth is they've done no such thing. In fact Video Game and electronics sections of retailers are shrinking quickly while toy offerings are expanding. Also note that a decent path to success has been blending the tactile and the digital, to some degree. (I think the Skylanders type fad is finally dying off.). It's worth noting that the hottest toy this Christmas was an updated modernized Lite-Bright. Sticking plastic pegs into holes so they light up to make proto 8 bit art. An actual truth is Parents tend to buy the toys for their kids that they loved growing up. And while electronics and digital are key to a childs life and social interactions these days, there remains and always will remain a strong niche for tactile play and actual toys. 

The second is the assumption that Lego's lower performance last year is in any way related to the actual and specific products. It really isn't. Remember the only portion of Lego's business that is directly impacted by direct paying consumers is the D2C stuff and Lego stores. The bulk of their business goes through third party retailers. The reduction in Lego comes from the weakening of those retailers. Particularly TRU. If the retailers are ordering less Lego is selling less. Even if and when the store shelves look barren and picked over for want of a restock. When one of the largest retailers stocking your product has effectively exhausted all of their credit lines and is having trouble getting more product, you aren't going to be able to sell them more and you will take a hit. Lego apparently saw the writing on the wall and reduced exposure to TRU even at the loss of sales. Whereas Mattel kept extending them credit because they needed to move product. Lego is looking at a $26 million write off. Mattel is somewhere north of $150 mil by estimates I've seen. 

Look lets take a reasonable eye towards this. No regular brick building line is going to cause a reduction like Lego reported. Individually the themes and sets don't move the needle that much unless they have some astronomical tooling and development costs. They achieved that in 2003 by over creating new unique parts then underutilizing them. Or charging less for the parts than was needed to amortize the tooling and development. Stuff like the Fiber Optics gimmicks. Mechanicals and Electronics. Those can be a massive drain. Sets built with bricks and a new assortment of funny hats for the minifigs? Not so much. Investing in the movies likely brought greater reduced returns than any bad selling line ever could. When they wander outside their core product lines they get burned. For example Galador. Stuff like their tablet Augmented Reality stuff is a far greater loss than any brick theme. It isn't a question of Pirates vs Ninja vs Castle etc. They will all make money and are all nice safe product lines. The only question is how much they hit or miss estimates. It's the exotics that cause the losses. 

[MAB]

8 hours ago, Aanchir said:

I don't think this tendency to hop on board the latest craze is anything new, honestly, and LEGO designs most of their themes anticipating a considerable turnover rate. I mean, when I was a kid I got into Pokémon cards, Yu-Gi-Oh cards, Beyblades, MegaMan electronic toys, and God only knows how many cartoons and video games over the course of what, in hindsight, can't have been more than a few years. Kids, especially in the tween age range, tend to be pretty fickle in their interests. There's a reason why LEGO Ninjago was originally intended to last just two or three years, why LEGO City releases new police sets every year, and why the recommended age range for many LEGO sets is fairly narrow. They know many of their buyers aren't going to be in it for the long term and that they have to keep enticing new buyers to stay competitive.

 

Yes, nothing new at all. In the late 1970s we started to have hand-held electronic games (simple compared to now, but still new and exciting just like tablets now). We had Atari and Intellivision, like consoles and computers now. We also had Slime (by Mattel) back then too, just like Slime now. We had Mexican jumping beans, pet rocks. We had Wizzers (essentially beyblades) - in fact, these were old fashioned by the late 1970s. Early 1980s we had Rubik's cube, followed by many different Rubik's products, like fidget spinners (and Rubik's cubes coming back again), etc now.

Not only isn't the tendency to hop on the lastest craze not new, but the majority of the crazes aren't really new either, just extensions of what has gone before.

5 hours ago, Faefrost said:

Look lets take a reasonable eye towards this. No regular brick building line is going to cause a reduction like Lego reported. Individually the themes and sets don't move the needle that much unless they have some astronomical tooling and development costs.

2

There is one situation where a regular brick line can cause a reduction like LEGO reported. That is where lines sell incredibly well for one or two years. And then that sales pattern does not continue, due to the line finishing (TLM), or changing and underperforming, or over-saturation. Loads of people got into LEGO due to TLM and that expansion didn't continue. While 2017 may have been disappointing for LEGO, they still made profit of a few billion dollars, which compared to 2015 and 16 was less than expected, but compared to 2011-14 would have been seen as growth.

