Why Toys “R” Us Had a Fall From Grace & Filed for Bankruptcy
At one time if a parent wanted to buy a new toy for his child Toys “R” Us was one of the first retailers he checked out. It had a great selection of toys and a wide network of stores. As late as 1997 Toys “R” Us was the number one toy retailer in the United States. But in 1998 Walmart passed the iconic retailer to become the number one toy retailer in the United States with a 17.4% share with Toys “R” Us lagging behind with a 16.8% share. The toy category has always served as a useful way to get customers into a Walmart store with Walmart offering prices that are hard to beat. Then those customers stay a while to buy everything else they need, making the toy category a key traffic driver.
Walmart’s growing dominance not just in toys but in many categories has come at the expense of less adept retailers. While Amazon is often cited as the cause for Toys “R” Us’ demise, big box retailers have long had their sights on this category. The top toy retailers in 1998 outside of Walmart and Sears were Kmart, Target and KB Toys. Amazon launched its website in 1994 and was not a major threat at that time.
Over the years while savvy competitors were knocking at its door, Toys “R” Us failed to keep up with its stores looking more and more dated and tired over time. “Toys “R” Us, which had basically devolved into a warehouse, did not have the vision or the money to give its customers a great experience,” said Howard Davidowitz, a consultant who worked with the retailer in the 1980s and 1990s.
While Amazon was not a key contributor to Toys “R” Us’ demise at first it contributed to its demise in later years. In 2000 Toys “R” Us signed a 10-year agreement to be the exclusive supplier of toys for Amazon. As part of the deal, www.toysrus.com redirected to www.amazon.com. By 2002 Amazon became the top online destination for toys. While locked up in this contract with Amazon Toys “R” Us did not feel the need to develop its own eCommerce capabilities, something it would later regret.
Despite contractual obligations Amazon allowed other suppliers to sell toys on its website. In response Toys “R” Us sued Amazon for breach of contract in 2004 and was awarded $51 million and the ability to terminate the contract. As TechCrunch aptly concluded about the deal going awry: “the lesson here: don’t hand a key part of your business to someone else, especially if it is where your growth is going to be coming from. That is the same as handing control over your destiny to someone else.” It took Toys “R” Us more than a decade to invest in a major website refresh, by that time it was too late.
But the final blow to Toys “R” Us came as the result of a private equity deal. In 2005 Toys “R” Us was bought by KKR, Bain Capital and Vornado Realty Trust in a $6.6 billion buyout that used more than $5 billion in debt to finance the deal. Following the purchase many employees were let go increasing the burden on the remaining staff. Paying $400 million in interest to service its debt obligations also did not help.
With interest payments like that there is no money left over to invest in stores, eCommerce and the overall customer experience. Debt obligations also kept Toys “R” Us from paying the wages that would lure the best employees away from retailers like Walmart.
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In 2017 speaking about a multimillion dollar website revamp, Lance Wills, Toys “R” Us’ former chief technology officer said: “in a year to two years, we have to catch up on 10 years of innovation and that’s no small feat.’’ “Some organizations recognize faster than others there are shifts in the ways customers want to be communicated with and the way customers want to purchase products,’’ says former Toys “R” Us CEO David Brandon. “It probably took us a while."
By the time Toys “R” Us filed for bankruptcy in the United States in latter half of 2017 it was till generating significant sales of $11.5 billion but it had $7.9 billion in debt on $6.6 billion in assets. With high interest payments it was hard for the retailer to turn a profit. Toys “R” Us’ bankruptcy became one of the largest in American history by a speciality retailer.
Many retailers enter bankruptcy proceedings, restructure their debt, sell stores, reorganize the company and live to see another day. Toys “R” Us planned to do all of these things but after a poor holiday season at the end of 2017 its owners did not believe Toys “R” Us had a future. Instead its financiers believed they could get more money through liquidation "In Toys' case, high leverage remaining from the 2005 leveraged buyout reduced financial flexibility, which in turn limited investment, leading to the erosion of the company's competitive position at a time when its primary competitors such as Walmart, Amazon, and Target were running on all cylinders," said Charlie O'Shea, an analyst for Moody's.
31,000 people ultimately lost their jobs as Toys “R” Us liquidated. Speaking to lawmakers in a 2019 hearing called “America for Sale? An Examination of the Practices of Private Funds” Giovanna De La Rosa, a 20-year Toys “R” Us veteran said: “Toys “R” Us had a decades-long severance policy — a week of pay for every year of service to the company. But when our company liquidated, the employees were left with nothing." "My coworkers and I were left with nothing while the executives and private equity owners walked away with millions." Facing pressure, towards the end of 2018 KKR and Bain established a $20 million fund to pay for severance, although it was still short of the $75 million in severance owed.
The Toys “R” Us brand was eventually sold to Tru Kids and in 2019 Tru Kids opened two Toys “R” Us popup stores but recently they closed down because of poor foot traffic due to the COVID-19 pandemic.
Currently there over 900 Toys “R” Us stores in 25 countries around the world but none of them are in the United States. These stores as well as websites generate $2 billion in revenue annually for the Toys “R” Us brand. WHP Global recently took a controlling interest in Tru Kids and plans to open Toys “R” Us stores again in North America, prior to this holiday season when toy sales are strongest. “There are so many malls that will no longer be in the future, so we don’t need to be there,” said Yehuda Shmidman, CEO of WHP Global. “But we could be in malls that do have traffic. ... So we really have an opportunity not just to capture that experience for toys that people are yearning for, but also capture where [people] want to shop. That will be very interesting post-Covid.”
www.toysrus.com is still up and running but it redirects to www.amazon.com if you try to make a purchase. The strange bedfellows are back.