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It was the biggest toy store in the world and it went bankrupt. So, why did Toys R' Us close? It's a question worth answering. In its 70-year history, Toys R' Us would not only rise from humble beginnings, it would also change how we consume toys altogether. So, when it went bankrupt, it was natural for us to say: Amazon killed it. This is partly true, but Amazon was the last dagger. In fact, most of the wounds were self inflicted.
George Lazarus was a pretty smart guy. Back in 1948, at just 25, he started a company that made baby furniture. Why babies? Because World War II had just ended and, according to Lazarus, soldiers were going to go home, get married, have children and live the American dream.
“I would sell cribs, carriages, strollers, highchairs—everything for the baby. My instincts told me the timing was right”
So, he borrowed $2000 and took all his savings (another $2000) to create Children’s Bargain Town. The business was moderately successful but, within less than a decade, he realized that the money wasn’t there but somewhere real close: toys. These either break or go out of fashion. So, parents frequently visited toy stores, especially in times of bonanza like the 50s.
Lazarus noticed this and in 1957, he opened a store dedicated exclusively to toys and aptly called it Toys R’ Us. From the start, his idea was to be different. First, the name: it was modern but, as years would prove, timeless as well. The inverted R was intended to represent a child’s writing. The mascot, Geoffrey the Giraffe, became a mainstay in ads and billboards. The marketing was genius, eventually including jingles and ads every Saturday morning.
The biggest game changer was the store itself. It resembled more a supermarket than a toy store, with its products stacked high and with plenty of options. This was a radical idea. Here’s what toy expert Richard Gottlieb had to say:
“Toys R’ Us astonished the era’s consumers, who had simply never seen stores that big and crammed with merchandise. What Lazarus really captured was this sense of American abundance after the war and after all those years of depression.”
An influx of cheaper products coming from Asia, specifically Japan, as it rebuilt its economy, helped the brand. Japanese toys were cheap and could easily be bought in bulk. So, the stores were always crammed with new, fascinating toys.
While the brand expanded moderately during the 60’s, it was the 70’s and 80’s that saw a boom in its growth, up to a point in which Toys R’ Us was considered the biggest toy company in the world. Lazarus focused aggressively on becoming standardized, efficient, and agile to fulfill the increasing demand. And he was confident in his brand.
“What we are is a supermarket for toys," Lazarus told the Washington Post in 1981. "We don't have a competitor in variety. There is none."
Lazarus also embraced technology to improve the company’s processes. With a complex computer system, Toys R’ Us could track each product sold and identify which were hot-selling items, way before other competitors did. This was the 80’s: computers weren’t cheap, nor small, nor easy to use. But Lazarus was willing to invest in order to have a stranglehold on the market.
He also understood demand very well. Toys are seasonal and their best season is usually one quarter, near Christmas. So, he didn’t just keep toys in store. He also kept baby products, diapers and formula to sell year-round. Around the country, smaller chains were unable to compete and quickly disappeared as Toys R’ Us opened more than 1200 stores around the U.S. Not only did they change the toy market in the U.S., but they created a category in its own. Toys R’ Us was the first category killer.
By 1990, it turned in $12BN. And in 2001, they opened an iconic store in Times Square, which usually means you made it. The store even had a Ferris wheel inside. But the 90’s also brought in murky waters. And before we explain that, let’s talk about what a category killer is and why it’s important to our story.
Category Killers are retailers that offer massive amounts of products and variety. They usually attack the consumer with low prices, product selection, ease of shopping and aggressive marketing. Plus, these companies are usually pretty knowledgeable in the market, which makes them a double threat, not only due to size, but also due to versatility. Toys R’ Us was the definition of a category killer.
Category killers thrive until another, bigger, more aggressive killer enters the ring. Some include Barnes and Noble, which killed independent bookstores. Best Buy devoured small electronic stores and Staples killed office suppliers. And then, there’s Walmart.
Yes, Toys R’ Us sold cheaper toys, but Walmart sold cheaper everything else. It sold diapers, formula, baby clothes, baby food, electronics and, of course, toys. It was a step above Toys R Us in the retail food chain. Sometimes, one above is all you need.
