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
BrainTrust

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
BrainTrust
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.

Ken Morris
BrainTrust
Ken Morris
Retail industry thought leader
1 year 6 months ago

There were several factors that contributed to the demise of Toys “R” Us. Obviously, their debt situation was a significant challenge. The other big challenge was the nature of their business of selling “commodity items” that can be purchased many places which results in price pressures and disintermediation by online retailers (e.g. Amazon).

Survival of retailers selling commodity merchandise requires new approaches that differentiate your brand with personalized services and experiences. Maybe Toys “R” Us would have been more successful if they would have made their stores a destination by creating interactive experiences and events in the store. People enjoy the theater of shopping and that is the value of the physical store. Their online experience is very good … simple and easy to use as is their BOPIS but too little too late. Walmart on the physical store side, Amazon on the e-commerce side and the heavy debt load pushed them beyond the point of no return.

Leigh Roberts
Guest

I see more kids engaging with the merch at the Apple store than I ever do at TRU.

Leigh Roberts
Guest

Why does the vendor always get lost in this conversation? Year after year, the big guys extract their pound of flesh from us and it has simply become unsustainable. The days of vendor “partnerships” are long gone and passed away with visionaries like Andrew Goodman, Edward Finkelstein and their kind. When I can go direct to Amazon FBA, sell at retail, control my brand (not an easy task on that platform, but definitely doable) why would I subject myself to retail blackmail any longer? They’ve saddled themselves with debt and expect their brands to make up for the short-fall. The customer is the least of their concern. I’m saddened for the thousands losing their income but the bottom line is many of these so-called retail “mavens” are nothing but strong-armed thieves and they are responsible for the people whose lives they ruin every day.

David Weinand
BrainTrust

Excellent input by all. While I believe their debt load was the largest contributing factor (that led to their inability to invest) to their demise, it’s not the only thing. Certainly changing tastes among their core demographics (to anything electronic — games, social media, etc.), lack of vision and core business model contributed as well. To me there are few formats more conducive to winning than an amazing in-store experience — but clearly Toys “R” Us didn’t have that nor have the vision or resources to create one.

Kenneth Leung
BrainTrust

Combination of the the inability to pivot to consumer needs and the need to service the high debt load killed the company. In this case, the brand still had some cachet so perhaps parts of it can be saved, but at this point liquidation and sale is the only way to reset the business and cut the debt load.

Lee Peterson
BrainTrust

I was wrong! Thought they could make the year. Classic case of being too much of a corporate hairball to move to next. Hopefully many lessons learned for other “box”/commodity concepts.

Cate Trotter
BrainTrust

It’s always a shame when a retailer leaves the market. But a lot of Toys “R” Us’s issues come down to experience. Unlike a lot of retailers, they were selling products (toys) that easily lend themselves towards fun, interaction and engagement, but there was very little of that in their stores. There was no reason to go there specifically. If Lush, for example, can make soap and personal cleaning products fun and offer an enjoyable in-store experience, then a toy retailer should be able to.

Ryan Mathews
BrainTrust
Let’s take these questions one at a time. Why did TRU fail? The easy answers are too much debt, too much competition from digital retailers, poor management decisions, insufficient capital supplied by the wrong kinds of investors, etc., etc. But the real answer is that TRU and those that advised and ran it confused cost cutting with a survival strategy, failed to innovate as times and tastes changed, and lacked a cohesive creative vision of the future. Without those things, a series of cutbacks, restructuring and rounds of capitalization just add up to a death by a thousand cuts. As for what it means for the category, let’s look at what the failure of Borders and the weakening of Barnes & Noble has meant for books or what the collapse of Virgin Records, Peaches, etc., et alia, has meant for books and records. Most of the middle tier retailers collapse and creative independents survive and often thrive. I expect we will see the same pattern in toys. The answer to the last question is sort… Read more »
Craig Sundstrom
Guest

Vendors and property holders will adjust, just with fewer buyers and tenants (the economy has never looked better … I’m told). But here’s nothing really positive here. Everyone connected with this, including those that pass laws that allow companies to load themselves with debt and yet enjoy the shield of limited liability, deserves condemnation.

