Toys ‘R’ Us Is a How-Not-To Guide for the Retail Business

Toys “R” Us Inc. is officially packing up its playroom.

The retailer said Thursday it intends to liquidate its U.S. business and shutter all of its 735 domestic toy stores and Babies “R” Us stores. It is exploring a reorganization and sale of its Canada division and other international operations. 

The demise of this big-box empire is not exactly surprising, given the chain had filed for bankruptcy in September and announced plans in January to close up to 182 stores. But it nevertheless represents a remarkable fall for a retailer that still commands a significant share of the toy market and looked to be readying for an IPO only a few years ago.

Still in the Pantheon

While Amazon and Walmart have surged ahead of it, Toys “R” Us still has significant market share in the toy business

Source: IBISWorld

Toys 'R' Us Is a How-Not-To Guide for the Retail Business

A full diagnosis of the company would likely identify its massive debt load as its primary illness, as my Gadfly colleague Tara Lachapelle has noted.

Tight Budget

Interest payments on debt tied to the LBO made it difficult for Toys “R” Us to invest in its operations or technology to lure online shoppers

Source: Bloomberg

Toys 'R' Us Is a How-Not-To Guide for the Retail Business

The retailer was saddled with hefty debt in a 2005 leveraged buyout in which Bain Capital, KKR & Co. and Vornado Realty Trust took the retailer private. In recent months, the company’s financial burden went from seriously challenging to unsustainable.

But the toy and baby-gear behemoth was afflicted by many other retail ailments. With rivals looking to get a piece of the sales its disappearance leaves up for grabs, it’s worth pointing out the other missteps that, if avoided, could perhaps have steered Toys “R” Us to an alternate ending.

A history of bungling e-commerce.  August 9, 2000, may have been a fateful day for Toys “R” Us. That was the day the company entered a 10-year agreement with Inc. to create a co-branded online store. Toys “R” Us was to manage the merchandising and buy the inventory; Amazon was to handle the order fulfillment and customer service.

The partnership collapsed years early, in dueling lawsuits. But it probably hurt Toys “R” Us to lean on Amazon’s strategy and expertise as long as it did, because it meant there was less urgency to build out its own. That partnership effectively put Toys “R” Us on the path to a long and losing game of catch-up.  

Slow Growing

Toys “R” Us’s online sales are not growing at a particularly fast pace

Source: eMarketer

Toys 'R' Us Is a How-Not-To Guide for the Retail Business

— The store environment didn’t change enough. When Charles Lazarus created the Toys “R” Us brand in 1957, his idea was to build a “toy supermarket,” a self-service format with a vast assortment of products where you could push a cart through the aisles and grab whatever you wanted off the shelves. It was a novel idea then, and it helped Toys “R” Us become a juggernaut. But here’s the problem: More than 60 years later, Toys “R” Us stores don’t feel much different.

Toys “R” Us executives clearly knew that had to change. In recent years, they tried to ramp up in-store events, making their outposts more experiential and giving shoppers a reason to visit more frequently. But the changes weren’t bold enough to stand out in the extremes of today’s shopping environment, when Amazon offers the convenience of speedy doorstep delivery and stores such as American Girl and the Lego Store offer hours of in-store entertainment.  

It didn’t make the most of its baby business. As I’ve noted before, Babies “R” Us could have been a lifeline for the wider Toys “R” Us company. It’s a much less seasonal business than toys, providing helpful stability.