economics

Toys R Us in Need of Inspiration

Published September 25, 2017 by Carl De Luna
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American retail toy store Toys R Us shocked the world when it announced it was filing for Chapter 11 bankruptcy protection. It came as a surprise as the Wayne, New Jersey retailer expects most of its sales from the holiday season. But when looking at it from another angle, it wasn’t really a surprise. Toys R Us had the writing on the wall but it failed to see it.

The New Yorker featured a story about how Charles Lazarus, a young and ambitious man, built Toys R Us from the ground up. He started with four toy stores which were then sold to Interstate Department Store. Interstate had plans to become among America’s top toy merchants and recognized that Lazarus had the connection of directly speaking with children. After finding success by selling popular toys such as Barbies, G.I. Joes and Lite-Bites, their aggressive expansion left them with too much debt. It did battle with Kmart and the results were not pretty. In 1974, Toys R Us faced its first bankruptcy protection filling. After four years, Toys R Us re-emerged stronger and expanded into children’s clothing with Kids R Us.

Lazarus retired in 1994 and Toys R Us grew to more than a thousand stores, but was facing a new challenge. Walmart came in and stole Toys R Us thunder by surpassing them in toy sales by 1998. Another spin-off Kids R Us began shutting down in 2003. With fading sales, Toys R Us was sold off amidst a bidding war and purchased by familiar names. They were bought by private-equity firms Bain Capital and Kohlberg Kravis Roberts or KKR and real estate investment trust Vornado Realty Trust for a deal valued at $6.6 billion USD.

Today, Toys R Us is mired in debt and the decision to file for bankruptcy protection was justified. It has $4.9 billion USD in debt with $400 million of those with interest payments due in 2018 and $1.7 billion due in 2019. CEO and Chairman Dave Brandon said that the decision is the start of a new era for Toy R Us as their financial difficulties have held them back, the debt issue would be addressed for their long-term success. He also expressed optimism that the restructuring would ensure the preservation of the iconic Toys R Us and Babies R Us brands for future generations. Parallel steps are also expected for its subsidiary in Canada. It will be business as usual for the toy retailer at its more than 1,600 Toys R Us and Babies R Us stores around the world. It also added that Toys R Us operations outside the United States and Canada would not be affected by the bankruptcy protection fillings.

The good thing for the toy retailer is that they have already gathered commitments from lenders such as one led by JP Morgan with the amount estimated at over $3 billion in debtor-in-possession financing. This type of financing allows Toys R Us to run the business and the trustee’s obligation and power to operate in the best interest of its creditors. It is also allowed to run its normal course of business, although they are required to seek court approval for any action outside normal business activities. Toys R Us also must maintain accurate financial records while filing the tax returns.

Despite the bankruptcy filing, Toys R Us is still hiring for the holiday season with at least 13,000 positions up for grabs for the holiday season. But these positions will be harder to fill than in other years as US unemployment hit a 16-year low at 4.4%. Toys R Us spokesman Joseph Contrino said that they have improved their pay packages and are offering weekend pay rates to employees on holiday shopping days and additional employee discounts. But even with that it would be hard to attract workers as statistics from the Labor Department showed that there is currently a record number of unfilled job openings.

On other fronts, several toy makers have cut ties with Toys R Us. Product Launchers, which provides novelty products from some toy makers like fidget spinners and squishies, said that it does not expect to receive payment for their $500,000 fidget spinner order and other items. Product Launchers chief executive Linda Murphy said that the toy makers depended on Toys R Us and the product purchase was their entrance to the toy industry. Murphy added that they have decided not to sell to Toys R Us going forward. Their fate is unlike those of board game company Hasbro Inc, Lego and Barbie maker Mattel and other large toy makers. They are expected to still get their full payment from Toys R Us after the toy retailer asked for approval of $325 million worth of special financing as payment to the likes of Mattel, Hasbro, Lego among others.

Toys R Us must take the opportunity of this latest bankruptcy filling with great seriousness. It must revamp their business model and adjust to the times. Online shopping is now king, led by Amazon who has a great business in online shopping due to its competitive pricing and quick delivery. Toys R Us must re-invigorate its retail stores which have closed left and right due to failure and adapt to the new consumer environment.

Toys R us must improve their website to compete with Amazon. They must entice consumers to buy from the Toys R Us website instead of other online venues. Toys R Us can also use their stores as pick-up points for orders bought online. This could increase the usefulness of their many stores throughout the United States and Canada. They could also do the same for its international stores.

Toys R Us must see that consumer dynamic has also shifted from toys to gadgets. Although there will always be room for nostalgia towards toys, gadgets such as tablets are the main attractions for today’s children. This should entice Toys R Us to not overstock and prevent ordering too much. It should also consider revamping its Babies R Us offering and consider its e-commerce rivals such as Amazon. Perhaps, Toys R Us should bring the fun back into their stores. They could take some inspiration from the Disney Stores. Their stores should be something that kids would be excited to see and drag their parents into. No more generic store displays of old. They must be more interactive and entice kids and adults alike into falling in love with toys again.

Toys R Us comes brutally unprepared for the changes happening today. It did not see the shift in consumer preference as convenience and competitive pricing are paramount. With some imagination, Toys R Us will return to its place at the top of every child’s favorite store.

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