Is Toys ‘R’ Us nearing the point of no return?
When Toys “R” Us filed for Chapter 11 bankruptcy protection last September, the company made the point that “the vast majority” of its locations were profitable and that it expected to keep most of its 1,600 stores (800 in the U.S.) open. Five months later, the chain has announced plans to close another 200 stores, effectively cutting in half the number of stores it operates in the U.S.
According to The Wall Street Journal, internal company documents also show that Toys “R” Us appears to be backing off from a promise to provide severance to workers affected by store closures. Store managers were told last month to let all workers know that the company would pay severance, while the documents reviewed by the Journal said, “There are no severance benefits being provided for the store-closing process.”
A spokesperson for the chain told the Journal that some employees at stores being closed may be eligible for bonuses connected to the performance of liquidation sales.
When Toys “R” Us filed for bankruptcy last year, it faced the task of managing a debt load of about $5 billion. At the time, the company announced that it had received a commitment of over $3 billion in debtor-in-possession financing that it intended to use to improve liquidity while maintaining operations. CEO Dave Brandon said Toys “R” Us would restructure its long-term debt as it entered “the dawn of a new era” ahead of the 2017 Christmas selling season.
As it turned out, Toys “R” Us’s Christmas was worse than the chain had expected, putting the retailer in danger of defaulting on its debtor-in-possession loan, according to a CNBC report. If the retailer fails to live up to the terms of the deal, lenders will have the option of forcing Toys “R” Us to pay them back immediately, which could potentially push the business to the point of no return.
- Toys “R” Us Plans to Close Another 200 Stores – The Wall Street Journal
- Toys R Us is in danger of breaching a covenant with its lenders – CNBC
- Toys ‘R’ Us files for bankruptcy, enters ‘new era’ – RetailWire
DISCUSSION QUESTIONS: Do you still see a viable path forward for Toys “R” Us? What advice would you have for management at this point? Do you expect the chain to lose employees in light of the report that it does not plan to offer severance packages to those affected by store closings?
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15 Comments on "Is Toys ‘R’ Us nearing the point of no return?"
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Founder, CEO & Author, HeadCount Corporation
Management’s actions don’t match their words — so much for the “dawn of a new era.” I believe Toys “R” Us has crossed the point of no return with the current leadership team. Not offering severance packages is the final indignity for their employees. How could employees ever trust this leadership team again? This is sad conclusion to what once was a truly powerful brand and industry leader.
Chief Executive Officer, The TSi Company
It’s no secret that Toys “R” Us has significant issues and none that can be easily solved. Christmas wasn’t what they expected? Where is the surprise there? Was there an excellent holiday ad campaign? No. Did they have fantastic offers exclusive to Toys “R” Us? Not many. Instead, we read about greedy executives fighting to get their bonuses despite filing for Chapter 11. So now we see the company still struggling. What they could do is continue to consolidate even if they need to go down to as few as 200 stores total. Get the monkey off their back which means get rid of as much debt as possible. Focus on a buyer who wants to help reinvent their business starting with innovative leadership that can build Toys “R” Us into the toy retailer of tomorrow. Beyond that, I don’t see long-term success and, if their current path continues, there is a higher chance they will go out of business.
Strategy & Operations Transformation Leader
President/CEO, The Retail Doctor
Throw the bums out. A major brand brought to its knees by various people who didn’t look at the customer experience. And now news of the current management who don’t get that they are in the people business.
A radical halving of the number of stores, restructuring of how they sell toys, how their stores are laid out and how they can give Amazon/Walmart a run for their money. Employees are a company’s greatest asset. As news leaks out about this, expect shrinkage and turnover at all their stores — not just the 200 mentioned — to increase dramatically. You can’t say one thing and do another unless you’re in politics.
Managing Director, GlobalData
I never quite believed the hype about keeping stores open. The vast majority of Toys “R” Us outlets I have visited are deathly quiet, deeply depressing and sell products at too high a price point. The proposition, as it currently stands, is broken and performance can only get worse.
An example of the company’s general incompetence was on show at an Arizona store I visited on Monday. The location is closing and a liquidation sale was in full swing. However, many liquidation prices were higher than Amazon’s standard price. Walmart and Target were also cheaper on a lot of items.
I was there to look, not to buy. But the few shoppers that were there seemed highly unimpressed. Most seemed to leave without buying. This is a company that remains in deep trouble.
