No more playing around – Toys ‘R’ Us is out of the retail game

Discussion
Photo: Getty Images
Mar 15, 2018
George Anderson

Last September, Toys “R” Us chairman and CEO Dave Brandon spoke of “the dawn of a new era” for his company after the retailer filed for Chapter 11 bankruptcy protection. While Mr. Brandon spoke of a brighter future where the company would be in a better position to deal with a debt load of $5 billion, many were skeptical. Unfortunately, the skeptics were right. Toys “R” Us has announced it will begin the process of shuttering all 735 of its U.S. stores.

Mr. Brandon said the move was unavoidable as the retailer no longer had the financial support it needed to continue operating in the U.S. “This is a profoundly sad day for us as well as millions of kids and families who we have served for the past 70 years,” he said in a statement.

While Toys “R” Us has not announced a specific figure, The Wall Street Journal estimates that 33,000 Americans working at the chain’s stores and in supporting positions will soon be out of jobs.

The Journal reported last month that the retailer had backed off a promise to pay severance to affected store workers in January. A Toys “R” Us spokesperson told the paper that some store employees may be eligible for performance bonuses connected to liquidation sales.

One slight glimmer of hope is that Toys “R” Us has said it is having discussions with “interested parties” that may be willing to acquire up to 200 of the chain’s top stores in the U.S. along with its stronger Canadian business. The retailer said it intends to go ahead with liquidation sales at these locations as if a deal will not be struck.

In the end, Toys “R” Us’s demise is likely to be tied to the $6.6 billion leveraged buyout of the company by Vornado Realty Trust, Bain Capital and KKR & Co. Over the years, Toys “R” Us has lacked the capital to remodel stores and create greater synergy between online and physical locations as it sought to pay down debt.

DISCUSSION QUESTIONS: Why do you think Toys “R” Us failed? What will the liquidation of Toys “R” Us mean for retailers and vendors in the toy category? How will store closings affect the retail real estate market?

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Braintrust
"Lesson to be learned: last year’s business tactics no longer cut it in retail. Evolve and think of the customer. Nothing but the customer."
"Their failure is sad ... resulted from a few key bad decisions mixed with radical consumer trends and competition that created a race to the bottom."
"While the company started in the late ’40s, the concept we all know took hold in the ’60s. That is a millennium for a retail concept."

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37 Comments on "No more playing around – Toys ‘R’ Us is out of the retail game"


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Bob Phibbs
BrainTrust

Once the store can’t be relevant, they turn to the hedge funds and VCs who suck any viable path forward away from them. It is also hardly a great time for smaller toy stores as a raft of closures will dampen their entire 2018.

Gene Detroyer
BrainTrust

Exactly. The key word is “relevant.”

Brandon Rael
BrainTrust

Great points Bob! The key word is indeed relevance. Retailers have to continuously reinvent themselves to survive and thrive. The Toys “R” Us model worked very successfully for years but didn’t change and adapt to the changing consumer preferences.

Doug Garnett
BrainTrust

I disagree a bit. This wasn’t about relevance. It seems to me the problem is that other stores took away their opportunity to be unique — to have a clear image of “why shop at Toys ‘R’ Us.” Target’s superb LEGO collection, for example, made a trip to Toys “R” Us unnecessary — and difficult if the family also needed toilet paper and shoes.

David Katz
Guest

Good call, Bob: “Relevance.” It’s important to remember that relevance is a moving target, evolving with consumer demand, path-to-purchase and the competitive retail landscape.

Dick Seesel
BrainTrust

It’s unlikely that Toys “R” Us is going to stay afloat, and this is a big deal for those who follow the recent history of retailing. They were among the first “category killer” stores with broad assortments of a single category in a big-box format. There have been others (Linens ‘n Things, Sports Authority, etc.) but this one stands out. If you see reporting on “the Amazon effect,” it’s more complicated than that.

It’s tough to survive in a highly seasonal business like toys given the growth of e-commerce and the dominance of discounters in the same category. And there has been a generational change, where many of today’s kids are interacting with technology (smartphone apps, streaming video games) instead of the toys of a short time ago.

And one more lesson learned: A mountain of private-equity debt doesn’t help.