 

[Faefrost]

16 hours ago, MAB said:

 

There is one situation where a regular brick line can cause a reduction like LEGO reported. That is where lines sell incredibly well for one or two years. And then that sales pattern does not continue, due to the line finishing (TLM), or changing and underperforming, or over-saturation. Loads of people got into LEGO due to TLM and that expansion didn't continue. While 2017 may have been disappointing for LEGO, they still made profit of a few billion dollars, which compared to 2015 and 16 was less than expected, but compared to 2011-14 would have been seen as growth.

 

True. But those loses or sales reductions are for the most part trivial compared to the massive losses brought on by the heavier R&D and developmental stuff going awry. Overproduction is and can be a huge loss. But generally they can keep it balanced. So having to clearance out year wave three TLM stuff is balanced by whatever the new thing is. It's also why modern Lego tries to put a 2-3 year EOL on all non Evergreen themes. Keep in mind that regular Lego sets are fairly low cost low risk compared to other toy products. They don't typically require much in the way of tooling for the specific product. The core property is actually the design, assembled using the more or less generic bulk parts that by their core design are totally interchangeable. For most Lego sets the tooling and production costs are pretty low, even with the extreme costs of the ultra high precision tooling used for Lego parts. So the individual sets carry much lower financial risk to Lego than most other toys. Their tooling is amortized much more broadly and the bulk of the costs per set is materials and design. The only time where it can really be a major issue is if they see a major sales drop and overproduction/overstock in ALL their themes and lines across the board. But it would take something major like the complete collapse of one of their largest worldwide retailers and the sudden loss of 15-20% of their retail shelf space to achieve that. And what are the odds of that happening?

Edited March 17, 2018 by Faefrost

[MAB]

On 17/03/2018 at 2:26 AM, Faefrost said:

True. But those loses or sales reductions are for the most part trivial compared to the massive losses brought on by the heavier R&D and developmental stuff going awry. Overproduction is and can be a huge loss. But generally they can keep it balanced. So having to clearance out year wave three TLM stuff is balanced by whatever the new thing is. It's also why modern Lego tries to put a 2-3 year EOL on all non Evergreen themes. Keep in mind that regular Lego sets are fairly low cost low risk compared to other toy products. They don't typically require much in the way of tooling for the specific product. The core property is actually the design, assembled using the more or less generic bulk parts that by their core design are totally interchangeable. For most Lego sets the tooling and production costs are pretty low, even with the extreme costs of the ultra high precision tooling used for Lego parts. So the individual sets carry much lower financial risk to Lego than most other toys. Their tooling is amortized much more broadly and the bulk of the costs per set is materials and design. The only time where it can really be a major issue is if they see a major sales drop and overproduction/overstock in ALL their themes and lines across the board. But it would take something major like the complete collapse of one of their largest worldwide retailers and the sudden loss of 15-20% of their retail shelf space to achieve that. And what are the odds of that happening?

Yeah, totally agree. Although they have overproduced / undersold every year, as nearly every theme will have some sets that need to go to clearance to get shot of them, the balance is normally not too bad. I think part of the problem here is that they have ramped up production in the last few years - not just in volume of the sets but in the variation of sets / ranges, expecting TLM type growth but they have oversaturated the market. Possibly to the point of too much choice. On a very small sample of one (my son), he enjoyed TLBM but decided not to get any bigger sets.  He has a few poly bags, some CMF and the odd small set he has been given, but there was so much choice for more substantial sets (30 USD + type sets) and he knew he couldn't get it all, he just didn't want to buy in and has chosen to play out scenes using his old Batman and Joker and his bucket-full of mixed lego (OK, it's boxes rather than a bucket, but I mean his general stash). If it was a bit more of a reasonable line, maybe he would have wanted them.

But yeah, the TRU issue will be an interesting one. Will their sales just shift to other retailers, or will they lead to losses for LEGO too? In the UK,  one of the TRU-rivals has been offering discounts to TRU loyalty card holders in an attempt to grab their customers at the time they are closing down.

[DanieGlass]

What I think is most fascinating, and paramount among the repurcussions this situation will have is that not all of the 15-20% of toy sales that TRU makes up will translate elsewhere. 10-15% presumably will, but that 5-10% leftover will fall beneath the cracks. Potential buyers will shift purchases elsewhere which, over time, could equate to a percentage of former toy buyers who have decided to change habits and spend on other things/hobbies. I don't want to over-extend any predictions, and many people have stated (and I agree) that the toy industry itself is in no position of dying off entirely. I believe we are simply witnessing the growing pains of changing consumer habits that LEGO's past growth has succesfully hidden from view.

