Toys ‘R’ Us has been a place of wonder for many a child, and a nightmare for parents, for over 40 years. With over 1800 owned or licensed stores across the world, that should be no surprise. What was a surprise was on the 18 September, Toys ‘R’ Us filed for Chapter 11 bankruptcy.
But what does that really mean? Well, it’s not as bad as you think. A Chapter 11 bankruptcy isn’t so much a ‘pack up, you’re closed for good’ but a ‘you’ve got a year to tell us how you plan on paying all your debtors back.’ So, no, it isn’t bankruptcy in the general sense of the word. The other important fact is that this is only in the US and Canada. For Australia, it’s business as usual.
What led to Toys ‘R’ Us filing for bankruptcy? It started in the 1990’s when big-box retailers such as Target and Walmart started undercutting Toys ‘R’ Us, selling below profitable prices to push Toys ‘R’ Us out of the market. What’s worse was what came in with the new millennium: e-commerce, specifically Amazon. Toys ‘R’ Us couldn’t divest enough money to invest in an online store with all the logistics and supply chain management that come with it. Though their strategy to become Amazon’s online toy shopfront was initially very successful, however, due to Amazon selling toys from Walmart and Target alongside their supposedly exclusive agreement, they sued to get out of the deal, leaving them out of the e-commerce market as well as the brick-and-mortar retailer market. In the hopes of increased profitability, they agreed to be taken private, by signing a deal with a consortium of private equity firms: KKR, Bain Capital and Vornado. The only issue was that the firms used a lot of debt to purchase the company. Now saddled with debt, and lacking the sales to meet their debt obligations, Toys ‘R’ Us started to drown in debt.
What’s the step forward for Toys ‘R’ Us in the digital age of shopping? For a lot of brick-and-mortar stores competing against online competitors, the answer seems to lie in leveraging their physical presence to attract customers. Think of Ikea. Going to Ikea is more than a chance to buy furniture and a collection of utensils you’ll never use, it’s an experience. From the labyrinthian layout to the Swedish meatballs with lingonberry jam, it’s memorable. Toys ‘R’ Us could do the same; from simple additions like play areas to live celebrity appearances, a little could go a long way to enhance the toy-shopping experience. Another solution would be to cater to a different demographic: the Lego collectors, the hobby RC enthusiasts, the Warhammer model aficionados, the Magic: The Gathering lovers. With a lot more disposable income, and a lot of commitment to their passions, they could be the new cash cow of tomorrow. At the end of the day, maybe it’s better to commit earlier to an online platform sooner than later, given the impact of e-commerce on the retail industry already. As a company, it’s a lot harder to look at long-term goals if you’re struggling to meet your current obligations but if there aren’t any plans to make the experience itself more enjoyable, then perhaps cutting costs and deep-discounting through an online storefront is the way forward.
Despite the dire outlook, things could be looking up for the former toy supergiant. Often a Chapter 11 bankruptcy is a moment of clarity, allowing the executives to think about what defines their company and restructure, coming out leaner, but healthier in the long run. Their $400 million debt is due next year, and the bankruptcy filing allows to perform as normal during the all too profitable Christmas season. If they manage to weather this storm, then perhaps one day, it too can be a place of wonder for our children, and perhaps a little less banal for us.
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