Toys ‘R’ Us Bankruptcy to be Blamed on Ecommerce?

Written by: Rara Kinasih on September 22, 2017

THE BACKGROUND

It’s safe to say that Toys ‘R’ Us is one of the most popular places on earth for kids everywhere. With an endless variety of toys stacked in high racks, it is a heaven created for kids or kids-at-heart alike.

The toy retailer was born after founder Charles Lazarus came back from serving in the World War II and decided to build a baby furniture business during the baby-boom in 1948.

Lazarus started featuring assortments of toys in the store then named “Children’s Bargain Town” after receiving a high demand from parents and soon learned that unlike furniture, toys would keep customers coming back, either for an upgrade or a replacement.

Less than a decade later, he restructured his business to solely focus on toys and opened the first Toys ‘R’ Us store in 1957 — with the iconic backward R giving a childlike impression. To date, the company has 1,600 stores across 38 countries.

“What we are is a supermarket for toys. We don’t have a competitor in variety, there is none,” told Lazarus to the Washington Post.

Toys R Us bankruptcy ecommerce
Toys ‘R’ Us founder Charles Lazarus retired as CEO and president in 1994 while remain chairman. Source: Getty Images.

For decades, the US company was so unbeatable that it had become a classic example of a category killer — a business that successfully specializes in one sector that it pushes out competition from both smaller specialty stores and larger general retailers.

So what happened to the once-booming business that the company filed for bankruptcy earlier this week?

THE CHALLENGE

When news of the Chapter 11 filing (“reorganization” bankruptcy”) by the toy retailer broke, media was quick to blame Amazon and the rise of online retail as the reason of yet another traditional retailer struggling to stay in business, known commonly as the Amazon Effect.

But the real reason for the bankruptcy is more complicated than this and what set off “a dangerous game of dominoes” was actually accumulated debt.

Toys ‘R’ Us had managed to sustain a crushing debt for more than a decade after getting bought by KKR and Bain Capital in 2005. The private equities bought the retailer, which at that time was valued around $7.5 billion, for $6.6 billion that consists only of $1.4 billion in equity.

They then used the company’s assets to raise $5.3 billion in additional debt, creating a total debt of $6.2 billion — based on the assumption that they would be able to cut the retailer’s operating costs and sell under-utilized assets to raise cash and repay the debt.

But they failed to predict the retail shift to ecommerce, which created a completely different competitor from the ones Toys ‘R’ Us had been facing in the past such as Walmart or Target.

The assumption that retail real estate would increase in value also failed them as the US became saturated with retail space once businesses began shutting down.

The company barely had enough money to repay its $5 billion debt and fight traditional retailers, let alone build a major online presence to go up against Amazon.

Given its fragile situation and end year sales around the corner, the company was forced to file for bankruptcy protection in order to provide the vendors with cash in advance as nearly all of them refused to ship products to fill the retailer’s inventory for the holiday season.

THE STRATEGY

With the new protection, Toys ‘R’ Us received a commitment for over $3 billion to help address the financial constraints in a lasting and effective way, as stated by Toys ‘R’ Us CEO Dave Brandon in the courts filling.

“Together with our investors, our objective is to work with our debtholders and other creditors to restructure the $5 billion of long term debt on our balance sheet.”

The company doesn’t plan to close stores and its operation in location around the world will continue normal operations. Toys ‘R’ Us also plans to spend $64.8 million before 2022 to make it more enjoyable to shop in its stores.

“Toys ‘R’ Us stores will be interactive spaces with rooms to use for parties, live product demonstrations put on by trained employees, and the freedom for employees to remove products from boxes to let kids play with the latest toys,” explained Brandon.

The plan also includes the creation of augmented-reality video games that customers can play on their smartphones while shopping at the store.

Toys R Us bankruptcy ecommerce
The iconic Indoor Ferris Wheel in Toys ‘R’ Us’s Time Square store that was closed in 2015 because of its high rental cost.

The suppliers’ support for the reorganization plan for Toys ‘R’ Us is also key to dragging them out of bankruptcy.

“Vendors are why they are in, they will be a big part of why they get out,” said Bloomberg Intelligence analyst, Noel Hebert.

Some of the key vendors such as Hasbro and Matte have rallied support and stated they were standing by the company.

Earlier this year, the company also expressed its commitment to take action towards the lack of its online experience with a $100 million investment to revamp its website.

“Some organizations recognize faster than others there are shifts in the ways customers want to be communicated with and the way customers want to purchase products,” said Toys ‘R’ Us CEO David Brandon. “It probably took us awhile.”

Toys R Us bankruptcy ecommerce
The company’s current ecommerce website: www.toysrus.com

CEO Dave Brandon has said that the company will not engage in a “race to the bottom” of a discount war that is usually employed by online retailers in order to gain new customers.

Despite accusations of being slow to adapt to the online shift, Toys ‘R’ Us was, in fact, one of the first companies to sign a deal with Amazon in 2000 to sell toys exclusively through the online retailer.

The exclusive agreement marked the first “click-and-mortar” collaboration between traditional and online retailers but Amazon broke the deal and began allowing other toy sellers in its platform because Toys ‘R’ Us stock couldn’t keep up with the high demand.

Toys ‘R’ Us sued in 2004, and Amazon ended up having to pay $51 million out of the $93 million that the toy retailer asked for to settle the lawsuit five years later.

THE FUTURE

Despite the woes of the company in the US, its Asian operations remained unaffected.

In April this year, the company unified its Japanese business with the operations in Greater China and Southeast Asia — bringing together 223 subsidiaries stores across Asia and 34 licensed retail locations in Macau and the Philippines.

“Toys ‘R’ Us (Asia) is open for business and continuing to serve our customers as we always do. We are financially robust and self-funding retail operation, which continues to significantly grow and invest in this region,” said Toys ‘R’ Us Asia president, Andre Javes.

The company even plans to open another 22 store in China the coming weeks.

The journey that Toys ‘R’ Us facing will not be easy but the CEO remains optimistic.

“As the holiday season ramps up, our physical and web store are ones for business, and our team members around the world look forward to continuing to put huge smiles on children’s faces,” said Brandon.

Toys R Us bankruptcy ecommerce

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