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Japan-Update

Toys 'R' Us-Japan soldiers on even as US parent liquidates

Chain aggressively opens small shops to survive amid fierce online competition

A conceptual drawing of small stores that Toys "R" Us-Japan is aggressively opening.

NEW YORK/TOKYO -- Geoffrey the Giraffe, the Toys "R" Us mascot, will continue to greet kids and parents as usual in Japan -- at least for now -- even as the once-mighty U.S.-based retailer is shuttering its domestic stores.

Toys "R" Us-Japan has continued to operate as usual since its U.S. parent filed for Chapter 11 bankruptcy protection last September, amid slumping sales due to stiff competition from online retailers such as e-commerce leader Amazon.com.

After filing for bankruptcy, Toys "R" Us of the U.S. sought to find a buyer for its domestic assets. But it eventually decided to pull the plug on its U.S. operations after failing to find a purchaser and making little progress toward debt restructuring. The retailer announced on March 15 that it has applied to a bankruptcy court for approval of its plan to liquidate its U.S. operations and close all 735 stores.

"I am very disappointed with the result, but we no longer have the financial support to continue the company's U.S. operations," Dave Brandon, the U.S. company's chairman and CEO, said in a company statement. "We are therefore implementing an orderly process to shutter our U.S. operations and will pursue going-concern sales or reorganizations of certain of our international businesses, while our other international businesses consider their options."

The future of the U.S. chain's overseas operations, including those in Japan, is still unclear.

Toys "R" Us-Japan is based in the Kanagawa Prefecture city of Kawasaki, near Tokyo. It currently operates about 160 stores -- Toys "R" Us and Babies "R" Us sites as well as combined locations.

"The U.S. and Japanese companies are separate," a spokesperson for Toys "R" Us-Japan said. "Operations at the Toys 'R' Us stores in Japan will continue as before."

The spokesperson added that there is no possibility of Toys "R" Us-Japan facing any financing problems, because it has a commitment line with financial institutions.

But Toys "R" Us-Japan's two current shareholders are both special-purpose companies under the umbrella of Hong Kong-based Toys "R" Us Asia Ltd., in which Toys "R" Us of the U.S. has an 85% equity stake.

So the Japanese company's management is still under the control of Toys "R" Us of the U.S. It is conceivable that the American company will divest its operations in Japan to another company during its liquidation process.

Toys "R" Us-Japan opened its first store in the Ibaraki Prefecture town of Ami, northeast of Tokyo, in 1991. The move hit the headlines as it came at a time of simmering trade tensions between Japan and the U.S. The opening followed the 1989-1990 Japan-U.S. Structural Impediments Initiative talks, which were held to correct a huge bilateral trade imbalance.

In those negotiations, the U.S. pressed Japan to open its markets to foreign competition and criticized its large-scale retail store law, which severely restricted the opening of new big-box stores, as a non-tariff barrier.

In 2000, Toys "R" Us-Japan expanded its network to 100 stores and listed its shares on the over-the-counter market.

But the Japanese company began to face headwinds in the second half of the 2000s, with sales sinking due to growing competition from the likes of Amazon, as well as toy sales by volume electronics retailers.

In 2009, Toys "R" Us of the U.S. launched a tender offer for Toys "R" Us-Japan, to take the Japanese company private. It also established the two special-purpose companies to hold shares in the Japanese entity.

While fighting a drawn-out battle with online retailers, Toys "R" Us-Japan is now aggressively opening small stores to survive.

Many people in Japan's retail industry often say, "what happened in the U.S. also happens in Japan several years later." But Toys "R" Us was an exception -- the Japanese company has been ahead of its American parent with regard to restructuring.

Toys "R" Us-Japan might be more resistant than Toys "R" Us of the U.S. to the "Amazon effect," under which the online retailer swallows all sorts of companies and industries.

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