In the end, nostalgia couldn’t save Toys R Us.
The once-mighty retailer, which has struggled to keep up with changing trends in consumer behavior and childhood play, told a U.S. bankruptcy court on Thursday that it must liquidate its operations, meaning the likely closure of hundreds of stores.
The former leader of the toy industry, Toys R Us filed for Chapter 11 bankruptcy in September after years of slipping sales and mounting debt. While intense price competition from mass retailers Walmart, Amazon, and Target has contributed to the company’s woes, experts place the blame squarely on the shoulders of management. They said Toys R Us has failed to innovate its business model, incorporate technology or adapt to changing consumer behavior.
The day of reckoning may have been delayed through a $7.5 billion leveraged buyout in 2005 by private investors Bain Capital Partners, Kohlberg Kravis Roberts, and Vornado Realty Trust. But the debt payments proved to be too much for the company, which hoped robust holiday sales would buoy its bottom line and keep it afloat a while longer. The company announced in January it would close 180 of its roughly 800 stores in the U.S. No buyers have stepped up to take over the chain, and the end seems to be in sight. Prior to the liquidation announcement, Toys R Us had announced that it would shutter all 100 of its stores in the United Kingdom.
Wharton marketing professor Barbara Kahn, Denise Dahlhoff, research director at Wharton’s Jay H. Baker Retailing Center, andMark Cohen,a former retail executive who is director of retail studies atColumbia University’s Graduate School of Business, talked to Knowledge at Wharton about where Toys R Us went wrong. Dahlhoff and Cohen made their comments during a segment onthe Knowledge at Wharton show, which airson Wharton Business Radio on SiriusXM channel 111.
The following are key points from the conversations. (Listen to the full podcast with Dahlhoff and Cohen using the player at the top of this page.)
The End Comes as No Surprise
The dissolution of New Jersey-based Toys R Us, which traces its roots to a baby-furniture store opened in 1948, comes as no surprise to industry watchers. That’s because Toys R Us hasn’t been able to tread water as the tides have shifted in the vast retail ocean.
Cohen described the chain as “guilty of serial mismanagement.”
“Toys R Us has never been able to wrap their arms around the changes necessary, and this is the inevitable outcome.”— Mark A. Cohen
“Retailers today, especially in any kind of fashion or trend segment, have to progress,” he said. “They have to morph, they have to modify. They have to represent the changes in the marketplace and their customers’ behavior. Toys R Us has never been able to wrap their arms around the changes necessary, and this is the inevitable outcome.”
He said the stores were too big, jammed full of inventory, poorly merchandised, and customer service was virtually nonexistent. A poor shopping experience won’t entice busy consumers who would rather grab a toy from Target while they fill their carts with groceries, school supplies, and the rest of life’s necessities.
“Toys R Us never made a concerted effort to bring that experiential opportunity into the stores,” Cohen said. “I think once they went private, they could have cleaned up their act a little bit. But there was no consequential effort to re-imagine themselves, to present themselves in a more engaging and attractive way.”
Instead, he said, the company was still trading on the view that it was “the center of the universe for the toy industry,” which was no longer true. “This failure began before they went private,” Cohen noted. “The company was doing poorly. That’s why the private equity trio swooped in … thinking they could fundamentally improve their performance. Frankly, they put someone in the job who had no capacity to do that and didn’t do that.”
Dahlhoff agreed with Cohen’s assessment, adding that Toys R Us didn’t defend itself against a number of external threats.
“The competition has changed so much. Also, the consumer has changed so much,” she said. “Kids spend way more time playing online video games. You don’t have to go to a Toys R Us store for those. In addition, the shopping experience has moved online, and Toys R Us hasn’t been the strongest in that area. Competitors like Amazon, Walmart, and Target have been very strong online, so that also added to the difficulties.”
The Amazon Factor
Though Toys R Us’s business was eroded by big box “everything” retailers like Walmart, Target, and Costco, Amazon dealt the chain some particularly tough blows, said Kahn, who is author of the upcoming book, The Shopping Revolution: How Successful Retailers Win Customers in an Era of Endless Disruption.
“Amazon changed customers’ expectations about convenience, particularly millennial parents who were a prime segment for Toys R Us,” Kahn said. “These parents became Prime members and got used to the convenience of ordering online.”
At least part of the damage was, in a way, self-inflicted. In 2000, Toys R Us launched a 10-year partnership with Amazon, in which it paid the e-commerce giant $50 million a year plus a percentage of sales to be Amazon’s exclusive seller of toys and baby products.
