Mastermind Toys ramps up expansion as Toys 'R' Us flounders

Pedestrians walk past a Mastermind Toys store on Queen St. East in Toronto on Tuesday, September 19, 2017. Mastermind Toys is shrugging off the challenges that have beset the retail sector with plans to open more stores this year. THE CANADIAN PRESS/Chris Donovan

TORONTO -- Jon Levy's favourite playthings as a Toronto child growing up in the 1960s and 1970s included Lego blocks and fort-building kits -- classics that still fly off the shelves of his Mastermind Toy stores today.

"My true innovation in this business is being able to get inside my inner kid and determine whether it is something truly fun to play with," said Levy, the chain's co-founder, CEO and chief toy merchant.

"Being able to explore that as an adult every day is quite an amazing occupation. And 90 per cent of the things I look at and interact with weren't around when I was a kid."

Indeed, much about the toy retail landscape has changed since Levy and his brother Andy co-founded Mastermind Toys back in 1984.

The latest evidence is the bankruptcy filing this week of big-box chain Toys "R" Us, and parallel proceedings by its Canadian subsidiary. It's the latest brick-and-mortar retailer to struggle amid the rise of e-commerce and changing consumer preferences.

And yet, Mastermind Toys is expanding its footprint across the country at the fastest pace in its history -- aiming to grow from 56 stores to 60 by the end of the year, and 90 by the end of 2020.

After that, the retailer will hone in on Quebec, where it has identified 18 to 20 potential stores.

The chain's focus on educational and specialty offerings that are harder to find at its bigger competitors -- including Walmart, Amazon and Toys "R" US -- has created a devoted following of Canadian parents.

Mastermind Toys has carved out a nice, profitable niche within the toy business, according to retail analyst Bruce Winder, the co-founder and partner of Retail Advisors Network.

"They differentiate by getting exclusive toys. And you can charge higher margins."

However, he added, Mastermind Toys may be moving too fast for a boutique toy store that is a small segment of the overall toy market in Canada -- which topped $2 billion in 2016, according to the NPD Group.

"There is only so much population in Canada," Winder said.

Quebec, where consumers prefer local brands and retailers must adhere to a different set of regulations, is "always a risk," he added.

"Having said that, I do think on the surface there is the same kind of niche there as in the rest of Canada."

The company's president and chief operating officer Humphrey Kadaner hails from Quebec and says the province has historically been a stronger market for niche businesses and slower to warm up to mass-market or online retailers.

"Conceptually, Quebec should be very receptive," said Kadaner, adding the company is taking the time to research and prepare properly.

Mastermind Toys started with a 300-square foot Toronto store focused on children's educational software, but it hasn't been a mom-and-pop shop for some time.

In 2010, after 25 years as a wholly family-owned business, Birch Hill Private Equity made an undisclosed investment in Mastermind Toys. It's now a majority stakeholder, said Levy, who along with his brother remain "substantially invested."

Birch Hill typically makes investments on a 10-year timeline, Kadaner said, and its current plans with the private equity firm take it through to 2020.

Kadaner shrugs off the increased competition from the likes of online behemoth Amazon.

Next year, Mastermind Toys aims to offer a so-called click-and-collect option for shoppers who want to order on the website and pick it up at the store -- a service, Kadaner argues, that gives a physical retailer an advantage over a digital one like Amazon for those who "don't want products sitting on their front step."

Levy says Mastermind Toys isn't trying to compete on price with the likes of Amazon, but rather on "experience" by offering customers the ability to try out many products with the help of knowledgeable staff.

"That's absolutely very important, and not a priority at Amazon," he said. "And if we have to fight on price, that's a whole different platform. But that's not where our business is premised."

Kadaner says, for now, Mastermind Toys has no plans to take on Amazon or Walmart on their home turf.

"We really feel we've got more than enough to keep us busy in English Canada over the next two to three years. We know we have the opportunity in Quebec," he said.

"So, we have no imminent plans to enter the U.S. But of course we certainly haven't excluded it."