The queue for Force Friday II, August 31, 2017 – Photo: Toys”R”Us
Toys ‘R’ Us files for bankruptcy, enters ‘new era’
Toys “R” Us announced yesterday that it has filed for Chapter 11 bankruptcy as the chain hopes that restructuring will allow it to manage its $5 billion debt load while positioning its business to compete against bigger and stronger competitors ranging from Amazon.com to Walmart.
While Toys “R” Us expects to close an undisclosed number of underperforming stores as part of its restructuring, it expects to keep most of its 1,600 stores open. The chain maintains that
“the vast majority” of its locations are profitable.
Toys “R” Us has received a commitment of over $3 billion in debtor-in-possession financing that it intends to use to improve its liquidity while maintaining operations. Chairman and CEO Dave Brandon said the company plans to restructure its long-term debt, which will give it the flexibility to invest in improving the customer experience in the chain’s stores and online.
Mr. Brandon called the action “the dawn of a new era at Toys “R” Us,” promising that the company will work with vendors to assure it has the right inventory in place for the upcoming holiday season.
The Wall Street Journal reports that Toys “R” Us is likely to receive vendor support as suppliers would suffer adverse effects if one of their largest retail customers were to fail. The two largest toy makers — Mattel and Hasbro — are owed nearly $200 million combined from Toys “R” Us, the paper reports.
- Toys “R” Us, Inc. Commences Court-Supervised Processes to Implement Financial Restructuring – Toys “R” Us, Inc.
- Toys ‘R’ Us, Once a Category Killer, Is Forced Into Bankruptcy – The Wall Street Journal
- Can toys raise J.C. Penney’s game? – RetailWire
- Toys ‘R’ Us mulls small, urban stores as part of turnaround – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Will Toys “R” Us be in a better position to compete following its restructuring under Chapter 11? What will the chain need to do to avoid losing any of its stakeholders — investors, lenders, vendors, associates and consumers — in the process?
Poll
BrainTrust
Meaghan Brophy
Senior Retail Writer
Phil Chang
Podcast Host, Retail Influencer, Fractional CMO
Make no mistake though, the debt isn’t going away. And the structural problems are still in place as more and more Millennial moms buy toys off Craigslist and at dollar stores. Let’s not forget this is the company that couldn’t make FAO Schwartz work.
It’s over for Toys “R” Us. The shopping habits of toy buyers have changed. No enhancement of the customer experience will change this. Chalk up a win for Walmart and Amazon.
A specialized superstore only exists when it can claim the largest selection in the category (Amazon wins), price (Walmart wins) and convenience (Walmart and Amazon win because you are not limited to purchases within the single category).
Specialized superstores are all in trouble for the same reasons. Think about Staples.
Toys “R” Us needs to shed inventory and be quicker at getting from supplier to store. They also need to shrink their brick-and-mortar presence and expand their e-commerce front.
Toys “R” Us is a destination for all parents looking for toys — they have that going for them and will continue to have consumer and brand support. If they took a cue from Best Buy about creating a single experience for the consumer to center around, they could make this turnaround quick and profitable.
Restructuring under Chapter 11 is a sad and traumatic outcome for a once vaunted brand like Toys “R” Us. Inevitably companies like Toys “R” Us will emerge from this and carry on in some way. However, the long-term prospects are uncertain. Naturally management will need to convince its stakeholders that there is a clear path to success — a clearly articulated and believable action plan will be critical to restoring confidence among the stakeholders and especially to employees who are immediately and directly impacted by this.
The problem I have with this is it’s another story of a retailer bought out by private equity and then years later filing for Chapter 11. Toys “R” Us should be the leaders in the toy industry in a big way, but while carrying so much debt they were not able to modernize their stores with an exciting reason for shoppers to visit them. Said simply, Toys “R” Us stores are old, outdated and tired. They need to be the “impressive in-store playground” for kids today, and they’re not. Their prices are a little higher than some of their competitors also making it difficult to compete. So filing for Chapter 11 is good; closing the underperforming stores is also smart. However, quickly bringing Toys “R” Us into the toy world of tomorrow with technology and stores we want to visit is the only way Toys “R” Us will survive long term.
This is such an important observation, Art. Thanks for raising it. Once the private investors began treating TRU as a cash cow instead of a dynamic and adaptable category leader, its days were numbered.
It’s an uphill battle for Toys “R” Us. They never seemed to keep up with all the changes in retail and with the bankruptcy filing it will be even more challenging. Going to stores sometimes is unpleasant enough, going to one of their stores is downright depressing. Glad my kids are grown. Hopefully when they start having kids I can just use my Amazon Prime to avoid the toy shopping experience.
Unfortunately for this eternal Toys “R” Us kid, this is indeed a sad day. But this formal bankruptcy announcement is a day that has been in motion for quite some time. For a certain generation, going to Toys “R” Us, was a worthwhile experience to look, feel and touch the latest toys and bikes and check out the latest video games. You were more than happy to enjoy the experience of going to the store, even if you left without any new toys. The store was a wonderland of toys and as a child you could literally spend all day there playing.
We can all point to the increasing competitive pressures from Amazon, and the convenience of online shopping, however in recent years the in-store experience has been a challenge for Toys “R” Us. Especially, as I have had mixed experiences with my own kids shopping in the stores. More often than not consumers are leaving the store empty handed, but are also very frustrated with the friction-full experience and the lack of customer service.
