Real Reasons Why Toys ‘R' Us Went Bankrupt
There is nothing more blissful than running into a room full of your favourite toys as kids. They colour a child’s imagination and transform their fantasies into tangible goods creating sensations of joy and pleasure. Toys ‘R’ Us, the American toy, apparel, video game, and baby products retail giant, had been doing the same since its inception in 1948. Starting as a children’s furniture store in New Jersey, it was expanded by its Founder Charles Lazarus in 1957 to include toys in its collection which changed the fortune of the company. Since then, it grew to open 800 stores in America and another 800 all over the world until it went bust in September 2017. The much-loved brand filed for Chapter 11 bankruptcy protection in US and Canada and has pulled down the shutters on more than thousand of its stores across US and UK. Though the Australian outlets seem unfazed by the circumstances, the picture appears grim for their global counterparts. This is learning for investors, who put their money in businesses for sale in Australia without conducting an evaluation of the venture.
The beloved brand was the go-to spot for families during holidays and a dream destination for children who would refuse to leave the store. The brand’s mascot Geoffrey the giraffe had become a household name until the retailer went belly up. Though the owners are putting the blame on Amazon’s rising popularity and changing consumer behaviour, there were several other reasons that led to the collapse. The lifecycle of the business has been a roller coaster ride. After becoming a supermarket for toys in 1957, the outlet was bought by Interstate Department Store in 1966. However, eight years later, they filed for bankruptcy and Mr. Lazarus returned as the owner. In 1978, the brand sold its shares for the first time on the Stock Exchange and started expanding exponentially during the 1980s. In the year 1994, Mr. Lazarus stepped down. Following its successful stint, the company opened its flagship store in New York’s Times Square in 2001. Four years later, it was acquired by private equity investors for a massive $6.6 billion and continued to grow. In fact, the retailer saw a huge surge in sales in 2012 when the figure touched a whopping $13.9 billion. The trouble began for the company due to its huge debt loan from the $6.6 billion acquisition by Bain Capital, Vornado Realty Trust and KKR & Co. in 2005. The three buyout experts put up $1.3 billion in equity and borrowed $5.3 billion to seal the deal. Though the move was intended to make the stores more profitable, it turned out that it restricted the company from investing in development of e-commerce and innovation to compete with big names in the market. That is why entrepreneurs acquiring businesses for sale must take the flow of capital into account while making the big move.
With the gigantic debt obligations, Toys ‘R’ Us was unable to slash prices while Walmart and Amazon continued selling toys at discounted rates. Negative earnings and negative equity added to the woes of the company. Despite the fact that the business sector grew by 5% in the last five years, the company failed to make any profits. In fact, the sales dipped by 15% during the same time. According to sources, the brand was fraught with a $400 million a year in debt service. The overwhelming debt costs and rising overhead from big superstores across the world didn’t allow the company to put up a fight with the online suppliers and concentrate on the changing economic scenario. The GlobalData Retail projected that 13.7% of all toy sales were made online in 2016, which was 6.5% higher from 5 years ago. Amazon ruled the roost with its online sales reaching $2.16 billion in the US in 2016 followed by Walmart which garnered $1.3 billion. While Toys ‘R’ Us had a measly $912 million to its credit in online sales in 2016.
The inability of the brand to compete with the robust infrastructure and logistics of the leading online stores was a big contributor to its steady decline. Consequently, parents switched to the cheaper alternatives in no time. Also, Toys ‘R’ Us failed to recognise the changing preferences of the kids. With the digital revolution, kids are now more inclined towards interactive gaming than playing board games or building blocks. Another factor that crippled the company was the fear of losing money amongst the vendors. As soon as the news of a financial problem broke out, the suppliers started demanding advance and upfront payments. This further burdened the company and led to its downfall. That is why any businesses for sale must be thoroughly appraised by the buyers for such loopholes.
In its bankruptcy filing in September 2017, the company stated that the brand would run out of cash in May 2018 in the US. Learning their lesson the hard way, the company planned to use the bankruptcy to resurface as a thriving retailer by closing down the unproductive stores and converting the rest into interactive zones. It planned to invest $227 million between 2018 and 2021 to create adjacent stores for the company’s brands - Toys ‘R’ Us and Babies ‘R’ Us. The plan included the creation of augmented reality video games to be played while shopping in the stores. However, all the hopes of a revival were dashed to the ground when in March 2018 it stated that it will be closing down all the stores in the US. In addition, it will be pulling down the curtain on 75 stores in the UK.
With growing concerns over the future, the Australian arm of Toys ‘R’ Us stated that the stores in the country will remain open and will continue to serve the customers. There are plans for finding new owners through the global restructuring firm Lazard for operations in Asia, Australia and Canada. The Australian stores are continuing the business as normal and have reduced the prices of over 300 products to gain more customers.
Endnote: The plight of this once-immensely-successful brand shows that businesses need to be more aware of the changing socio-economic conditions and buying behaviour of the consumers. The product offerings should be meaningful and capable of competing with others in the market to survive the rat-race. Thus if you are an entrepreneur or wish to acquire a business for sale you must make sensible decisions by understanding the pulse of the consumers.