It is highly unusual for an $11 billion sales company to disappear overnight, but that is exactly what is occurring with the complete liquidation of the giant toy retailer Toys ‘R’ Us. Toy designers utilizing 3D printers should be strategic and flexible, as well as adjust to the changing market with new entrants and expanding existing toy sellers capitalizing on the situation. Currently the betting is that some of the new large retailer entrants will be Kohl’s, JCPenney and Party City. Toy designers seeking new buyers and markets may want to use the rapidly changing market to examine fast growing toy market categories such as STEM toys. Toy designers developing new products and processes may be eligible for R&D tax credits.
The Research & Development Tax Credit
Enacted in 1981, the now permanent Federal Research and Development (R&D) Tax Credit allows a credit that typically ranges from 4%-7% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:
- Must be technological in nature
- Must be a component of the taxpayer’s business
- Must represent R&D in the experimental sense and generally includes all such costs related to the development or improvement of a product or process
- Must eliminate uncertainty through a process of experimentation that considers one or more alternatives
Eligible costs include US employee wages, cost of supplies consumed in the R&D process, cost of pre-production testing, US contract research expenses, and certain costs associated with developing a patent.
On December 18, 2015, President Obama signed the PATH Act, making the R&D Tax Credit permanent. Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax for companies with revenue below $50MM and for the first time, pre-profitable and pre-revenue startup businesses can obtain up to $250,000 per year in payroll taxes and cash rebates.
The New Entrants
Kohl’s operates 1,155 stores and is headquartered outside of Milwaukee, Wisconsin. JCPenney has 875 stores and is headquartered in Plano, Texas. JCPenney uses a lot of store within concepts such as Sephora and may be a potential candidate for a separate toy retailer category. Party City has 900 stores and is adept at changing merchandise to fit the occasion which may be ideal for branded toys where a current theme costume could be paired with the corresponding theme toy. Presumably many of the existing Toys ‘R’ Us buyers will be absorbed by the large retailers entering the market. A diagram presenting the new toy retail market is shown below.
STEM toys, although a small subset of the overall market, has been a fast growing category. The new retailer entrants should give some thought to stocking popular new product categories rather than just subsuming some of the older declining categories.
Initial Market Disruption
We would expect the toy market to be disrupted during the period that new entrants are establishing themselves and the existing Toys ‘R’ Us inventory is redistributed through the reverse logistics market.
Although there is a lot of nostalgia about the demise of Toys ‘R’ Us, the US economy has an uncanny ability to quickly recreate itself and many of the new retailer entrants need more sales to sustain themselves. As the retailers adapt to this new market so should 3D printer toy designers who may be able to use R &D tax credit to help the industry restructuring.
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Charles R. Goulding and Lara Tomiko of R&D Tax Savers discuss the toy market.