If you were bringing up children in the late 80s and early 90s (I wasn’t btw) then you probably remember the way your children begged you to take them to Toys R Us?
This mammoth toy shop chain stocked them high and stocked them wide driven by the need for children to have new toys almost monthly.
After they filed for bankruptcy on September the 19th (this wasn’t actually caused by Amazon as you’d think). The world found out that this famous toy store was in big, big trouble!
It was caused by big-box chains like Walmart and Target inserting their own toy departments within their retail spaces. This not only pushed up prices, it also meant their other competitors had smaller margins.
Toys R Us was no longer unique in the marketplace and failed to change and adapt to market conditions.
Apparently, Toys R Us are prepared to close around 25% of its 106 UK stores and unfortunately, there will be a loss of hundreds of jobs. This is really quite sad.
Toys R Us has around 3000 workers in the UK and is looking to scale back it’s big box model since so many of their consumers are used to buying their toys online now.
Due to the high debts that this company holds, the closures are part of a deal that they have been worked out with their landlords.
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Just because you’re one of the biggest players in the market, doesn’t mean you don’t have to change and adapt as new players enter the market.
What would make Toys R Us unique would differentiate themselves from their department store rivals? I think there’s a true need to really get in touch with what your customers want and demand.
Always be following the trends
Everyone and his uncle knew that sales online were growing in every single category and everyone knew that you had to make online sales a priority. Unfortunately, Toys R Us did not get this particular memo.
With the likes of Walmart and Target going after the toy market real hard and offering not just only toys but everything else you could get for the home, this made it hard for Toys R Us to differentiate itself.
LBO stands for a leveraged buyout. This is where a bunch of financiers buy a company, sell off some of the assets which in turn increases their company cash flow. This then convinces the banks and bondholders to allow them to borrow more and increase their debt.
Once this was done the financiers would then just pull their cash out for themselves and leave the company with a ton of debt.
This isn’t a new thing concept. It has pretty much been happening in the corporate world over the last 30 years and is the reason why so many other companies have had to file for bankruptcy and then eventually go out of business.
Over the years Toys R Us started new brands like Babies R Us and to be fair this did quite well for a number of years until Walmart decided that they wanted to have a full-scale price war. Their intention was to really dominate the toy sales market mostly during the holidays.
As you know, there aren’t many companies that can go head to head Walmart and come out ahead. By 2005 the rot was really starting to set in and Toys R Us sales started to decline.
If you really want to put things into perspective, in 2005 Walmart was selling more toys then Toys R Us. In essence, stealing Toys R Us customers whilst they were loading up with their weekly shop (who could blame them, time is money).
Toys R Us had over 11 million dollars in revenues which sounds quite good until you realise that just 75% of the profits were coming from 24% of their stores and the trends continued to get worse.
With a succession of purchases from private equity groups that used a series of cash to buy stock and then raising capital off the back of the company’s assets, the total debt increased to remarkable 82.7% of total capital. You don’t need to be a rocket scientist to work out that this is definitely unsustainable.
When a company takes on so much debt they start making silly decisions due to the pressure of having to perform to pay off its loans.
One of the favourite decisions companies make when they’re under pressure is to cut costs so they can improve cash flow and so that they can pay the interest on their loans. This is based on the assumption that sales would increase or be maintained at the current rate.
This didn’t happen for Toys R Us.
As 2005 was coming to an end more retailers were starting to invest quite heavily into e-commerce. One such player in the market was Amazon.
To be fair, no one could have predicted just how fast e-commerce would grow and what effect it would have in this marketplace.
Most of the analysts were predicting that Amazon would eventually go out of business since they had high turnover but were not making any profits (boy, how wrong could they be).
As you can imagine, by this time, Toys R Us just did not have the resources to fight two heavyweights of the likes of Walmart and Amazon. They thought it was far easier just to sit on the sidelines and hope or pray for a miracle.
What they should have done was start closing stores as soon as they realised that e-commerce was the future and definitely the way to go. By closing stores, they would have been able to pay back a lot of the debt that they had accrued over the years. This, in turn, would have alleviated the pressure that they now face.
If the management were switched on, they would have completed an analysis of every single store that wasn’t performing well and closed it whilst investing in the stores that were doing well (hello!!).
Toys R Us should have invested quite heavily in e-commerce, improving client conversions and making their website mobile first. They arrived too late for the party.
With just over 400 million dollars of debt coming June next year Toys R Us just didn’t have the cash flow all the assets to repay bondholders and when this happens investors get very nervous.
This is why they find themselves under so much pressure now, for the actions they didn’t take when they should have done over 10 years ago.