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How does the biggest toy store in the world
end up in bankruptcy?
It’s a question worth answering.
In its 70-year history, Toys R’ Us rose
from humble beginnings to become the first
category killer, a term we’ll explain later.
But, when we hear that Toys R’ Us went bankrupt,
our first thought is: Amazon killed it.
Well, that’s not entirely true.
Amazon was the last dagger in an already battered
brand.
And most of its wounds didn’t come from
the outside.
is born
Charles Lazarus was a pretty smart guy.
At just 25, he started a company
that made baby furniture.
Why babies?
Because World War II had just ended and, according
to Lazarus, soldiers were going to go home,
get married, have children and live the American
dream.
So, he borrowed $2000 and took all his savings
(another $2000) to create Children’s Bargain
Town.
The business was moderately successful but,
within less than a decade, he realized that
the money wasn’t there but somewhere real
close.
Toys.
You see, toys either break or go out of fashion.
So, parents frequently visited toy stores,
especially in times of bonanza like the 50s.
Lazarus noticed this and in 1957, he opened
a store dedicated exclusively to toys and
aptly called it Toys R’ Us.
But his idea was to be different.
First, the name: it was modern but, as years
would prove, timeless.
The inverted R was intended to represent a
child’s writing.
The mascot, Geoffrey the Giraffe, became a
mainstay in ads and billboards.
The marketing was genius, eventually including
jingles and ads every Saturday morning.
But the biggest gamechanger was the store
itself.
It resembled more a supermarket than a toy
store, with its products stacked high and
with plenty of options.
This was a radical idea.
Here’s what toy expert Richard Gottlieb
had to say:
By the way, how do you become a toy expert?
An influx of cheaper products coming from
Asia, specifically Japan, as it rebuilt its
economy, helped the brand.
Japanese toys were cheap and could easily
be bought in bulk.
This mean that the stores were always crammed
with new, fascinating toys.
And, who doesn’t love toys?
While the brand expanded moderately during
the 60’s, it was the 70’s and 80’s that
saw a boom in its growth, up to a point in
which Toys R’ Us was considered the biggest
toy company in the world.
Lazarus focused aggressively on becoming standardized, efficient, and agile to fulfill the increasing
demand.
And he was confident in his brand.
Lazarus told the Washington Post in 1981.
Lazarus also embraced technology to improve
the company’s processes.
With a complex computer system, Toys R’
Us could track each product sold and identify
which were hot-selling items, way before other
competitors did.
And this was the 80’s: computers weren’t
cheap, nor small, nor easy to use.
But Lazarus was willing to invest in order
have a stranglehold on the market.
He also understood demand very well.
Toys are seasonal and their best season is
usually one quarter, near Christmas.
So, he didn’t just keep toys in store.
He also kept baby products, diapers and formula
to sell year-round.
Around the country, smaller chains were unable
to compete and quickly disappeared as Toys
R’ Us opened more than 1200 stores around
the U.S.
Not only did they change the toy market in
the U.S., but they created a category in its
own.
Toys R’ Us was the first category killer.
By 1990, it turned in $12BN.
And in 2001, they opened an iconic store in
Times Square, which usually means you made it.
The store was CRAZY: it even had a Ferris
wheel inside.
But the 90’s also brought in murky waters.
And before we explain that, let’s talk about
what a category killer is and why it’s important
to our story.
Category Killers are retailers that offer
massive amounts of products and variety.
They usually attack the customer with low
prices, product selection, ease of shopping
and aggressive marketing.
Plus, these companies are usually pretty knowledgeable
in the market, which makes them a double threat,
not only due to size, but also due to versatility.
Toys R’ Us was the DEFINITION of a category
killer.
And category killers thrive until another,
bigger, more aggressive killer enters the
ring.
Some include Barnes and Noble, it killed independent
bookstores.
Best Buy devoured small electronic stores
and Staples killed office suppliers.
And then, there’s WALMART.
Yes, Toys R’ Us sold cheaper toys.
But Walmart sold cheaper diapers, formula,
baby clothes, baby food, electronics and,
of course, toys.
Walmart was a step above Toys R Us in the
retail food chain.
And, sometimes, one above is all you need.
Walmart grew rapidly in the 90s.
So fast that, by 1998, it took sole first
place as the biggest toy retailer in the U.S.,
and this hadn’t happened in a decade.
But toys were only the fishing hook to reel
customers in, so they could buy OTHER stuff.
Come in for Monopoly and leave with two spare
tires, a blender and the biggest sack of rice
you can buy.
Something like that.
Walmart’s success centered around one thing.
Cliff Annicelli wrote:
Also, Toys R’ Us wasn’t only battling
Walmart but also the threat of e-commerce.
