Target to profit from Toys 'R' Us relaunch through unusual partnership

The small-scale return of Toys 'R' Us this holiday season will put more jingle into the pockets of Minneapolis-based Target Corp.

In an unusual partnership, the toy retailer — which is trying to make a comeback under new owners after going bankrupt and closing all of its stores last year — has partnered with its once-rival Target to source most of its toys as well as to place and fulfill online orders.

"This is great for Target," said Neil Saunders, an analyst with GlobalData Retail. "Essentially, it's almost like Target acquired some of the assets of the Toys 'R' Us brand without having to spend a penny. It's inevitably going to send some business Target's way. This is extra traffic and sales being pushed to them."

The new Toyrus.com website, which launched Tuesday morning, features toy reviews and trends as well as product pages. But when it comes time to buy an item, it has a "buy now at Target.com" button that directs customers to the product page on Target's website to make the purchase.

The back-from-the-dead Toys 'R' Us also is opening two interactive stores this November, located in shopping malls in Houston and Paramus, N.J. Plans are to open eight by more by the end of next year.

The stores, much smaller than its previous big box stores, will carry a limited assortment of products. Sales employees will be on hand with handheld devices to direct customers to choose from a deeper assortment on Target.com.

Executives of Tru Kids Brands, the parent company of Toys 'R' Us, said they picked Target as a partner because of its strong toy assortment, digital prowess and its array of fulfillment options that include curbside pickup and same-day delivery.

It's hard to get those things right, so it makes sense for Toys 'R' Us to want to partner with Target instead of building such capabilities from scratch, Saunders said. And as the toy retailer starts over again, it does not have the same buying power it had to get better prices on toys, which is essential in a low-margin business.

"But in a way it is a strange solution because they really cede control of parts of the business to what is essentially a third party," he said. "To me, it suggests there isn't a completely viable business. … As a toy business, they should be able to create their own online offering that is fully supported and that is run in-house instead."

Both companies declined to make executives available for interviews or to disclose details on how they will share the sales.

For Target, analysts see little downside to this partnership, noting that this will help further strengthen its position in toys.

In the wake of the Toys 'R' Us bankruptcy in 2017, and the shuttering of all of its stores the following year, a number of retailers from Best Buy to Walmart and Kroger pounced on the opportunity to increase their toy assortments. But few were as aggressive as Target, which significantly grew its toy inventory and assortment, carved out a few more aisles for toys in 500 of its stores, and remodeled some toy departments.

The gamble seemed to have paid off.

Seth Sigman, an analyst with Credit Suisse, estimated that Target was able to grab 15% to 20% of the marketshare up for grabs after Toys 'R' Us went out of business. And it should continue to pick up momentum from the partnership with the Toys 'R' Us as well as Target's recent teaming up with Disney on 25 in-store shops this year and 40 more slated for next year.

Sigman also doubts all the non-toy retailers who got into the toy business last year will stick with it.

"We see that reversing this year, an opportunity for those with credibility in the space," he wrote in a research note on Tuesday.

While other retailers are closing stores, Target's growing strength makes it a more important partner for vendors, which means Target can get better access to products and more financial support than in the past, he said.

Brian Yarbrough, an analyst with Edward Jones, wondered how much traffic Toys 'R' Us will be able to drive to its website given that the toy company has been out of business for more than a year now.

"The Toys 'R' Us brand is very strong, especially during the holidays," he said. "But they went through bankruptcy and have been lost in consumers' minds. So will people go to them now? That's the question."

If Toys 'R' Us does get some wind under its sails, it remains to be seen if it will continue using Target to fulfill the products, he said.

"This is probably a good way for Toys 'R' Us to dip their feet in the water and to see if they want to make these investments themselves," said Yarbrough. "I would assume over time if they roll out more stores, they'll want to operate their own site."