That having been said, it’s hard not to believe that debt, while hastening the demise, wasn’t really the cause: the company has been losing market share for years, and IMHO, never really offered a compelling shopping experience. Born by “price is everything,” and die by it.

Ricardo Belmar
BrainTrust
This is a very sad ending to a 70 year run for an iconic retailer. The child within us all must now say “farewell” to everyone’s favorite giraffe. Personally, I remember visiting Toys “R” Us as a child with my parents and the excitement it brought to wander the aisles seeing interesting toy after interesting toy. However, it’s that old experience that resulted in Toys’ “R” Us’s downfall. What I remember from those childhood days is exactly the same in-store experience I would have today, decades later The difference is that this experience could be had just as easily in Walmart or Target’s toy department. Pair that with the online Amazon experience and wrap it in an LBO bow, and you have the end of yet another famous retail brand. This is a prime example of a retailer that didn’t see the writing on the wall and failed to adapt to the changing retail scene demanded by shoppers. They relied on price to save them until shoppers realized they didn’t have the lowest price anymore.… Read more »
Ed Rosenbaum
BrainTrust

This is a sad day we all have to admit we saw coming for a long time. Sadder even for those of us having friends working there as I do.

But the handwriting has been there for a long time. Too much competition offering the same plus more products for far less. They were never able to stop the bleeding. And today begins the end of the end.

Marc Gingras
Guest
1 year 6 months ago

Aside from the obvious debt load problem, it’s clear that Toys “R” Us couldn’t find a way to compete with the Walmarts and Amazons of the world. (Unsurprisingly, they couldn’t match their prices.)

But where they could have differentiated themselves from competitors was through the in-store experience. They should have focused their energy on becoming an entertainment destination, rather that a toy store. In recent years, they had experimented with video screens, colorful motion-sensor lights, unboxing areas to test out new products, etc., but it was definitely a case of too little, too late.

Mark Price
BrainTrust
Mark Price
Managing Partner, Smart Data Solutions, ThreeBridge
1 year 6 months ago

The private equity firms simply loaded them up with too much debt to have any flexibility to make changes in the face of a rapidly changing marketplace. This bankruptcy is not a failure of brick and mortar retail; rather, it is a failure of a financing strategy.

The big box closings of TRU unfortunately will flood the real estate market which is already facing a glut of big box closings. Unfortunate.

Jeff Miller
Guest
Their failure is sad on many levels and resulted from a few key bad decisions mixed with some radical consumer trends and competition that created a race to the bottom. They needed more than any retailers to pivot to become an experience destination for toys and games instead of a place to buy cheap toys. Key bad decisions were: The 10 year contract with Amazon back in 2000 when they missed the boat on first wave of e-commerce; Like most retailers, over expansion of stores; Leveraged buy out (not sure they ever work); And most important – not taking advantage of the key differentiation they had — their stores. Toy’s “R” Us needed to become the best place to find and play with new toys and not just an empty store with no one to help you. On the consumer trend side, obviously the rise of both the mega stores like Target and Walmart making a big push into Toys followed by Amazon jumping in created a race to the bottom. At the same time… Read more »
Charles Dimov
Guest

The Big Box format is no longer the instant winner that it used to be. Questions are, did they fight hard enough against the Amazon effect? Were they pushing the boundaries of convenience, and ease of use of omnichannel offerings? Hoping this will be a key lesson for other retailers. We need to keep our eyes on the ball, adapt fast, CONTINUALLY adapt, and watch what works with the customer. Then if something does not work — change it, without thinking about sunk costs.

Cannot help but to feel sad for an iconic brand, and the many hard working employees.

wpDiscuz
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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