Edited March 19, 2018 by DanieGlass

[fred67]

First of all, and I'm not trying to sound rude or anything, but I still don't understand what everyone seems so upset about.  TLG's profit margins are well north of 20%, the envy of just about every other mass market company out there.  Most companies that sell huge volumes are lucky to get 5%.  TLG didn't LOSE anything except GROWTH.  They still made phenomenal profits!

8 hours ago, DanieGlass said:

What I think is most fascinating, and paramount among the repurcussions this situation will have is that not all of the 15-20% of toy sales that TRU makes up will translate elsewhere. 10-15% presumably will, but that 5-10% leftover will fall beneath the cracks. Potential buyers will shift purchases elsewhere which, over time, could equate to a percentage of former toy buyers who have decided to change habits and spend on other things/hobbies. I don't want to over-extend any predictions, and many people have stated (and I agree) that the toy industry itself is in no position of dying off entirely. I believe we are simply witnessing the growing pains of changing consumer habits that LEGO's past growth has succesfully hidden from view.

I don't really agree on this position.  I'm not a fan of TRU; never was.  I get it that a lot of people, when shopping for presents for kids, would hit TRU to buy something - parents for their own kids, and their kid's friends for birthdays, grandparents, aunts and uncles - I get it; they don't know what to get, so they go to TRU and look around.  But now they will go elsewhere - Target, WalMart, wherever there will be a large selection of toys and, if anything, LEGO - as a percentage of the toy section - is way more represented at Target and WalMart than at TRU.  If that actually matters, then it might end up being better for TLG.  The reality, though, is more people will simply buy stuff online - and that was, and is continuing to be the trend, TRU or no TRU.

Now, for us customers, it's going to really suck.  With less competition, it seems stores will be less likely to give great deals on LEGO.  If LEGO cuts production, then expect to see far less on clearance.

But if I was worried about TLG "making it" for the long term, as a company, 15 years ago, I'm certainly not anymore - they have a long way down to go before they are in the red again.  Your favorite toy company will be around for a very long time.

 

 

[MAB]

6 hours ago, fred67 said:

First of all, and I'm not trying to sound rude or anything, but I still don't understand what everyone seems so upset about.  TLG's profit margins are well north of 20%, the envy of just about every other mass market company out there.  Most companies that sell huge volumes are lucky to get 5%.  TLG didn't LOSE anything except GROWTH.  They still made phenomenal profits!

 

Yes, and in fact if anything, it was last year that was a big drop in growth in terms of revenue but that was still their most successful year ever in terms of revenue.

In terms of growth in revenue (not profits), the last decade or so goes like:

2009 22%

2010 37%

2011 17%

2012 25%

2013 11%

2014 15%

2015 25%

2016 6%

2017 -8%

 

That's double digit growth for a decade before  2016, even after the recent drop, they are running at almost 4x the revenue in 2008. With profits every year. Of course, what they have done is cut the number of staff to be able to retain such large profits based on a lower revenue going forward. While double digit growth has been possible in the past, lego is so saturated into (Western) lives now that further growth at the same rate is highly unlikely.

 

6 hours ago, fred67 said:

Now, for us customers, it's going to really suck.  With less competition, it seems stores will be less likely to give great deals on LEGO.  If LEGO cuts production, then expect to see far less on clearance.

 

Yes, this is probably one of the bigger issues for customers. Less big stores competing for our money means less incentives to discount.

[koalayummies]

Yeah made that competition point (in response to one desiring more competition yet contradictory caring less about the demise of TRU) back a few pages, during the 'good, I never got ____ at the price I wanted so good riddance'.

Here's a more in-depth look at the situation TRU was in, a bit more complicated than the oft repeated theories of smartphones and technology grabbing kids attention, Amazon sales reigning king (which is still a retail-killer no doubt) and Toys R Us being 'too greedy'. No, they were being slowly cannibalized for cash for the benefit of 'alternative investors'.

http://theweek.com/articles/761124/how-vulture-capitalists-ate-toys-r

"...In other words, if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through. As recently as last year, the company still accounted for 20 percent of all U.S. toy sales...

Bain, KKR, and Vornado will have to write off their investment, of course. But they did suck around $200 million in fees out of Toys 'R' Us over the course of their ownership.

