TOY BOX:

Unlocking New Potential

Team Star
Struck IIM
Bangalore
Toys & Games in UK is a ~€8Bn market with a ~3.5% expected
growth; showing characteristics of a mature market
Toys & Games market in the UK over time (Revenue) Broad trend towards maturing market 3D Consideration for Success

10 8.7 10% 9% Toy Portfolio

8.0 8.2 7.8 8.1 8.4
7.1 7.3 5.6%

Revenue change
8 6.9 Higher interaction Stocking up high demand
3.9% for latest ‘hotshot’ toys during peak periods –
5% 2.6% 3.6% 3.5% 3.5%
6 2.2%
Revenue (Bn

games & bestsellers effective inventory mgmt

4
0%
2
EUR)

-4.1% Monetization
0 Engagement
-5%
2017 2018 2019 2020 2021 2022E 2023E 2024E 2025E
2017 2019 2021 2023E 2025E >50% increase in likeliness to
spend on sudden craze toys

Segmentation of UK Toys & Games Market by category (2020) Number of manufacturers in UK Toys & Games over time

3.0 2.66 800 684

675 674 636

# of Manufacturers
564 594
600 500 483 504 516
2.0 1.57
Revenue (Bn

1.24 1.15 1.10 400

1.0
200
EUR)

0.14 0.13
0.0 0
Video Game Toys for Dolls & Plastic & Construction Puzzle Card 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Consoles Toddlers & Stuffed Toys Other Toys Sets & s Games
Kids Models

Note: Conversion rate used is 1GBP = 1.14EUR

Source: Case data; Statista reports; Team analysis
 Underlying behavioral shift driving long term market changes;
emerging trends present attractive growth opportunity
Technological
precedence
Market Growth
Evolutionary  Increasing penetration &
Change affordability of gadgets
boosting early age adoption
 AR / VR and other new age toys
kicking out the traditional
giants out of business
Time duration
Age
Market Growth
Compression
Taste &  Tendency of children to move
Preference
Change
away from Toys starting earlier
 Social conditioning leading
them to lose interest / discard
a given toy relatively quicker
Time duration
Note: List of trends not exhaustive
Source: Case data; Team analysis
E-retailing
(Online channel)
 Following the retailing trend
across all industries prioritizing
convenience
 External factors like Covid-19
forced accelerated e-retailing
adoption
Substitute
Industry threat
 Other forms of entertainment
eating up time & spending
share of kids (music, football..)
 Attempt to portray toys as more
‘Childish’ turning successful for
kids nearing the age of 10
Market
Consolidation
 Maturing market with too many
players pushing down scope of
profitability
 American super brands & MNCs
consolidating power via
acquisition of small players
Brain activity
preference
 Parents and middle-aged toy
shoppers are increasingly
shifting their focus towards
educational toys
 Especially after COVID-19,
parents want to fill learning gap
through play time at home
Toys R Us is consolidating a flat growth market; Correlation
between portfolio, scale & profitability gives useful insights
Evolution of the competitive landscape in UK Toys market Understanding the relation between portfolio, size &
margins
+2% Operating Margin % (2021)
Toy Box has to
+4% 10% move north-west
700 +4%
662 CAGR Operating 5%
638 Player
650 41 (’17-’21) Margin (’21) 0%
611 33
600 30 42 Toy Box -6% 2% -5%
46
48 -10%
Market size by Revenue (Mn

550 74 Toys R Us 5% 3% Operating a wider

84 -15% portfolio with low
500 94 Learning Smaller players stick to scale dampens
World
9% -8% -20% profitability a lot
450 limited categories, still
133 -25% might not be profitable
135 Childrens
400 Grotto
-4% -19% -30%
132
350 0 5 10 15 20
Other 0.2% NA
300 Number of categories in po r t folio Toy Box
EUR)

This chart excludes Toys R Us data as its high revenue skews the
250 visualization

200 372 Toys R Us leveraging Scale Economies to dominate categories

339 Toy Box
150 306
Toys R Diversification hedges risk against Higher operating cost of large stores
variability of demand in a limits expansion capacity
100 Us particular category or segment
50 Learning World
Bigger inventory management Larger scale limits customer
0 Childrens reduces stock out possibility and interaction & understanding, hence
2017 2019 2021 Grotto Other minimizes lost sales opportunity increases response time to market

Note: Smaller players have been clubbed under ‘Other’

Source: Case data; Team analysis
Implications for Toy Box: Critical juncture in business lifecycle;
New approach with sharper focus & responsiveness required
Success factors in UK Toy industry
Concerns facing Toy Box?

