The case of Toys R Us can help shed some serious light on the importance of market analysis for all investors. Toys R Us was founded in 1957 and it has since become an extremely prominent figure in the lives of many American children. For many of us, it is easy to recall a time when we walked into a Toys R Us store – either to browse or to buy a toy. But, this week, it is expected that Toys R Us will close its doors for the last time, liquidating it’s nearly 600 remaining box stores all throughout the country. Although the retailer itself is a privately-owned company, this announcement has shocked the share prices of several major toy-producing companies, including Mattel and Hasbro. But, what can this case teach us about market analysis?
An investor who had analyzed this market previously might have noticed that lately the toy industry as a whole has been suffering. It is increasingly more common these days to see a child playing with an iPad than a Barbie doll, for example. For Toys R Us specifically, this negative trend could be a result of growing developments in the external market, such as technological development over time. In many cases – this one included – technology has changed the environment in which retailers operate. Plastic toys might seem less appealing to children these days than an iPad or a TV that can keep them busy for hours on end. Of course, this is only one possible explanation for consumers’ sudden shift away from the traditional toy industry, but it seems to be an important one.
Furthermore, this market shift away from toy stores like Toys R Us can also be attributed in part to the competition within the company’s industry. Recently, major retailers like Wal-Mart and Amazon have accounted for a larger portion of existing toy sales than ever before. In addition, these stores can offer a powerful incentive that Toys R Us cannot: convenience. It is extremely easy to purchase a toy for your child while you buy your weekly groceries or paper towels. It is even easier to have that toy delivered to your home via two-day shipping from Amazon Prime. Contrastingly, toy-buyers everywhere might need to make more of an effort to find a Toys R Us store, as the retailer had fewer locations and delivery options than other major retailers.
For many market analysts, these three factors – technological advancement, convenience, and quick shipping – might seem to be some of the most important indicators of a company’s current financial success. Further, the kind of analysis shown above can prove to be crucial for an investor’s financial success.
Especially in the long-term, it is important for an investor to think about the direction in which market trends are headed so that he or she can better prepare himself or herself to make profitable investments today. To analyze market trends, an investor might start by asking himself or herself: what companies are currently quintessential examples of success? What factors are currently making those companies profitable and allowing them to expand? Finally, which of these companies can you envision thriving 20 years from now?
Asking yourself questions such as these before you make an investment decision can help you to gauge the future of the industry in which a company performs and its relative success within that industry. From there, you can try to reasonably predict that company’s future success. Of course, there might always be outliers and cases that you cannot predict, but the ability to think about your investments in the long term can be a helpful tool to help you make more informed stock-picking decisions!