Misfit Toy Management

Cash or Competition

What Killed Toys"R"Us: Competition or Cash?

Attempting to keep up with the changing pace of the toy business at the turn of the century, category-killer-turned-killee Toys“R”Us shot for a strategic partnership in an area where it didn’t show core competencies, the burgeoning online retail space. The company signed a ten-year contract as a major online retailer’s sole toy supplier, and analysts hailed the move as the perfect play. The partner? Up-and-coming e-tailer Amazon.com, the same company that would join Walmart on the hunt for brand mascot Geoffrey the Giraffe years later. The clicks-and-mortar partnership ended in 2006 after a two-year court battle, and Toys“R”Us limped along until announcing the liquidation of its 735 U.S. stores on March 15th, 2018. 

 

What was it about Toys“R”Us that made it falter at every step? Did it get beat at its own game by competitors offering cheaper prices and better experiences — the latest victim of the retailpocalypse? Or were the company’s cash flow problems to blame? The toy titan’s last 20 years give a case for both arguments.

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Competition

In the 60s and 70s, Toys“R”Us’s low prices crushed mom-and-pop shops, but in 1995, Walmart’s 2,133 U.S. stores — more than three times Toys“R”Us’s 618 — were rolling back toy prices and rolling over Toys“R”Us. Sadly, Toys“R”Us didn’t want to play ball: In 1998, the Federal Trade Commission ordered Toys“R”Us to stop engaging in anti-competitive practices, such as threatening to drop toy manufacturers’ products if they sold to competitors. By the end of that year, Walmart had taken the crown as the nation’s top toy retailer. The hottest toys were available everywhere, but Toys“R”Us had the coldest prices; it posted a net loss of $132 million in January 1999. 

At the same time that wholesaling giants were etch-a-sketching away at Toys“R”Us’s market share, a shift toward e-commerce became the second competitive transformation the toy chain failed to make. As newcomer eToys.com was nearly tripling Toysrus.com’s sales in 1999, Toys“R”Us brought in help from Silicon Valley to revamp its web presence, but it disagreed with the partnering company’s plan to offer toys on Toysrus.com for less than those in stores. That deal fell apart quickly, and the Amazon deal formed about a year later, putting Toys“R”Us even further behind in e-commerce. The former toy champ was getting backed into a corner by online and big-box competitors, and it needed help. What was it about Toys“R”Us that made it falter at every step? Did it get beat at its own game by competitors offering cheaper prices and better experiences — the latest victim of the retailpocalypse? Or were the company’s cash flow problems to blame? The toy titan’s last 20 years give a case for both arguments.

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Cash

When a cohort led by Bain Capital took over the chain that “Toy King” Charles P. Lazarus started with only $5,000, it did so with the “help” of a $6.3 billion loan. Just to make the yearly loan payments, the new owners would have to find a way to double Toys“R”Us’s annual net profits. And like the former managers of Toys“R”Us, the Bain Capital cohort underestimated the retail price wars, the growth of e-commerce, and the ensuing drop in retail real estate values. As it turned out, Bain Capital and company never brought Lazarus’s company back to life. 

With Toys“R”Us’s meager profits paying the massive debt interest, the company couldn’t afford changes to evolve with the ever-changing retail space. Fierce reinventions and reinvestments kept many category killers alive during the market’s shift, but with cash problems keeping Toys“R”Us stagnant, customers increasingly turned toward Amazon and Walmart as their preferred toy stores. In Toys“R”Us’s 2017 bankruptcy filing, 12 years after the leveraged buyout, it claimed it was still spending $400 million per year to pay off the buyout deal’s debt. 

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Conclusion

When Toys“R”Us stumbled at the crossing of bricks and clicks with the Amazon train headed its way, would-be heroes didn’t swoop in to save it — they tied it to the tracks. So is the train (the competition) or the hero-turned-bandit (cash problems from the buyout deal) really to blame? In truth, it was both: while Amazon and Walmart did indeed steamroll the original category killer, Toys“R”Us might have escaped them had it not been chained by the buyout deal’s debt. If there’s any bright news in the Toys“R”Us story, it’s that the name will probably be purchased and the chain reborn as a new entity . . . and maybe the third owners of this kid will actually want it to grow up. 

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