Causes of Bankruptcy at Toys R Us

Abstract

With declining sales and the rise of online retail, Toys R Us is one of many companies that have filed for bankruptcy. Toys R Us has also pulled its IPO offering. In the world of Amazon and Walmart, Toys R Us was unable to keep up. This paper will provide a comprehensive look at the underlying issues due to which Toys R Us was unable to thrive. With so many options in the market, Toys R Us needs to create a draw for its customers to remain competitive. The company’s strengths, weaknesses, opportunities, and threats will be analyzed to determine the best course of action supported by research. With research, financial analysis, and dynamic operations, it was concluded that Toys R Us needs to become relevant again and create a business out of what they offer similar to what American Girl has done.

Executive Summary

Toys R Us was founded by Charles P. Lazarus in 1948 and initially began as a furniture store, which then shifted its focus entirely to toys. The company has 866 stores in the United States and more than 750 international locations. The company’s strength lies in its volume of stores that it operates, many of them in emerging economies that could prove to be an investment. It recently filed for bankruptcy in the United States and Canada. At first glance, the company is suffering from low sales, not enough foot traffic, and toys that do not appeal to children of the digital age. However, at looking closer, the underlying issue seems to be Toys R Us’s reluctance to re-engineer its business.

Toys R Us was losing sales due to big retailers like Amazon, Target, and Walmart. Amazon offers the convenience of online shopping with very fast shipping that eliminates the wait time associated with shopping online. Target and Walmart offer one stop shopping that allows an individual to get all of their shopping done without having to make multiple stops. Toys R Us only offers one genre of products, which are toys.

When compared to a similar rival within the same industry such as American Girl Doll, it is clear that it is possible to be successful while offering an exclusive product. The appeal of American Girl Doll is that it creates a unique, interactive experience for its customers. One of Toys R Us’ weaknesses is that is does not have a competitive edge. Toys R Us could do the same by providing unique, interactive, experience geared displays for children in their stores similar to that of Build-A-Bear, which is a competitor in the same market. They can also manage a turn around by focusing on lower prices, better customer experience, revamping stores to include the interactive portion, hire engaging employees who cater to children, offer other services such as toy repairs or setup assistance.

Toys R Us is a retail company that is exclusively a toy retailer that has 866 stores in the United States and more than 750 international locations. It had consistent success since it was founded in 1948 because it provided the most popular, up to date, and largest variety of toys with the most locations as well (Thomison, 2016). Toys R Us was known as a category killer, which meant that the company sold a product from only one category. With this strategy, the company was able to build a large volume that other retail chains could not match due to Toys R Us’ inventory and price. Then, Walmart launched a price war that was matched by Target and sold more toys than Toys R Us by 2005 (Hartung, 2017). KKR, Bain, and Vornado acquired Toys R Us in 2005 for $6.6 billion. The retailer has $4.9 billion in debt of which $400 million is due in 2018 and $1.7 billion due in 2019.

Toys R Us has filed for bankruptcy in the United States and Canada, which will help relieve it from this debt (Hirsch, 2017). This can be attributed to the rise of e-commerce, where people buy online on sites such as Amazon and eBay. Toys R Us did launch its own website in 1998 and it became one of the fastest growing sites in the toy category. As Toys R Us tried to improve its business strategy, so did its competitors. Walmart and Target also sell toys but also offer the convenience of one stop shopping for its customers whereas Toys R Us is unable to do so. In the age of technology, many children prefer I-Pads and I-Phones to traditional toys further dwindling sales of Toys R Us. In 2011, Toys R Us’ domestic U.S. sales were worse than that of 2008, which was one of the worst holiday seasons for retailers. The president of the company resigned after only 10 months despite signing a one-year contract. In 2012, the department heads for administration and merchandising also resigned from their positions. The executives at Toys R Us have been experiencing high turnover within the past seven years (Clifford & Lattman, 2012). The company is grappling with how to grow the business with all of the competition.

Sales are dwindling and competition is thriving but what caused these issues to arise for a company that seemed to doing very well? According to Hartung (2017), KKR and Bain Capital acquired Toys R Us in 2005 for $6.6 billion plus $1 billion of debt at a total valuation of $7.6 billion. KKR and Bain Capital put in $1.3 billion and used the company’s assets to raise the remaining amount bringing the debt from $1 billion to $6.2 billion, which was 82.7% of total capital. The interest rate on this debt was around 7.25% that created payments of $450 million per year on interest alone. The plan was to cut company costs, improve cash flow, and pay off the debt. The rise of e-commerce, at the time, was not anticipated. Amazon was only an $8.5 billion company in 2005 as opposed to the $100 billion dollar giant it is today. The executives set the company up for failure right from the acquisition.