And it’s not like they didn’t try.
In fact, they created Toysrus.com in 1998,
but failed MISERABLY.
In December 1999, so many people ordered products,
the company failed to deliver products before
the 24th.
Which is the ONLY thing you’re supposed
to do.
They didn’t abandon the idea of digital,
though.
After the Christmas fiasco, and thanks to
$60 million from investors, they partnered
up with Amazon.
The terms were almost PERFECT: ten-year exclusivity
with Amazon, to distribute their toys.
Who wouldn’t love that?
And, at first, it seemed the deal worked.
Toys R’ Us was the biggest toy seller on
Amazon within the first two years.
But Amazon was unsatisfied with the supply
and wanted more.
So, they began selling other brands.
Which pissed Toys R’ Us and lawsuits ensued.
Toy’s R Us won.
But only $56 million.
Which isn’t much, especially with the sacrifice
that came along with it.
You see, instead of working on their own digital
platform, Toys R’ Us had relied heavily
on Amazon.
So, when the relationship ended, the company
was left with no digital identity nor platform.
This is a pivotal moment in the company’s
history.
Toys R’ Us was now desperate to jumpstart
itself and remain competitive.
They slashed prices, bought other toy makers
like FAO Schwartz and KB Toys, and they winnowed
their stores by removing all unnecessary,
loss-generating products.
Toys ceased to be the priority: money was.
But all these decisions came at a high cost.
The acquisitions were very expensive.
The cost-cutting focus in their stores backfired
as the locations became more and more unappealing,
so price slashing didn’t really work, because
customers didn’t visit the locations.
On top of that, their digital presence was
very deficient.
And most of the company’s income went directly
to paying off their debt which was estimated
at $5 BN.
So, companies like Walmart and Amazon did
do some damage.
But, as you can see, not all of it.
Toys R’ Us had turned public in 1978 to
great success but, by 2005, it took a big
hit.
Its debt was graded as a JUNK BOND and offered
at very low cost, high reward but VERY high
risk.
In March of that year, a private group bought
out Toys R’ Us, led by KKR Group, Bain Capital
and Vornado Realty.
This group bought the company through a LEVERAGED
BUYOUT which means that the acquisition is
done through mostly borrowed money.
They dished out only $1.2 BN, while the other
$5.4 BN was borrowed.
And to secure those $5.4 BN, Toys R’ Us
assets were used as collateral.
Remember that junk bonds are very
high-risk.
It’s not Toys R’ Us wasn’t making money.
It was.
But it had to pay up to $400 million a month
in interest alone, in what critics called
an “ATM for Wall Street.”
So, with dwindling sales, competition
and a smaller market share, those $400 million
eventually ate away at the company and in
September 2017, Toys R’ Us declared bankruptcy.
But this surprised many.
Some investors said Chapter 11 wasn’t necessary
and the bankruptcy papers cited that efforts
were made to find funding.
Also, there was no restructuring plan.
It felt shady, to say the least.
And it brings forth the ethical discussion
around leverage buyouts.
They seem justified.
It’s an opportunity for the company to become
leaner, more financially solid...
Most end up loading with debt with assets.
Investors usually protect themselves.
After all, the wrapper protects the chocolate
bar.
But if you want to eat the chocolate bar,
you discard the wrapper, right?
In this case, the wrappers were Toys R stores,
employees, benefits, etc.
The investors did just that.
KKR, Vornado and Bain earned $470 million
off Toys R’ Us, before declaring it bankrupt.
Meanwhile, 30 000 jobs were lost, their severance
plans nullified, unpaid vacations were eliminated
and the stores all around the country were
cannibalized by other brands.
Former employees gathered around the country
and protested.
So much so, that eventually, Bain and KKR
both set up funds totaling $20 million to
pay former Toys R’ Us employees the money
they owed.
As protests ensued, it was clear that the
toys were no longer created to bring a smile
to a kid’s face but rather dollars to the
pockets of Wall Street fat cats.
And thus, died a company that had grown too
big.
Perhaps too big, too hungry, so it started
eating itself from the inside.
But, perhaps, it’s too big to die.
After bankruptcy, the company resurged as
Tru Kids and opened a few stores in the U.S.,
where it hopes to revive 70 years of history.
Hopefully, not all of its history.
What did we learn about this story? Well, that it sucks to be a kid today.
You have to go through the tire section, the reusable diapers aisle
the non-fat milk fridge, the low energy consuming light bulbs, to the quinoa and kale organic chips pantries
and then, MAYBE, just MAYBE you can peek on magic Walmart's aisle 5
to choose that small action figure you’ve waited all morning to buy.
