Toys R Us: What went wrong? (Part I)

Last week, Toys R Us announced it was set to close all its stores across the US and the UK, threatening tens of thousands of jobs. The Retail Gazette takes a closer look at one of this decade's biggest retail casualties.

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Toys R Us

1999: After entering the online toy market in 1998, Toys R Us endured a disastrous 1999 Christmas period, failing to deliver many gifts in time for December 25.

Though internet retailing was still in its infancy, this was an early warning sign for what was to be the retailer’s achilles heel.

However, at the time, its out of town big-box store format was still driving its success and its biggest competitors remained rival megastores like Walmart.

 

2000: In an effort to capitalise on the emerging online market, Toys R Us signed a 10-year deal with Amazon to be its sole supplier of toys.

Had the deal gone to plan, the story of Toys R Us could have gone very differently. This could well have been a prime opportunity for the retailer to get a grasp on online retail from an early stage and utilise it effectively as it continued to grow.

Instead, Amazon broke the terms of the contract and allowed other companies to sell toys on its marketplace. It said that Toys R Us didn’t supply a broad enough range of toys, including many of the leading ranges.

This marks the instance that Amazon became a threat to Toys R Us, offering a wider and better range of products and often at much lower prices.

 

March 2005: Toys R Us was bought by a consortium of investors including Bain Capital Partners, Kohlberg Kravis Roberts and Vornado Realty Trust for $6.6 billion.

By July it had officially become a privately-owned entity. The three buyers borrowed over $5 billion to finance the transaction, a sum which would weigh on the shoulders of the retailer until its demise.

The group’s initial goal was to turn around the business, which had been losing out to growing competition from rival big box retailers and the emerging online market. They aimed to grow the business’ international arm and expand into new markets.

This expansion was funded by numerous efforts to refinance its huge debt pile. When the company later sought a buyer after filing for bankruptcy, this debt would prove to be a major deterrent ultimately resulting in its collapse.

2006: Toys R Us sues Amazon for reneging on its initial agreement, successfully winning $51 million in damages by 2009. Despite the significant payout, it initially claimed almost double this amount.

 

October 2016: After a decade of gradually declining sales and continuing failure to invest in its online offering, Toys R Us’ UK arm expressed concern over a potential drop in consumer spending following the Brexit vote.

Though it was far from the only retailer to raise these fears, which ultimately turned out to be justified, it shows a perspective of caution as its margins grew thinner and thinner.

“The full effects of the vote will not be known for some time,” the company said.

“The company will adapt any plans necessary to mitigate any negative effects of the vote to leave the EU, but it is too early… for any specific plans to be developed or acted upon.”

 

August 2017: Toys R Us UK releases its full year results for 2016, reporting eye-watering losses of £673 million, down from a profit of £2.96 million a year prior. Despite this huge drop off in profits, the company’s statement made no mention of any plans to change its operations or tackle the root of the losses.

Instead, it sought to assure investors that the company had “access to considerable financial resources from across the Toys R Us group”, its US parent company.

It added that these considerable resources would allow it to “continue in operational existence for the foreseeable future”.

 

September 15, 2017: In the first signs that things were going seriously wrong at Toys R Us, suppliers at it US arm began to reduce their shipments to the retailer over fears of it falling into bankruptcy.

This came ahead of the crucial Christmas trading period where Toys R Us makes nearly half of its yearly revenue.

Its hefty debt pile, which was costing it hundreds of millions a year, was also nearing maturity, ramping up pressure to reassure suppliers and investors it could survive.

September 19, 2017: Toys R Us filed for a Chapter 11 bankruptcy filing in the US and Canada, in a move intended to allow it to keep stores open over the Christmas period while it worked to restructure its debts.

“We are confident that we are taking the right steps to ensure that the iconic Toys R Us and Babies R Us brands live on for many generations,” chief executive Dave Brandon said.

“As the holiday season approaches, our global team members are ready to serve the millions of kids and families who will be shopping with us.”

Restructuring attorney Jay Sakalo said: “Management concluded if they don’t file now, it will have a devastating impact.”

Though at this point its UK stores were to supposed to have remained unaffected by the ruling, it acted as another nail in the retailer’s coffin both in the UK and the US.

Having hit the news, the confusion around the bankruptcy meant many avoided the store during their Christmas shopping, confused as to whether it was open and whether they’d be able to return the products.

 

September 20, 2017: Its main rival in the UK, Smyths, released its financial statement for year, revealing that its sales had shot up 19 per cent while its profits had almost doubled to £11.2 million.

This essentially discredited any conjecture that Toys R Us’ financial woes were due to market conditions, instead pointing to serious fundamental failings in its own operations.

Global Data’s Fiona Paton said: “As more toy sales move online Toys R Us has struggled, but other toy specialist chains have managed to steal market share, with The Entertainer and Smyths Toys both rolling out stores and delivering growth.

“Additionally, the market has remained steady in toys & games growing 16.8 per cent over the last five years, meaning Toys R Us’ position is not one of external market conditions but rather its own strategy.”

September 22, 2017: Toys R Us announces “Project Sunrise”, its turnaround strategy which proposed a return to public ownership, alongside an ambitious pay rise for its staff members.

Though a public offering could have helped quash the retailers debt problems, in hindsight its announcement of a pay rise for all of its 64,000 staff seems a near desperate attempt to reassure the public and investors that its finances were not as bad as they seemed.

We want toys out of the box and into the hands of kids,” chief executive David Brandon said.

“We know we need to do it. We haven‘t had the capital to do it. It will also involve shrinking some of its other stores and closing those which aren‘t turning a profit, while opening smaller stores in more urban areas.”

 

October 2017:  Fears that the company’s troubles in the US could hinder operations in the UK are confirmed as many suppliers halt deliveries to Toys R Us in the UK.

“The overwhelming majority of our vendors are back online and shipping and we continue to work through the small number of others to ensure that our customers can shop with confidence”, the retailer said.

Coming at the beginning of the Christmas shopping season, many of the most popular lines came under threat of unavailability.

 

Part two will follow on March 22 2018.

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