Neil Saunders
BrainTrust

The liquidation of Toys “R” Us is the unfortunate but inevitable conclusion of a retailer that lost its way and forgot core retail competencies.

Even during recent store closeouts, Toys “R” Us failed to create any sense of excitement. Moreover, its so-called heavy discounts remained well above the standard prices of many rivals like Amazon and Walmart. Arguably, if Toys “R” Us can’t successfully execute a closeout and stimulate interest, then it has little to no chance of trading under normalized conditions.

Ken Lonyai
BrainTrust

Ultimately Toys “R” Us failed from the pervasive arrogance that besieges the retail sector.

No doubt Amazon will be repeatedly mentioned in light of this demise, but Toys “R” Us made their own bed. They have stuck with an outdated retail model at least two decades beyond its lifespan. Rather than investing in technology, elevating the store experience, and offering enough value to thwart competitors, they maintained a discount store atmosphere without the pricing to back it up. That opened the door for — well, everyone knows.

Lesson to be learned: last year’s business tactics no longer cut it in retail. Evolve and think of the customer. Nothing but the customer.

Cathy Hotka
BrainTrust

Studies by Bloomberg and others have shown that a number of U.S. retailers have unsustainable levels of debt, some brought on by leveraged buyouts. Others mentioned recently include Bon-Ton, Kohl’s, Claire’s, J. Crew, Nine West and Macy’s. Without the capital to adapt and reformat, it’s tough to survive.

Art Suriano
Guest
This sad story is another example of when a company gets purchased by private equity. The stockholders make a killing and are thrilled, but the company becomes loaded up with enormous debt, killing it unless miracles take place. Who came out ahead? The stockholders involved in the original sale and the private equity firms. Who loses? All the employees, vendors, landlords and of course the customers. Was it worth it? Well, the few that made millions on the deal will say yes and, for that reason, the trend will most likely continue. Unfortunately we have seen countless times this same scenario. There’s nothing wrong with a company going private for the right reasons — meaning whoever buys them invests in them. Toys “R” Us had every opportunity years ago to crush the competition by becoming the toy store of the future with new store designs that would turn them into a store playground, allowing kids to come in and play with other kids and store associates and most importantly to try out product. What parent… Read more »
Brandon Rael
BrainTrust
This is indeed a sad ending to a once iconic and ubiquitous toy store, and the Toys “R” Us kid in me is mourning its loss. There are many factors leading to Toys “R” Us declaring bankruptcy, which has ultimately led to the company liquidation and store closures. It will not be easy times for the 33,000 employees that will be losing their jobs. It’s easy to just point to Amazon’s online dominance and the changing consumer preferences. However, it’s far more complex than it appears. Change is constant in retail, and the big box toy store concept simply did not resonate with the latest generation, who literally has the world at their fingertips. To a generation of children, Toys “R” Us was the place of dreams where you could spend hours checking out the latest and hottest trending toys. However, the most compelling reasons to go to a toy store these days are to experience, experiment and play with the toys. Perhaps a “brand ambassador” sales associate will be there to provide expert advice… Read more »
Gene Detroyer
BrainTrust

While the company started in the late ’40s, the concept we all know took hold in the ’60s. That is a millennium for a retail concept. In fact, few companies, including big ones last that long. The Toys “R” Us concept ran its course while new ideas and new competition (online, Walmart) grabbed the the consumer’s changing behavior and tastes.

And yes, the LBO didn’t help and probably accelerated the decline. LBOs are a very dangerous game and just one hiccup can destroy the debt service projections.

Lyle Bunn (Ph.D. Hon)
Guest

This addition to the heap of retailer that “once were” emphasizes how risky retail is as consumer preferences and buying options change. Toy makers and importers will miss this massive retail outlet and employees will be scrambling to find new jobs. The primary lesson is that retailers must be more nimble than ever before to respond to consumer changes, expand into trending areas and bring better customer experiences to the store.

Nikki Baird
BrainTrust

Ah, the end of the toy jail. The entire financial side of the business is completely the reason why they failed, no arguments there. Retailer MUST invest to keep up with the transformation disrupting the industry.

The only thing I’ll add is that it is striking, when you walk into a Toys “R” Us today, just how bad of an experience it is — just how much consumer expectations have evolved from what used to be a totally successful model. If nothing else, the last days of the company should serve as a reminder to everyone exactly what’s at stake if you don’t change.