 Sales decline - Continuous decline in sales volume & pricing power (2017-21: ~21% sales decline)
 Increasing competition - Toys R Us continues to expand footprint impacting Toy Box customer base Product
Engagement
 Deep pocketed competitors – Toys R Us is consolidating (5x Toy Box revenue) and is supported with portfolio
deep pockets Sweet
 Blurring of the “Toy” categorization - New entertainment substitutes taking up the mind space and spot
time share of children: Video games, Music, Sports, Media merchandise

What should Toy Box do? Target

Markets

 Specialize – Identify attractive subsegments in toys & capitalize on opportunities in niche segments
o Higher margin emerging segments with high expected demand due to underlying market changes
 Efficient Operations – Focus on margin & cash flow maximization; Minimize expenses Agility Responsive-
ness
 Enhance customer engagement & stickiness - Exploit brand equity of “Toy Box” & top it up with
superior customer experience & engagement
 Align org. structure & incentives with new corporate strategy Freedom & Customer
 Expand presence to newer markets (geographies) Culture focus

Source: Case data; Team analysis

Need to realize placement in market; Video / Computer games
and Educational Toys top contenders for concentrated efforts
Focus on being leader of some rather than being a laggard of
all
130 Shares by Market Segments (Mn EUR)
Player
123
120
Proposed Focus Segments
110

100 Toy Box Toys R Us

93
90
90 Childrens Grotto Others
Hamleys Learning World
80

70 64
Large MNC players Legacy local retailers 60

50 47 45
Flat industry growth making Victims of increasing competition & 41 39
40 38
them pursue aggressive routes price wars with larger players 33 31
30 28 27
Deep Pockets allow MNCs to fuel Consolidation in market forces
inorganic growth via acquisitions them towards narrowing focus 20
11
10 4
Can afford to be present across Need to minimize damage by
segments with leading share specializing in 1-2 categories 0

Computer games
Video &

Puzzles
Ride-ons

Other
Infant
Activity

Board Games

Models
Male action
Toy vehicles
Dolls

Outdoor toys
Soft toys

Arts & Crafts

Educational toys
Toy Box Childrens Grotto
Learning World

Note: The categories of Activity, Educational Toys and Arts & Crafts have hereafter been clubbed under one umbrella category named ‘Educational Toys’
Source: Case data; Team analysis
Positioning Toy Box for leadership in the UK toys market
Where To Play? How To Win?
Educational game Sales (€ mn) Video game Sales (€ mn)
 Identify & target attractive customer segments
319 400
& markets
200 261
123
 Position Toy Box value proposition prominently and
128
effectively – Enhance marketing &
communication
2017 2021 2026E 2017 2021 2026E  Lean operations – Focus on core business activities
(Buying & Selling, Customer service, Marketing)
Margins 50-60% 45-50%
 Sharpen focus of business – Narrow the portfolio
Target group (% Segment Remarks
o Employ a divisional structure (product line based)
of population) stability
higher accountability, faster response to changes in
Educational Toys 35+ age (40%) High High margin; Strong traction in elders market
Video games 15-44 age (34%) High High margin & high growth o Helps align & track performance effectively
High margin but Toy Box lacks
Sporting merch. All age groups High o Hire appropriate talent per business requirement
capabilities in the segment  Stay abreast of and responsive to market
High risk – High reward; Uncertainty of developments
Media merch. Young Kids Low
scoring a “HIT Toy” is high

