What Led to the Fall of Toys ‘R’ Us

by | Apr 23, 2018 | Business Feature

If you take a look around town lately, you may notice that the Santa Clarita Babies ‘R’ Us closed down. These days, a store closing down isn’t much of a story, but that’s a small local piece of a national story, as a once iconic chain shuts down its stores nationwide. The nearly 880 Toys ‘R’ Us and Babies ‘R’ Us stores across the U.S. are closing, despite being a national icon of childhoods for decades. While this goes on, many ordinary people and industry experts alike ponder: what went wrong? The answer is a complex one.

The Debt

In many cases, the trouble for Toys ‘R’ Us (based in Wayne, NJ) started in 2005, with a leveraged buyout that left it $5 billion in debt. “They were at the intersection of so many challenging trends, and they were at the wrong end of those trends,” said Michael Dart, a retail expert and a partner at the consulting firm A. T. Kearney. “All of these forces coming together fundamentally tipped them over the edge.” This debt only grew in the following years. By early this year, the company was $7.5 billion in debt to a group that included a who’s who of toymakers, including:

  • Mattel: $136 million
  • Hasbro ($59 million)
  • Spin Master ($33 million)
  • Lego ($32 million)
  • Radio Flyer ($12 million)
  • Crayola ($2.6 million)

The liquidation in January was part of a Chapter 11 bankruptcy plan that would help get rid of unprofitable locations and help cut down that debt. However, creditors got antsy in the wake of an underperforming 2017 holiday season. Between Thanksgiving and Christmas, Toys ‘R’ Us said it typically would fare “well against the competition because of significant inventory offerings” and “a strategy of selling late at high margins after competitors sell out of ‘hot’ inventory and attracting last-minute shoppers who fear that online deliveries will not be made in time.” That didn’t happen this year, though.

“This year, however, was different,” Toys ‘R’ Us (said to USA Today). “As a result of a general decline in toy sales, competitors had full product offerings through the end of the holiday season, and same-day and two-day delivery guarantees eased customer fears regarding online shopping.” Creditors saw a company that couldn’t even perform well in the prime season for toy shopping, and it was decided that a total liquidation of U.S. operations would be a better way to try and recover money. The company was purchased by private equity firms Bain Capital and Kohlberg Kravis Roberts and the real estate firm Vornado Realty Trust back in 2005.

The Competition

Of course, we can’t talk about this without addressing the elephant in the room: Amazon, which is what many people point to as the single biggest reason why Toys ‘R’ Us wasn’t able to get out of its debt hole.

To put this in perspective, online toy sales have increased by more than 55 percent in the past two years to $17 billion in the United States. In Europe, e-commerce revenue for toys is already starting to eclipse that of some brick-and-mortar companies. The reasoning for this, in terms of consumers, is obvious. Amazon and other online stores allow a great selection of toys, including more niche items, at prices that are often lower than a retail store.

However, other retail giants also saw the chance to take advantage of the chain’s weakness this past holiday season. Wal-Mart and Target priced toys at lower levels, something they could do because they had other items that they could sell. Without being able to compete in terms of product or convenience, it’s easy to see where Toys ‘R’ Us fell short.

Whether or not you feel that this was a case of a good company gobbled up by market forces or the slow march of business wiping an obsolete business away, this reminds us that no set of jobs are immune. 30,000 jobs could disappear due to the business closing, and this doesn’t even address the potential ripples throughout the toy industry. If one is in retail, it may not be a bad idea to invest in some effective resume templates, even if you are happy with your job. This is a smaller sign of a bigger trend in business, and no one wants to be on the outside looking in.

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