How Did Toys R Us Fail? Lessons for Investors and Entrepreneurs

By the time Toys R Us filed for liquidation — putting approximately 30,000 employees out of work — it was no longer much of a surprise. Toys R Us had already filed for bankruptcy six months prior, and though the toy store giant had optimistic plans about turning itself around, many were skeptical.

The closure of Toys R Us not only left many wondering how a business so large could fail so substantially, but also what lessons could be learned from its demise. Let’s take a look at these lessons below.

A Company Embroiled in Debt

There are very few names as recognizable as “Toys R Us.” From the jolly giraffe mascot to the brightly colored logo, many have fond memories of this toy store chain. Moreover, there are very few areas without a Toys R Us; it’s a staple throughout most major cities.

It wasn’t a lack of revenue that was a problem for Toys R Us: it was debt. And, in fact, Toys R Us is an excellent example of why a company cannot outrun its own debt.

In 2005, Toys R Us was subject to a $6.6 billion leveraged buyout by Bain Capital and KKR & Co. This debt wasn’t just harmful to the liquidity of the company. It made it difficult for the company to invest in innovation — and it made it easy for the company to be disrupted. By the time Toys R Us declared bankruptcy in 2017, it had approximately $5 billion worth of liabilities. Toys R Us was never able to completely recover from the buyout.

Bankruptcy alone is not necessarily a red flag for a business. A bankruptcy and restructuring can successfully pull a company out of debt; unfortunately, the timing was way off. Toys R Us declared bankruptcy in September, just before the company’s notoriously busy holiday season. During the restructuring, everyone from the top down was distracted by the bankruptcy case. Employees wondered whether they would have jobs the following year. Customers were also hesitant; why purchase a gift card from a company that might become insolvent?

Competition Only Got Stronger

The bankruptcy of Toys R Us was highly publicized, and for good reason. Unfortunately, it also led to a “blood in the water” effect. Knowing that Toys R Us was about to fold, the competition became rabid. Companies that had extremely strong Internet presences, such as Amazon, were able to out compete Toys R Us regarding selection, price, and convenience. They didn’t have the overhead expenses that Toys R Us had to maintain a strong labor base and brick-and-mortar stores.

As mentioned, Toys R Us didn’t have the liquidity necessary to continue to improve its stores either, or to explore new methods of customer service and fulfillment. Amazon and others were able to quickly lap its traditional, aging store processes, as they struggled with their debt and their public perception.

While Amazon, Walmart, Target, and other stores expanded their offerings, making it a point to offer faster delivery and better online customer service, Toys R Us was saddled with older technology and fulfillment processes. All of these things together created a holiday season able to topple the giant.

Vendor Confidence Was Lost

As if all of the above wasn’t enough, Toys R Us also lost the confidence of many of its vendors. Vendors did not want to continue to provide product without cash in advance or cash on delivery, ultimately making it harder for Toys R Us to procure the stock that it desperately needed to survive. All the while, the major giants such as Walmart and Amazon were able to continue providing better products faster.

Toys R Us serves as an example of how a situation can quickly spiral once a business is already in trouble. A troubled business will have fewer customers, reduced vendor faith, and increased competition to contend with; if there isn’t a firm plan in place, a business may fail just as quickly as public perception changes.

Regardless, this may not have been the end of Toys R Us if it hadn’t been for the crushing debt taken on by the business, starting with the costly leveraged buyout that plagued it since 2005. Many analysts suspected the company would begin to fail — and some where even surprised that it lasted as long as it did.

Regards,

Ethan Warrick
Editor
Wealth Authority


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