Walmart grew rapidly in the 90s. So rapidly that, by 1998, it took sole first place as the biggest toy retailer in the U.S., and this hadn’t happened in a decade. Still toys only reeled customers in so they could buy other stuff. Here's an example: a customer walks in to buy a board game for the family, sees there's a sale on rice, and a new blender just came out. Walmart’s success centered around one thing. Cliff Annicelli wrote:
“It’s a matter of convenience for a lot of people. Parents don’t have the luxury to just shop for toys. It’s easier to just go to Wal-Mart, where they can do the rest of their shopping and still get the best toys.″ Also, Toys R’ Us wasn’t only battling Walmart but also the threat of e-commerce. At this point, it's important to highlight that the company had tried to venture into e-commerce. They created Toysrus.com in 1998, but failed at the one thing they needed to do. In December 1999, so many people ordered products, the company failed to deliver products before the 24th.
Toys R' Us didn’t abandon the idea of digital, though. After the Christmas fiasco, and thanks to $60 million from investors, they partnered up with Amazon. The terms were almost perfect. It was a ten-year exclusivity with Amazon to distribute their toys. At first, it seemed the deal worked. Toys R’ Us was the biggest toy seller on Amazon within the first two years. So, why did Toys R' Us close if they had partnered with the retailing giant.
Amazon wanted more. So, they began selling other brands. An angered Toys R’ Us sued and won, but only $56 million. This was pocket change, especially with the sacrifice that came along with it. You see, instead of working on their own digital platform, Toys R’ Us had relied heavily on Amazon. So, when the relationship ended, the company was left with no digital identity nor platform.
This is a pivotal moment in the company’s history. Toys R’ Us was now desperate to jumpstart itself and remain competitive. They slashed prices, bought other toy makers like FAO Schwartz and KB Toys, and they winnowed their stores by removing all unnecessary, loss-generating products. Toys ceased to be the priority: money was. All these decisions came at a high cost.
The acquisitions were very expensive. The cost-cutting focus in their stores backfired as the locations became more and more unappealing, so price slashing didn’t really work, because customers didn’t visit the locations. On top of that, their digital presence was very deficient. The company did generate income, but most of the company’s income went directly to paying off their debt which was estimated at $5 BN. So, it was a perfect storm.
Companies like Walmart and Amazon did do some damage, but, as you can see, not all of it. To understand why did Toys R' Us close, we need to go back in history. Toys R’ Us had turned public in 1978 to great success but, by 2005, it took a big hit. Its debt was graded as a junk bond and offered at very low cost, high reward but ver high risk.
In March of that year, a private group bought out Toys R’ Us, led by KKR Group, Bain Capital and Vornado Realty. This group bought the company through a leveraged buyout which means that the acquisition is done through mostly borrowed money. They dished out only $1.2 BN, while the other $5.4 BN was borrowed. To secure those $5.4 BN, Toys R’ Us assets were used as collateral.
Remember that junk bonds are very high-risk. Plus, as we said, it’s not Toys R’ Us wasn’t making money. It was. But it had to pay up to $400 million a month in interest alone, in what critics called an “ATM for Wall Street.” So, with dwindling sales, tough competition and a smaller market share, those $400 million eventually ate away at the company and in September 2017, Toys R’ Us declared bankruptcy.
This move surprised many. Some investors said Chapter 11 wasn’t necessary and the bankruptcy papers cited that efforts were made to find funding. Also, there was no restructuring plan. So, they had reasons for suspicion.
In fact, this example brought forth the ethical discussion around leverage buyouts. They seem justified. It’s an opportunity for the company to become leaner, more financially solid, right? It depends on who you ask. Most end up loading debt with assets and investors usually protect themselves. After all, the wrapper protects the chocolate bar. But if you want to eat the chocolate bar, you discard the wrapper, right?
In this case, the wrappers were Toys R’ Us stores, employees, benefits, etc. The investors did just this that we have mentioned. KKR, Vornado and Bain earned $470 million off Toys R’ Us, before declaring it bankrupt. Meanwhile, 30,000 jobs were lost, their severance plans nullified, unpaid vacations were eliminated and the stores all around the country were cannibalized by other brands.
Former employees gathered around the country and protested. So much so, that eventually, Bain and KKR both set up funds totaling $20 million to pay former Toys R’ Us employees the money they owed. As protests ensued, it was clear that the toys were no longer created to bring a smile to a kid’s face but rather dollars to the pockets of Wall Street fat cats. And thus, died a company that had grown too big. Perhaps too big, too hungry, so it started eating itself from the inside.
But, perhaps, it’s too big to die. After bankruptcy, the company resurged as Tru Kids and opened a few stores in the U.S., where it hopes to revive 70 years of history. Hopefully, not all of it.