Doug Garnett
BrainTrust

There’s too much blaming I see around Toys “R” Us that suggests they just didn’t “innovate.”

But clearly market manipulations, like the LBO here, are a major problem in retail. Besides LBOs of retailers, I am very concerned by the M&O fad among manufacturers. It’s nearly impossible for a retailer to carry significantly unique product when, for example, Stanley/Black & Decker and TTI owns so many of the tool brands. Consumers do not like it when all stores and all products (regardless of brand) look basically the same.

Any Toys “R” Us analysis also needs look at how the toy business changed since their heyday. When we were first buying toys for my kids, Toys “R” Us was the place. But over time Target, Walmart, Fred Meyer and many other stores dramatically expanded their toy departments. Then these other stores locked up exclusives, etc.

It’s hard to blame Toys “R” Us when the channel around them evolved rapidly in a way that eliminated the unique reasons to go shop there.

Leigh Roberts
Guest

How exactly do stores remain innovative and differentiate themselves with unique product when those items are being made by the smaller and mid-sized vendors? Only the giants can afford to sell to them and absorb all the allowances and charge-backs. What new, exciting (and small) guy can afford to sign a vendor agreement that states, in fine print of course, that they can cancel a signed PO up until the moment of delivery? This is the reality.

Doug Garnett
BrainTrust

Valid question and I know that reality well. Except we aren’t talking about small operations. We’re talking about the difference between large makers and massive conglomerates. At least that’s the case of tools which I know best.

Black & Decker wasn’t small before they were bought by Stanley. Milwaukee tools wasn’t small before being bought by TTI. Craftsman wasn’t an insignificant brand before being bought by Stanley. Yet we are already seeing an amazing blandness in assortment brought by those companies.

The tiny guys? Nope. They can’t pull it off — here’s a post I wrote about how consumers would be served well if Kickstarter’s mythological products would have been forced to pass the retail requirements.

But, also, retailer demands of manufacturers to avoid risk have reached a dangerous point where they drive product assortment into dullness so nobody wants to shop their stores. Spreadsheet management by buyers isn’t a good thing — some never look up from the spreadsheet to consider whether anyone would want to shop their department.

Leigh Roberts
Guest

“…retailer demands of manufacturers to avoid risk have reached a dangerous point where they drive product assortment into dullness so nobody wants to shop their stores. Spreadsheet management by buyers isn’t a good thing — some never look up from the spreadsheet to consider whether anyone would want to shop their department.”

Exactly! I was new to major retail in the early ’80s when the department store was king. Those were the days that the industry (as we knew it then) was breathing its last gasp of creativity and innovation. Once the race started to fill the buying offices with MBA bean-counters, it pretty much went to…well…you know. And here we are.

Geraldine Stutz, we hardly knew ye!

Doug Garnett
BrainTrust

So frustrating. I came to retail later. But it’s incredibly sad to me to see brilliant buyers who see how to creatively maximize sales within their departments pushed out by bean counters who only know how to ensure they meet their Six Sigma goals … while making the department uninspired.

Shep Hyken
BrainTrust

One reason Toys “R” Us failed is that they focused on price. It was all about low prices. The moment another company (as in Amazon — or any other competitor) offered a lower price, the customer left. When a customer is loyal to a company because of price, it’s just a matter of time before they shift their loyalty to a different company.

One other comment on this topic is that this may not really be the end of Toys “R” Us. It wouldn’t surprise me to see Toys “R” Us come back in the future.

Brandon Rael
BrainTrust

The brand name has some value and is synonymous with our imagination, and childhoods. Perhaps Toys “R” Us will come back, same as FAO Schwarz is planning a comeback this year. Shep, I do agree that not competing with pricing was a significant issue, however, the value-added services and customer experience simply was not up to the level it needed to be.

Cynthia Holcomb
BrainTrust

Super warehouses of things — toys in this example — can’t compete with Amazon and others. Without a compelling reason to physically go to Toys “R” Us, why get out of your chair? Very sad indeed. Shareholder greed paralyzed Toys “R” Us to death and 33,000 people are losing their jobs. Very sad.