- Toys “R” Us is shutting down all U.S. stores and laying off 30,000 employees.
- Company struggled with increased competition from online retailers.
It’s the end of an era.
Faced with insurmountable debts and flagging sales, Toys “R” Us is closing or selling all of its remaining stores in the United States. The company will lay off more than 30,000 employees and liquidate its remaining inventory at nearly 900 Toys “R” Us and Babies “R” Us locations across America.
Originally founded in the late 1940s, Toys “R” Us had at its peak more than 2,000 stores, but filed for bankruptcy protection in September as it has faced increased competition from online retailers, including Amazon. It also struggled to climb out of debt stemming from its $5 billion leveraged buyout by investment firms Vornado Realty Trust, Kohlberg Kravis Roberts, and Bain Capital in 2005.
In a leveraged buyout buyers use debt to purchase a company. And in this case, KKR and Bain left Toys “R” Us with billions of dollars of debt, and $400 million per year in repayments.
What happens when a company declares bankruptcy?
Companies can file for Chapter 11 bankruptcy protection in order to restructure and reposition themselves for long-term sustainability. For Toys “R” Us, that meant trimming the number of stores it was operating and raise money to deal with its heavy debt burden.
Scores of other retailers have also filed for bankruptcy in recent years as consumers have started spending more money online, such as Payless and Radioshack.
While millions of Americans have memories of strolling through their local Toys “R” Us stores as children, those who will suffer the most immediate effects of the company’s shutdown are the 30,000 employees who will soon be out of work.
Consumers, too, will have one less choice when shopping for toys and children’s products. Toys “R” Us is yet another brick-and-mortar retailer being run out of town by ecommerce companies, and less competition is typically bad for consumers.
Something else to note: If you’re holding Toys “R” Us gift cards, you’ll only have 30 days to use them.
Online retailers gaining power
Toys “R” Us’ downfall may not be that surprising, given the growing market dominance of ecommerce companies such as Amazon.
With large, expensive stores and tens of thousands of employees, Toys “R” Us had considerable expenses to deal with while its online rivals were able to play fast and loose with margins to undercut the competition.
Scores of other retailers have also filed for bankruptcy in recent years as consumers have started spending more money online
Other brick-and-mortar retailers, such as Walmart, have been able to keep up, however.
While Toys “R” Us has been shackled with billions in debt, Walmart was able to keep up with an evolving retail sector and adapt by expanding its web presence and acquiring ecommerce companies such as Jet.com — something Toys “R” Us and many others didn’t have the resources to do.
Additionally, Walmart and Amazon have more diverse product offerings, allowing them to cut prices on items including toys while making up for the losses with revenue from other unrelated products and services. Unfortunately, as its name implies, Toys “R” Us was perhaps a one-trick pony.
“They were at the intersection of so many challenging trends, and they were at the wrong end of those trends,” Michael Dart, retail expert and partner at A. T. Kearney, told The New York Times. “All of these forces coming together fundamentally tipped them over the edge.”
Why does it matter to you?
Clearly, the loss of an iconic American brand is going to cause a bit of nostalgic distress, as is the idea that Americans will no longer be able to take their kids to their favorite childhood store. Fewer competitors, too, could lead to price increases.
Another key takeaway? While toy sales have been increasing annually in the U.S., Toys “R” Us still wasn’t able to keep up.
Domestic toy sales jumped 7% between 2014 and 2015, and 5% between 2015 and 2016, according to industry data. Last year, sales increased another 1%. Toys “R” Us, evidently, wasn’t able to capitalize on that growth.