Requires setting-up highly responsive sourcing & inventory practices

Source: Case data; Team analysis, Public domain
Achieving operational excellence at Toy Box
Org. Structure

Marketing

Key Business
Activities

Store Ops. &

Sourcing Distribution Customers
Service

Market mediation
Internal function • Focus on Customer delight
• Focus on efficiency

A Market mediation – Revenue driver B Internal function – Cost driver

 Focus on keeping customers happy & engaged  Focus on efficiency in costs & achieving corporate objectives
 Ensure product assortment matches customers’ needs  Outsource non-critical activities like distribution
 Improve customer service – training of sales personnel  Align corporate structure with business model – Product based org.
 Enhance store experience & feel structure aligning KPIs and incentives

 Prevent customer disappointment – Clear communication of  Hire talent commensurate with corp. strategy (Niche play, marketing
offerings; minimize stockouts etc.)
 Dedicated teams to track market movements & customer
Source: Case data; Team analysis
preferences
Geographical analysis: Utilizing Toy Box’s geographic presence
to optimize response towards threat from Toys R Us stores
Hypothesis: Toy Box is more or less able to deal with the competitive threat of
Stores where absolute revenue declined from
2017 to 2021, with competition impact Toys R Us over a longer period of time. Though it remains to be severely impacted
in the initial years (potentially due to customer acquisition tactics by TRU)
Stores where absolute revenue increased from
2017 to 2021, with competition impact
TRU present TRU present Total
Scenario Green % Red %
Stores which did not see any competition in 2017 in 2021 Stores
impact
“Short Run” 13 8% 92%

“Long Run” 7 71% 29%

Expand to Out Of Town Stores Establish Product Niche

 Current focus on High Street  To counter competition coming in on

locations only caters to half of the
‘Red’ stores typically tend total market opportunity
to be smaller in scale
than their counterparts  57% of Out-of-Town shoppers are of
age 35+, which are more likely to buy
Educational Toys
 Threat of competition from TRU is
much lesser for such locations as
there is limited revenue potential
existing turf, more responsiveness
to customer demand is required
 Specializing on some categories &
spotting early trends can go long
in building first mover advantage
 In selected categories, a wider
assortment of products can be
introduced to sub-urban public

Created on Tableau

Note: The analysis is based on the sample data set of 31 stores and doesn’t take into account the full population of 100 stores; ‘Competition impact’ refers to presence to Toys R Us store in the same location
Source: Case data; Tableau, Team analysis
Summary recommendations & Action plan:
Prioritization framework, timelines & expected challenges
Action plan for moving towards a sustainable profit model Impact evaluation & Prioritization
framework
Operational Financial Time for
Recommendation 1
Ease Commitment execution

Narrow down Product portfolio to focus on 2 4

1 main segments:
Short – Medium
Term

Direct Impact
Video & Computer Games; Educational Toys
3 2
Expand store presence to Out Of Town areas
Medium - Long
2 This presents 50% of untapped market opportunity
Term 5
with lower threat from competition

Outsource distribution to third party vendors

3 Optimize cost using pooling economies by Short Term
specialized logistics players Time Commitment & Efforts

Re-position itself as a specialized & focused

brand Short – Medium Headwinds expected to be encountered
4 Communication to the market to install interest in the Term
new marketing message Resistance to change within the organization: Need to tackle this with
explanation & help to all employees highlighting tangible & intangible
Rejig the Organizational Structure to changes
divisional
5 Clearly identify the 2 divisions & establish
Medium Term Confusing brand positioning among customers: Need to roll out a
boundary spanning teams to maintain proper communication campaign to establish credibility with respect to
agility the changed organizational mission & stance in the industry

Note: The assessment of the recommendations have been done qualitatively by the team
Source: Case data; Team analysis
Financial implications & Expected impact on Toy Box
Financial implications & projections of proposed recommendations Impact on Toy Box business

