Toy market not much fun for UK retailers

This week’s sale of the Early Learning Centre by Mothercare for a fraction of what it paid more than a decade ago shows recent trading in the UK toy market has been anything but child’s play.

The sector has suffered several big failures — first Woolworths in 2009 then Toys R Us, which went into administration a year ago. Competitors, from supermarkets to Amazon, have piled into the market, while sales of wooden train sets and traditional games have increasingly been replaced with iPads.

Even Hamleys, the world’s most famous toy store, has suffered. Trading was weak in its last financial year and in recent months it has parted company with its finance director and chief executive.

Mark Newton-Jones, Mothercare’s chief executive, said the company could no longer justify the capital spending and management effort required to develop own-brand toys that accounted for 15 per cent of sales in a market invaded by well-funded new entrants.

“The supermarkets all started to sell more toys and they were very aggressive on pricing,” he said. In the wake of the financial crisis “they used toys to drive footfall.” On top of that came Amazon, content to sell at margins well below those of traditional toy retailers. Then the likes of B&M, The Range and Home Bargains moved in.

High-street chains and independent businesses bore the brunt of the competitive pressure, just as they did in sectors such as books and entertainment. According to the Local Data Company, about a quarter of the UK’s nursery goods and toy shops — almost 500 stores — have closed since 2012. Traditional toymakers have also suffered: last month, Play-Doh maker Hasbro complained of a “very disruptive year” as it reported below-forecast Christmas trading.

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Mothercare, a babywear retailer that bought ELC for £85m in 2007, could easily have succumbed to the pressures itself but for a drastic refinancing last year, which resulted in the closure of almost half of its stores.

Gary Grant, who runs the privately owned toy chain, The Entertainer, which bought ELC for £13.5m, is undeterred by the upheaval.

“We believe in the high street,” Mr Grant told the Financial Times. “We had a stellar year last year, opening 16 new stores. We’re doing for toys what Waterstones did for books.”

The Entertainer has almost quadrupled its number of UK stores since the 2009 collapse of Woolworths, to 163.

Mr Grant is planning more openings, including the eventual return of standalone Early Learning Centre stores, which sell hundreds of children’s toys from plastic sand pits to wooden buses.

There have been three relative winners from the recent turmoil. Argos, now owned by J Sainsbury, has taken over as the UK’s market leader in toys. Smyths, the privately owned Irish toy retailer, moved into some of the stores vacated by the bankrupt Toys R Us and now has more than 100 out-of-town outlets. “They stepped in when Toys R Us had failed to invest. Their stores were way better and so was their web platform,” said Mr Newton-Jones.

Smyths, still owned by the four brothers from County Mayo who founded it 30 years ago, declined to comment. Its annual UK revenues are about £500m.

Meanwhile The Entertainer, founded by Mr Grant in 1981, operates a franchise business in the Middle East as well as its UK stores and has £200m of revenue. Reflecting its founder’s religious beliefs, it donates a tenth of profits to charities and its stores do not open on Sundays. Its website accounts for about a fifth of group sales.

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Removing the weaker players from the market has not altered some of the other characteristics of the toy industry. It is the most seasonal niche in retailing. “We make a quarter of our annual revenue in just four weeks,” said Mr Grant. A bad Christmas — or a weak Black Friday — is a big problem.

Unexpectedly weak toy sales at Argos were a major factor behind a 2.3 per cent drop in non-food sales at parent company J Sainsbury over the festive period.

It is also prone to fads, varying from the latest Disney movie release to bolts from the blue such as the 2014 craze for loom bands or last year’s big hit LOL Surprise — small dolls wrapped in multiple layers of paper.

There have also been big changes in the way that children play. “The world has changed and the way people play has changed,” said Mr Newton-Jones. As the cost of technology has tumbled, gadgets such as iPads have become more accessible, even for younger children. According to Euromonitor, the video games market is now worth more than the traditional toys and games sector, and is forecast to grow at a faster rate.

But Mr Grant said that for young children in particular, play still has a vital role. “It is how children learn and develop,” he said.

Both he and Mothercare, which will continue to sell ELC toys for younger children under a supply agreement with The Entertainer, can draw comfort from the fact that despite the encroachment of video, the second-biggest individual toy brand in the UK is still Lego.

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