The end of Toys R Us heralds the end of an era as the company plans to liquidate in the face of overwhelming competitive forces. On Wednesday, they told employees of their plans to sell or close all U.S. stores and file liquidation papers before a court hearing for Thursday afternoon.
Toys R Us initially announced the closing of 182 U.S. stores in January. Going-out-of-business sales for those stores began the following month.
While the last two weeks have seen reports that the company was destined for complete liquidation in the U.S., it is not guaranteed. If a buyer wants to buy some of the stores to run them as an ongoing business, then Toys R Us may continue to exist as a shadow of its former self.
Devastating debt
The fall of Toys R Us is noteworthy as far as recognizing businesses that have changed markets.
“For most of its 70-year history, Toys R Us was the company that put other toy chains out of business. It outlasted KB Toys, Zany Brainy and Noodle Kidooodle,” USA Today reported. “It bought, and later sold, FAO Schwarz.”
Its downfall came at the hands of a flood of market changes to the retail industry brought on by Amazon. Toys R Us fell to the same troubles other traditional retail chains faced: it was too large and outdated in a digital age. The company was also dealing with an enormous amount of debt weighing them down.
This $5 billion in debt came from a leveraged buyout in 2005 by real estate trust Vornado and private equity investors Bain Capital and KKR, according to USA Today. This “saddled Toys with crushing interest payments amounting to $400 million a year.” Toys R Us was handed this card as the economy entered its worst downturn following the Great Depression.
Toys R Us was unable to pay off this debt, though they had a long and glorious run as an iconic American toy and juvenile product retailer since 1948.
Rise and Fall
Founded as a children’s furniture store by returning World War II vet Charles Lazarus, the retailer began opening toy superstores in 1957– driving the demand behind advertisements on TV for popular toys like Barbie Dolls and Slinkys.
Toys R Us dominated the toy market as a powerhouse until retailers like Walmart and Target stepped. These retailers moved in with the aim to attract customers with lower priced toys in hopes that they would then also buy higher priced products while there.
Following the 2005 buyout, Bain, KKR and executives put in place following the buyout expected to restore the retailer to a point that they could launch a stock offering within three years. With this, they planned to collect a good return on their investment. How would they do it better? They planned to cut costs and increase sales by implementing better marketing and more efficient management, according to USA Today. Unfortunately, Toys R Us continued its spiraling descent.
The company also made a critical (but maybe unforeseeable) error when it partnered with Amazon to launch its new e-commerce operation. Amazon turned into a competitor that was able to undercut Toys R Us’ prices. Further, Toys R Us’ huge debt payments bit chunks out of profits that could have been used for investing in stores and online retail processes.
The fate of the company seemingly turned optimistic when CEO Dave Brandon promised in his opening statement that “Toys R Us is here to stay” in September when the company filed for bankruptcy.
Critical stakeholders were very supportive of the retailer’s attempts at a comeback. Toy manufacturers, money lenders and landlords who owned store properties backed almost all the retailer’s requests as it tried to reorganize. USA Today reflected:
“Toy makers said they needed the retailer to survive because it provided the best year-round showcase for all of their products, unlike retailers that only stock up on toys in November and December and shrink their toy aisles after the holidays.”
Toys R Us tried the approach of creating a destination atmosphere by providing play areas for kids and even augmented reality to enhance in-store experience. These adventurous additions were not enough to save the retailer.
A company spokesperson told The Record that Brandon told employees it was a sad day and that customers and others would be sad to see the brand disappear.
Whatever the ultimate fate of Toys R Us, its impression on the industry and in our lives is eternal.