The warning signs have been there for years and, hopefully, this bankruptcy period will enable Toys “R” Us to streamline their operations, optimize their assortments and make their store the “it” place to have a multi-sensory experience.
” … the dawn of a new era … ” indeed! The broader toy category will fast become primarily an online category. If I can purchase a snowblower online then toys are an easy online purchase. All the debt restructuring (not elimination!) in the world will not change that reality. There are a lot of brand vendors that will never get paid for their products and if they do, it’ll be pennies on the dollar. The only way Toys “R” Us will survive is if they can reinvent the store. The store needs to become a playground and community center for young moms and children — that happens to sell relevant stuff!
Toys “R” Us had been a venerable fixture in most families’ holiday shopping plans for decades. The redefinition of convenience sparked by new retail purchase and delivery models and partnerships have seamlessly blended the physical and digital while elevating data to a strategic competitive weapon in the creation of personalized shopping experiences. But before all that, there are basics in retailing that must be consistent and in place: from having a clean, fresh and exciting “in-store playground” (as mentioned by Art Suriano) to ensuring the right inventories are on the shelves in an easy-to-shop format.
Revamped financial arrangements are an important first step as they provide the necessary time to make the needed changes. So while a new era can certainly be had, it requires that it forgets its past successes in order to find a very different model of what success will look like in retailing in the coming decade. To the extent it achieves this, Toys “R” Us will be able to appeal to its constituents and gain control over its future. I’m optimistic.
Toys “R” Us may need to take a cue from Nordstrom and create brick-and-mortar spaces that focus on experience. Toys “R” Us locations need to become a destination where kids want to go to play and discover instead of a space where parents go to pull a boxed toy off the shelf. If Toys “R” Us is successful with their Times Square location this holiday, I think there is hope for them yet.
Private equity has a lot to answer for in this case. They have used Toys “R” Us as an ATM and left the business in a challenging position. Certainly not all of the problems are debt-related — but those high debt levels have made it difficult for Toys “R” Us to evolve and adapt its stores, seriously invest in its website and create a sustainable, competitive business.
Chapter 11 buys breathing space, and it creates flexibility — but it is not necessarily the savior of the firm. Market dynamics are firmly against Toys “R” Us, and it will need to evolve its entire proposition and manage its liabilities if it is to survive.
Brand manufacturers like Lego are going direct while toys can be purchased online and in other stores like Target and Walmart. Toys “R” Us needs to define the toy buying niche experience for itself and also develop exclusive toy lines quickly to have a future.
I’m a little surprised that this has taken so long. Discounters have been chipping away at Toys “R” Us for years. Without their robust chargeback operation, Toys “R” Us would have been gone in the slump of 2008. Amazon, free delivery, etc. was just the last blow.
Aside from pet supply stores that allow furry shoppers and provide ancillary services, I think many category killers are doomed to a similar fate as Toys “R” Us. One stop shopping is in vogue once again.
This one is sad but also so obvious to see coming. I wish I could say that this will turn around a brand that I loved as a kid, but I don’t think Chapter 11 will force management to make the necessary and obvious changes that they should have made over the last decade. Everyone points to retailers like Apple and REI where shoppers come as a destination to play and learn. Toys “R” Us by the very nature of their products and their target audience should have been focusing on playing and learning and transforming their stores into destination locations instead of trying to compete on price, selection and worrying about bonuses tied to same store sales.
Honestly, TRU has 1600 underperforming stores. The company will receive vendor “support” until the latter can find a way to extricate themselves from this, and of course it will get plenty of attention from advisers, lawyers, accountants who won’t need to go to the checkout to come away with what they want: what remains of the cash.
I’m not sure where this will end, but I know how it will end … badly.
While curious that Toys “R” Us claims they will not need to close stores, I am doubtful Chapter 11 will cause them to take a necessary hard look in the mirror and emerge successful. Toys are becoming more and more dominated by big name CPG brands — and as many of them come to the realization they can sell direct to consumers either via their own stores or online, Toys “R” Us days are numbered. Under private equity they remained perfectly content to run their stores as a warehouse that were no longer inviting places you wanted to shop at. As a parent, I can say that while we have each year visited a Toys “R” Us to shop, we use it more and more for showrooming as we just don’t get a sense that the stores even want us as customers any longer. That perception is shared by many other parents we know and is a major source of problems for the brand.
Unless they are going to undertake a true transformation into an experiential destination, it seems unlikely they will survive. Competing on price and assortment will not work for Toys “R” Us in the face of Amazon and Walmart or even Target. They have to bring something more to encourage shoppers. Create branded islands or themes of toys — not just aisles and shelves and maybe shoppers will come back.
Toys “R” Us needs to take a showrooming approach with smaller stores.
What’s hot? Halloween. What’s not? Toy stores that don’t get it. This weekend people of all ages will go to Home Depot, Walmart and their respective counterparts to load up on this years latest and greatest Halloween stuff. Hard to get and the latest winning inventory items for this holiday will be stacked to the ceiling in these retail stores.
As for the highly regarded Toys “R” Us, well, they see things differently and much prefer doing things as they see fit. Is it any wonder they are waiting for the market to catch on and do the right thing. The only thing that is worse than the store merchandising and inventory is declining receipt count and size. There is little or no time for the company to continue with this management style. We need a realistic leadership that knows 21st century brick and mortar sales merged with e-commerce market expectations.