Basically, the trio took an imperfect-but-functioning company and cannibalized it for cash.

Frustratingly, the story of Toys 'R' Us' debt burden has been a footnote in news coverage, buried under musings on how the company failed to compete with the likes of Amazon. And when the debt is covered, it's often devoid of context: Toys 'R' Us just happened to borrow money, it proved to be a bad decision, and now the retailer is suffering the fate of imprudent borrowers everywhere. Rarely does anyone point out that debt was a deliberate Wall Street strategy.

In short, how Bain, KKR, and Vornado treated Toys 'R' Us is how Wall Street treats American businesses writ large. And if inequality is dragging down the profits of retailers and other industries, then these cannibalistic practices are the other half of the feedback loop: driving inequality ever higher, and depriving Americans of the jobs and incomes they need to consume.

In other words, we are all Toys 'R' Us. And the vultures are hungry."

The leveraged buyout killed TRU, as well as several other large American ventures just this month and the track record is something like 40%... failure.

Edited March 20, 2018 by koalayummies

[Faefrost]

18 hours ago, fred67 said:

First of all, and I'm not trying to sound rude or anything, but I still don't understand what everyone seems so upset about.  TLG's profit margins are well north of 20%, the envy of just about every other mass market company out there.  Most companies that sell huge volumes are lucky to get 5%.  TLG didn't LOSE anything except GROWTH.  They still made phenomenal profits!

I don't really agree on this position.  I'm not a fan of TRU; never was.  I get it that a lot of people, when shopping for presents for kids, would hit TRU to buy something - parents for their own kids, and their kid's friends for birthdays, grandparents, aunts and uncles - I get it; they don't know what to get, so they go to TRU and look around.  But now they will go elsewhere - Target, WalMart, wherever there will be a large selection of toys and, if anything, LEGO - as a percentage of the toy section - is way more represented at Target and WalMart than at TRU.  If that actually matters, then it might end up being better for TLG.  The reality, though, is more people will simply buy stuff online - and that was, and is continuing to be the trend, TRU or no TRU.

Now, for us customers, it's going to really suck.  With less competition, it seems stores will be less likely to give great deals on LEGO.  If LEGO cuts production, then expect to see far less on clearance.

But if I was worried about TLG "making it" for the long term, as a company, 15 years ago, I'm certainly not anymore - they have a long way down to go before they are in the red again.  Your favorite toy company will be around for a very long time.

 

 

The huge hit to Lego comes from the loss of retail shelf space. On a scale that will be hard to compensate for in the short term. Lego has two real finite resources that they have to carefully manage. Factory Production Line Time, and Retail Shelf Space. They just lost acres of available shelf space from the pool. If the customer can't find your product or find it within a reasonable radius of their home, they cant buy it. Yeah online and Amazon are huge. But not huge enough to completely replace brick and mortar and retail shelf space. Especially for toys. So much of the toy business is impulse buy. 

7 hours ago, koalayummies said:

Yeah made that competition point (in response to one desiring more competition yet contradictory caring less about the demise of TRU) back a few pages, during the 'good, I never got ____ at the price I wanted so good riddance'.

Here's a more in-depth look at the situation TRU was in, a bit more complicated than the oft repeated theories of smartphones and technology grabbing kids attention, Amazon sales reigning king (which is still a retail-killer no doubt) and Toys R Us being 'too greedy'. No, they were being slowly cannibalized for cash for the benefit of 'alternative investors'.

http://theweek.com/articles/761124/how-vulture-capitalists-ate-toys-r

"...In other words, if Bain, KKR, and Vornado had never come along, Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through. As recently as last year, the company still accounted for 20 percent of all U.S. toy sales...

Bain, KKR, and Vornado will have to write off their investment, of course. But they did suck around $200 million in fees out of Toys 'R' Us over the course of their ownership.

Basically, the trio took an imperfect-but-functioning company and cannibalized it for cash.

Frustratingly, the story of Toys 'R' Us' debt burden has been a footnote in news coverage, buried under musings on how the company failed to compete with the likes of Amazon. And when the debt is covered, it's often devoid of context: Toys 'R' Us just happened to borrow money, it proved to be a bad decision, and now the retailer is suffering the fate of imprudent borrowers everywhere. Rarely does anyone point out that debt was a deliberate Wall Street strategy.

