The recent bankruptcy filing by Toys “R” Us, which announced plans to close more than 1,600 stores in 38 countries, including 735 stores in the U.S., sent shock waves in many directions.
Toys “R” Us (and Babies “R” Us) employ some 31,000 workers. But a leading toy maker, with plans to rescue the retailer’s Canadian operations and up to half the U.S. locations, says more than 130,000 jobs will be affected.
When I read the news, I remembered the Toys “R” Us store that opened in a new center near my office in the late 90’s. It was a godsend. I could get in and out in 30 minutes with Christmas gifts for three kids. But my guess is that most people who saw the headline reflexively thought another former brick-and-mortar powerhouse had fallen to e-commerce.
But that’s not entirely the reason.
In 1948, 25-year-old Charles Lazarus began selling children’s furniture in Washington, D.C., in a store called Children’s Bargain Town. After a few years he opened a second store and noticed that unlike furniture, toys would break and kids would outgrow them.
Demand grew, and by the 1960’s Lazarus proved that the “supermarket store” format was the future. Toys “R” Us
emerged and grew into a worldwide presence. Known as the “Toy King,” Lazarus retired in 1994 and passed away in March at the age of 94.
There’s no question that e-commerce cost Toys “R” Us its market dominance. But it was an ill-timed acquisition and crushing load of debt that was the root of its demise. According to the New York Times and Money Magazine, here are the key events that led to the liquidation.
- In 2005, Bain Capital, KKR & Co. and REIT Vornado Realty Trust brought the toy chain for $6.6 billion in a leveraged buyout, contributing $1.3 billion in equity. The price worked out to about 7.5 times earnings.
- The deal left Toys “R” Us with a $5.3 billion debt and more than $400 million in annual interest payments, hobbling necessary investment in stores.
- Weakened and struggling under an enormous financial burden enabled Walmart, Target and others to eat into the toy merchant’s share. Last year, toymakers Mattel and Hasbro each sold about $1 billion worth of toys at Walmart – more than twice their total sales through Toys “R” Us, which never developed a successful online presence.
- Electronic video games, Apple products and e-commerce combined with poor 2017 Christmas sales put the final nail in the coffin. The 70-year-old company filed bankruptcy in September 2017 and liquidation in mid-March.
It’s understandable that parents of a certain age feel a tug of nostalgia for Toys “R” Us, but the toy chain’s fate was sealed in that period before the game-changing effects of internet merchandising were known.
The store closures will be felt in retail property markets everywhere and by toy manufacturers, too. For example, toy mogul Isaac Larian, who is chief of MGA Entertainment, says MGA’s Little Tikes plant in Hudson, Ohio, which employs 1,200 workers, sells 40% of its product to Toys “R” Us. Larian, creator of Bratz dolls, told the Los Angeles Times that Toys “R” Us’ accounts for about 20% of MGA’s total sales.
Larian has launched a crowd-source effort to acquire the merchant’s Canadian operations and about 200 of its top U.S. stores, pledging $200 million of the needed $1 billion. His acquisition plan would have to win approval from creditors and the U.S. Bankruptcy Court.
“People say that if there is no Toys “R” Us another retailer will pick up the slack. I don’t think so because they don’t have the room,” Larian said. A top retail analyst agreed, saying that Walmart and Target toy sections carry about 3,000 fewer items than Toys “R” Us.
“I sold my first product to Toys “R” Us in 1979,” said Larian. “The best memories of my three children when they were young was to go inside a Toys “R” Us.”
May 16, 2017