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What Happened To Toys’R’Us And What Next?

9 November 2017 | About a 4 minute read
Tags: bankruptcy, Finance, retailers, sales, toys, toys r us, Toys'R'Us


On 19th September 2017, Toys’R’Us filed for bankruptcy protection. The once-loved toy company, who had seen their profits halve since 2009, needed more money to bring financial strength to their balance sheet and begin sorting out their debts. What surprised the nation most was the speed of this move with the Christmas period looming, which would usually contribute to 40% of Toys R Us’ annual sales.

 

What went wrong?

Bad Private Equity Management

In 2005, KKR Capital, Vornado and Bain Capital brought the toy firm into private equity ownership with an investment of $1.4bn cash and $5bn debt. Initially, this seemed like a good deal, with sales peaking at $13.9bn in 2012. However, the terms of the debt financing meant that Toys’R’Us were paying $250m in servicing the debt. The goal from the outset was global expansion, opening new stores in China and Poland, but as the global crisis hit in 2008, the burden of the debt became too great.

 

E-commerce Naivety

In 2000, Toys R Us became one of the first big brands to sign a deal with Amazon to sell toys and baby products exclusively on their site. The ten-year partnership only lasted four years however, as Toys R Us filed a claim with the Securities and Exchange Commission that Amazon were selling other toys on their website. The suit was settled for $51m in 2009, just a fraction of the revenue Toys R Us could have received in online sales. More importantly, Amazon now understood the toy business and had the infrastructure in place to severely impact Toys’R’Us’ market share within this category.

 

Price War

Big department stores in the US; Walmart and Target, have recently used the ‘toy’ category as a loss leader (accepting extremely low or sometimes a negative margin to drive traffic and people through their doors). With Toys’R’Us pushing their suppliers to lower their prices, strain was put onto their supply chain relationships, and it was this relationship that reared its head on September 6th.

 

CNBC published an article claiming the Toys R Us board had brought in lawyers to look at their strategic options, potentially including bankruptcy, in order to deal with the debt issues. Their suppliers pounced, demanding cash on delivery, and within a week, the supply chain had completely broken down at a time where Toys’R’Us were looking to significantly increase inventory. They had no choice but to file for bankruptcy protection.

 

What’s next?

While the bankruptcy protection filing only covers Toys’R’Us North American operation, Toys’R’Us continue to thrive in the Asian market with Andre Javes, president of the Asia Pacific region, reporting the firm had achieved “double-digit growth in the last four years [in China]” and he is confident the problem in North America will have little effect in the region. Joint ventures and other business relationships have enabled the firm to build a presence of 226 stores in the region.

 

Back in the US, Toys’R’Us will look to restructure its $5bn debt with existing debt holders and other creditors to finance the Christmas rush and build its online presence through recently launched web stores.

 

What should other retailers be doing?

When Mr. Lazarus founded Toys’R’Us, he was quoted saying “listening to the customer is probably the best thing in the world”. This principle still holds today and one which Lego, a firm which faced similar issues to Toys’R’Us in the past, used to turn  their business around. Their Future Lab, for example, set up to really understand their customers, found significant differences in purchasing behaviour between European and American parents. “American parents don’t like play experiences where they have to step in and help their kids…European parents are more hands-on” said Anne Flemmert-Jensen, the Future Lab leader. Lego, subsequently changed their marketing strategy to introduce their products as more of an educational tool. This is a lesson all retailers should be learning from: innovation through true understanding of the customer in order to stay ahead of competitors.

 

A report by Credit Suisse predicts that 25 percent of US shopping centres will close by 2022, a frightening prospect although one which is in line with customer behaviour. Customers want the convenience of delivery to their front door but also to have an “experience” when inside the physical store. Apple pioneered this approach and now most luxury brands have adopted this strategy, one which Toys’R’Us will likely use in the future.

 

Overall, the song in its chapter 11 filing summed up Toys’R’Us’ naivety well:

“I don’t wanna grow up, ’cause if I did,

I couldn’t be a Toys’R’Us kid.”

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