In short, how Bain, KKR, and Vornado treated Toys 'R' Us is how Wall Street treats American businesses writ large. And if inequality is dragging down the profits of retailers and other industries, then these cannibalistic practices are the other half of the feedback loop: driving inequality ever higher, and depriving Americans of the jobs and incomes they need to consume.

In other words, we are all Toys 'R' Us. And the vultures are hungry."

The leveraged buyout killed TRU, as well as several other large American ventures just this month and the track record is something like 40%... failure.

That's mainly just the biggest idiots in the Mainstream Media. Any and all of the Business focused Media, including the more entry level sources such as the Wall Street Journal are talking extensively about how it was caused by the LBO. The Leveraged Buyout. The business community seems to be somewhat split between terified and disgusted by this. About half of them view LBO's as a shady thing that need to be looked at more deeply. Things that if not outright illegal are certainly questionable. The others are terified that the loss of the US's last big toy chain will trigger cries of "Think Of The Children" from the mothers of the electorate demanding Congressional investigation into both Bain and companies shady LBO and Amazon's Monopoly power. 

[fred67]

2 hours ago, Faefrost said:

The huge hit to Lego comes from the loss of retail shelf space. On a scale that will be hard to compensate for in the short term. Lego has two real finite resources that they have to carefully manage. Factory Production Line Time, and Retail Shelf Space. They just lost acres of available shelf space from the pool. If the customer can't find your product or find it within a reasonable radius of their home, they cant buy it. Yeah online and Amazon are huge. But not huge enough to completely replace brick and mortar and retail shelf space. Especially for toys. So much of the toy business is impulse buy. 

I get that - but the volume of toys sold won't go down, because people that "need" to buy toys will get them from somewhere else and, as I pointed out, everywhere else is either LEGO neutral (like online stores, where shelf space doesn't come into play), or stores like Target or Walmart, where LEGO is over represented compared to TRU.   In short, the shelf space LEGO gets in the toy sections of those stores is a much higher percentage of the toy section than it was at TRU.  I don't know about Europe, but there are far more Targets and Walmarts than TRU.  Those are the kinds of places shoppers will go, and they will see MORE LEGO relative to other toys than they would at TRU.

I may be completely wrong, but shoppers gotta shop, and if they are looking for a present for their kid's friend's birthday, where will they go?

[Faefrost]

One interesting rumor coming out of the TRU Bankruptcy and Liquidation. Apparently they sold off the K B Toys name and branding last year. And the buyer plans on starting it up again as a Mall Chain. Also Amazon seems to be putting in a bid for a few hundred of TRU's retail properties. While it is pretty well known that Amazon doesn't plan on continuing TRU's business even rebranded as themselves. Safe bet is Amazon is looking to move into Walmart/Target style retail space. So Toys will be a big element of that. 

Like I said it will balance out. But it is going to be a horrible 18-24 months for the toy industry until it all shakes out and many players will be damaged or destroyed. And the problem is the failure of just a few of the really major players could cause a cascade of failure throughout the industry. Imagine what happens if Hasbro or Mattel gets into serious trouble? 

[Faefrost]

Liquidation starts Thursday the 22nd

https://www.usatoday.com/story/money/business/2018/03/20/discounts-heres-when-toys-r-us-liquidation-sale-starts/443056002/

So sad...  (also some Lego mentions and news in that article as Lego is one of the vendors challenging the Liquidation plan. It looks like total owed to toy vendors is $450 million+)

Edited March 21, 2018 by Faefrost

[zoth33]

I think you are over hyping the whole TRU thing.  There's a reason why TRU is going out of business its called online sales they just cant compete.  Lego will and is making up sales online.  

[koalayummies]

15 hours ago, zoth33 said:

I think you are over hyping the whole TRU thing.  There's a reason why TRU is going out of business its called online sales they just cant compete.  Lego will and is making up sales online.  

That's actually not the root of the reason why, it has already been discussed at length in this thread.

Simplified cliff notes version: Private equity, obtain cheap credit, acquire profitable but slow-growth company (like TRU), force purchased company to pay for majority of its own acquisition to private equity with loans, saddle it with debt, cut costs everywhere making company even less successful, fire people, short term profits, take fee payments on the debt, ~40% chance the leveraged buyout fails, move on to the next. https://www.rollingstone.com/politics/news/why-private-equity-firms-like-bain-really-are-the-worst-of-capitalism-20120523

Not smartphones. Not internet sales. Not Amazon or Walmart or kids not wanting toys.

Edited March 22, 2018 by koalayummies