(€ in 000s) 2021 2022E 2023E 2024E 2025E 2026E

Low High
Revenue/Sqft 247 350 361 371 382 394
Profit margins
Total sqft 300 300 300 300 300 300
# Shops 102 102 102 102 102 102
Target customer base
Revenue 74,320 1,05,140 1,08,294 1,11,543 1,14,889 1,18,336
Bought in costs 32,772 39,953 41,152 42,386 43,658 44,968 Inventory variability
Gross profit 41,548 65,187 67,142 69,157 71,231 73,368
Gross margin 56% 62% 62% 62% 62% 62% Efficiency
Store Costs 13,249 15,118 15,151 15,184 15,218 15,251
Distribution Costs 6,524 7,360 7,581 7,808 8,042 8,284 Marketing focus
Overheads 3,942 4,001 4,061 4,122 4,184 4,246
Marketing Costs 6,237 6,299 6,362 6,426 6,490 6,555 Portfolio
Store Labour Costs 10,212 16,631 16,880 17,134 17,391 17,651
diversification
Total operating costs 40,164 49,409 50,035 50,674 51,324 51,987
Total costs 72,936 89,362 91,187 93,060 94,982 96,955 Differentiating factor
Total operating profit 1,384 15,778 17,107 18,483 19,907 21,381
TB current average TB expected performance
Operating margin% 2% 15% 16% 17% 17% 18% performance post recommendations

Note: Excludes store network expansion into out-of-town locations

Note: Preliminary projections: Revenue growth assumed at 3% p.a. – Conservative estimate vs 9-10% CAGR for video games & educational toys since Capex capability & store expansion data is not available for Toy Box
Source: Case data; Team analysis
Appendix – UK Toys market segmentation by Category (2017)

160 151

140
128

120
Revenue (Mn

100
88 87
84 82 80
EUR)

80
66
63
60
42
39 37
40 33
26

20
9

0
Video & Activity Dolls Infant Male Action Ride-Ons Board Toy Models Puzzles Outdoor Soft Toys Educational Arts and Other
Computer Games Vehicle Toys Toys
Games s
Crafts

Source: Case data; Team analysis

Appendix – Financial implications of Status-quo

(€ in 000s) 2017 2018 2019 2020 2021 2022E 2023E 2024E 2025E 2026E
Revenue/Sq.ft 247 238 230 221 213 205 <<Reduced volume & pricing due to
Sq.Ft 300 300 300 300 300 300 competition
#Shops 102 102 102 102 102 102

Revenue 93,932 88,278 83,832 78,713 74,320 71,595 68,971 66,442 64,006 61,660
Bought in costs 34,017 33,798 34,007 33,295 32,772 31,571 30,413 29,298 28,224 27,189
Gross profit 59,914 54,480 49,825 45,418 41,548 40,025 38,557 37,144 35,782 34,470
Gross margin 64% 62% 59% 58% 56% 56% 56% 56% 56% 56%
Store Costs 11,824 12,206 12,552 12,904 13,249 13,282 13,315 13,348 13,382 13,415 <<Tightening real estate market
Distribution Costs 7,010 6,943 6,800 6,668 6,524 6,426 6,330 6,235 6,141 6,049 <<Inhouse distribution + IT development
Overheads 3,520 3,620 3,782 3,895 3,942 4,001 4,061 4,122 4,184 4,246 <<Inflation
Marketing Costs 6,492 6,419 6,322 6,339 6,237 6,299 6,362 6,426 6,490 6,555 <<Increasing competition
Store Labour Costs 9,834 9,968 10,035 10,138 10,212 10,365 10,521 10,679 10,839 11,001 <<Change in labour law
Total operating costs 38,680 39,155 39,491 39,945 40,164 40,374 40,589 40,810 41,036 41,267
Total costs 72,697 72,954 73,498 73,240 72,936 71,945 71,002 70,108 69,260 68,456
Total operating profit 21,235 15,324 10,334 5,473 1,384 -349 -2,032 -3,666 -5,253 -6,796
Operating margin% 23% 17% 12% 7% 2% 0% -3% -6% -8% -11%

Source: Case data; Team analysis