Content Marketing Manager, Surefront
I would ask company leaders what they’re doing to appeal to Millennial parents. Toys “R” Us has no mobile app, for instance, with the exception of a Babies “R” Us registry. And when was Toys “R” Us last in the news for something positive?
They could have played on the legacy brand nostalgia, partnered with a few independent toy makers in each locale or created a sustainable toy line. They lost their niche … getting sales because you’re the only brand on the block doesn’t happen anymore.
Bottom line, the company failed to differentiate itself in a time when uniformity is the kiss of death. With all of that said, I have many fond memories with my grandpa at Toys “R” Us and I’m sad to see them go … but frankly, total liquidation would be easier to watch than this.
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
There is no way forward. 1.) You have a business model that is obsolete vis-a-vis online toys. 2.) Companies, especially retailers, can’t save their way to profits. By eliminating stores, you eliminate the cost of the stores but you don’t eliminate the corporate overhead to the same degree. This is a company built on volume. The volume is gone.
EVP Thought Leadership, Marketing, WD Partners
Are you familiar with the b8ta concept? Or Bonobos? Showroom stores. Think of that for toys. A no-brainer, right? Reduce store and labor size plus increase the experience. To me, something much more drastic, like testing showroom stores, would be the only glimmer of hope for Toys “R” Us.
Just paring down and cutting expenses can’t be the only strategy. For anyone. What’s the way forward? Testing and trying new models should be an essential part of every retailer’s DNA now, and we just haven’t seen that from Toys “R” Us. So unless we see some vision, I’d say more like 2019 will be the end of the game.
Kids in the 21st century do not play with plastic toys anymore. Kids grow up nowadays on mobile phones, mobile apps and tablets. There is nothing management can do. It’s time for Toys “R” Us to join Borders Books and RadioShack in the afterlife.
President/CEO, The Retail Doctor
That’s just not true. Visit a local toy store like Pufferbellies in Staunton, VA or Creative Kidstuff stores around Minneapolis. PLENTY of toy stores are doing just fine.
B2B Content Strategist
Since the holiday season accounts for 40 percent of Toys “R” Us’ annual revenue, these results show the urgent need to adapt — just to survive.
Amid Amazon and Walmart’s dominance, Toys “R” Us must overhaul its e-commerce site, competitive pricing and fast home delivery.
Toys “R” Us’s strategic advantage is in the baby category, which accounted for 36 percent of its total 2016 U.S. revenue, which it should use as a differentiator. For toys, Toys “R” Us could emphasize its broad variety and expertise with recommendations (E.g. “Top 10 toys for 8-year-old boys.”)
Culling underperforming stores would help to pay down crippling debt.
Opportunities for growth exist in Asia. China eliminated its one-child policy; more babies means more demand for baby products. China’s half a billion middle-class consumers are increasingly affluent and willing to buy safe, quality products made overseas.
In the meantime, I expect more North American employees to leave; a lack of severance won’t inspire their engagement or loyalty.
Attorney, Alston & Bird LLP
A tiny percentage of retailers complete successful turnarounds in bankruptcy. Most will liquidate or be sold. The Bankruptcy Code (following the 2005 changes) does not provide time to experiment with new strategies. In order to achieve the turnaround, bankruptcy has to be used as a tool to execute a specific predetermined plan. I’m not sure that the amount of new money and the longer runway under the Toys “R” Us debtor-in-possession credit facility (compared to other recent DIPs) will be enough to overcome the challenges they face.
CEO, The Customer Service Rainmaker, Rainmaker Solutions
It is sad to see a company like Toys “R” Us going through this slow agonizing death spiral. It is apparent that their management team was not able to push their model to the 21st century. Children simply are not playing with the products on the shelves. If they can’t hold it in their hand and press their thumbs down, it is not going to sell. And I feel bad because I have friends working there.
CFO, Weisner Steel
If you were a holdout on doom calling for Circuit City, no reason to be on this one (other than sentimentality, perhaps): TRU has about as much chance as a giraffe does of doing the limbo. We might debate, for academic purposes, what chances it might have without a crippling debt load, or if the internet didn’t exist … but both those things do.
CEO, President- American Retail Consultants
Toys “R” Us is already past the point of no return. In the modern age of retail, there is no tolerance for realignment under bankruptcy. TRU’s competitors which were already taking market share, simply continued to do this as TRU lost valuable employees, vendors, and customers to a partially filled toy store with limited customer service. We can already write the tombstone for TRU who is trying to stay alive in an outdated model. Too many large stores, an inefficient distribution system, poor inventory management, and a weak online presence. Next!