Due to its debt, Toys R Us was unable to venture into the online market as aggressively as they should have to counter Amazon. The company also could not keep up with Walmart’s low prices. Walmart would take a loss by pricing toys and other popular items at steeply low prices to get customers into their stores so they could spend on other big-ticket items. Customer service and shopping experience at Toys R Us were sub par at best and not inviting to customers. American Girl Doll, which is also an exclusive toy retailer, has seen tremendous, continuous success due to its interactive geared shopping experience for customers. American Girl Doll only sells doll, which one would assume could be its detriment as was with Toys R Us. The same factors that plague Toys R Us are the same factors that American Girl Doll must deal with. American Girl Doll is able to thrive and be profitable because of the unique experience they provide. Each toy comes with a historical background, a story, and accessories, which sell even at their high price point. Bhattarai (2017) states, that smaller neighborhood toy stores are thriving and increasing sales every year while Toys R Us, a retail giant is failing. What sets these smaller stores apart is the customer service of helpful employees, the carefully curated selection, gift-wrapping services, and lego building events. These stores are providing a unique shopping experience that Toys R Us is lacking. “Kids these days are restless – they’re looking for an interactive experience,” said Susan Lee, a partner at marketing firm Simon Kucher & Partners. “It isn’t enough to just have stacks of toys on a shelf” (Bhattarai, 2017). Customer service plays a large part in the success of these smaller stores as well. Bhattarai (2017) lists a variety of different experiences shoppers reiterated at a store called Child’s Play from employees going out of their way to open newly packaged games so children can decide if it is the right one, tracking down obscure toys that some children request, and even taking the time out to play with some of the kids in the store.

Toys R Us’ strengths lie in its numbers as the retail giant has so many locations within the U.S. and worldwide. The company also has a large inventory with a diverse range of toys that is difficult to come by in another store. Toys R Us has been around for almost 70 years and for many people creates a sense of nostalgia that can be used to its advantage. It has developed its website and utilize it to further appeal to its customer base. The company currently employs over 70,000 employees and still managed to pull in annual revenue of $13.646 billion (Satell, 2017).

The weaknesses of the organization include a lack of competitive advantage when compared to other retailers. The toys sold at Toys R Us stores are not unique and can be found and other retailers and sometimes for a better price. Toys R Us also depends on its holiday season sales to make the most profit and that is not enough anymore to help the company thrive. The organization also wants to pay its executives $16 million in bonuses that they argue are necessary for the executives to perform well. Normally, executive pay is fairly higher compared to the average worker due to the required experience, risk, educational background, work schedule, etc. (Martocchio, 2017). This is not necessary for a bankrupt organization to do especially since these are the same executives that have allowed the company to fail for so long instead of implementing new business strategies. This would be understandable if the organization were trying to bring aboard new executives that have a proven track record of bringing companies back to life after suffering such losses.

Opportunities for Toys R Us came in the form of its alliance with Amazon provided both companies the opportunity to excel. It allowed Amazon to partner with other retailers instead of trying to sell everything itself. Toys R Us was able to pick the hot items and have them features and was also responsible for keeping them in physical stock. This deal however did sour due to both companies filing lawsuits against each other. Toys R Us claimed Amazon was allowing other retailers to sell on their website while Amazon claimed this was due to Toys R Us not being able to keep items in stock. The lawsuit has been settled with Amazon agreeing to pay Toys R Us a settlement of $51 million (Martinez, 2009). Toys R Us can learn from this alliance and partner with other companies to further its selling power. Toys R Us also has many international locations that if situated in the right emerging markets can create the opportunity to enhance international revenue.

The threats that Toys R Us faces are retail giants like Amazon, Walmart, and Target. Even some of the smaller neighborhood toy stores are doing a better job in providing what customers are looking for. Walmart, Target, and Amazon may offer the same products as Toys R Us but many times offer it in a package exclusive to the retailer that entices customers. Layoffs from multiple store closings have made the company unreliable as well as the current filing of bankruptcy over the debt the company was left with. The company is now in a negative light creating a negative image of the brand as much of its financial woes have been highlighted by the media (Marketing Mixx, 2017).

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