The joint toy store was a success, but it had serious consequences for Toys R Us. For one thing, the agreement meant that Toys R Us had no autonomous online presence — customers who tried to visit ToysRUs.com were redirected to Amazon. For another, once Amazon saw how well it worked, it began expanding its toy and baby categories, and other merchants, including Toys R Us competitors, began selling those products on Amazon.
“Amazon changed customers’ expectations about convenience, particularly millennial parents who were a prime segment for Toys R Us.”— Barbara Kahn
“Amazon learned how Toys R Us did business … everything Amazon learned about selling toys they learned from Toys R Us, in some sense,” Kahn said.
Toys R Us ultimately sued Amazon and won, allowing the chain to terminate the deal. But it lost years of momentum in developing its own online presence and e-commerce strategy.
Kahn noted that Toys R Us and other category killers had business models built around offering the lowest prices and best assortments — but now Amazon dominates both of those. In order to survive, companies have to find some other differentiator. For example, Best Buy matched Amazon’s prices, but also adopted a showroom model that took advantage of the fact that customers like to see, touch, and try electronics, and to get advice from knowledgeable store associates.
“Best Buy appreciated that and leveraged that advantage, and through price matching, they made sure the customers who came also bought from Best Buy,” Kahn said. Toys R Us failed to create compelling reasons for customers to visit, either due to a superior store experience or via partnerships to exclusively sell popular brands or products.
“Toys R Us was trying to win on convenience and price, but it wasn’t convenient and the prices weren’t so great,” she said.
Why No One Wanted to Buy Toys R Us
Cohen, who was an executive at Sears and has held positions with other department and clothing stores, said he’s heard no whispers about buyers for Toys R Us. It seems no one wants to revitalize the chain that was once part of pop culture with its catchy slogan, “I don’t want to grow up, I’m a Toys R Us kid.”
In addition to the crushing debt, what also makes the chain unattractive is the glut of retail space available in the U.S. Decades of overgrowth have resulted in an abundance of empty storefronts as more brick-and-mortar operations move the bulk of their sales online.
“There’s so much excess that’s been developed over the last 30 or 40 years that’s now going vacant through these serial bankruptcies and liquidations that you’d have to be crazy to make any kind of concerted bid, unless you had something you could roll out,” Cohen said. “Frankly, I don’t see anybody making the math work.”
Dahlhoff said smaller spaces are what’s trending now in retail real estate. Target and Walmart are experimenting with smaller formats, she noted, and many retailers are opening showrooms with limited merchandise. Toys R Us stores are cavernous, which make them even less appealing to buyers unless the spaces are broken up.
“The shopping experience has moved online, and Toys R Us hasn’t been the strongest in that area.”–Denise Dahlhoff
Toys Aren’t Top Sellers Anymore
The sales of toys are declining in general, and the professors pointed to the shift to digital as the main reason.
“It has been a weaker category; there hasn’t been much growth,” Dahlhoff said. “Kids are interacting more digitally, so there’s just not as much demand.”
The toy industry has traditionally relied on holiday sales to stay in the black. That span of five or six weeks used to be adequate when manufacturers could create insane demand for products like Tickle Me Elmo or Cabbage Patch Dolls. But kids are less interested in physical toys these days, and marketers are putting their efforts elsewhere.
“It’s an extraordinarily trend-sensitive business with enormous issues of service and supply. The lead times are daunting,” Cohen said. “This is an industry that has been struggling for years from a design, product development, wholesale point of view, and now the retail network that has supported it has gone substantially all into Walmart, Amazon, and Target.”
Independent toy stores have been closing for years, Cohen noted, leaving Toys R Us — which was once the category killer driving many of those closures — as “the last man standing, if you will.”
Toy sellers also face pressure from the “voracious discounting” that comes from competition from both online outlets and big-box stores, Cohen said. They can no longer get full margin for their products.
There’s Still Hope
It appears to be lights out for Toys R Us, but that doesn’t mean doom for the entire toy industry. To be sure, the challenges are great. Cohen painted a Darwinian landscape for retail where only the fittest survive. Retail bankruptcies and widespread store closings were rampant in 2017, and the trend seems primed to continue in 2018 – shortly before the Toys R Us closures became public, news broke that mall staple Claire’s is preparing to file for bankruptcy.
“This is an industry that has been struggling for years from a design, product development, wholesale point of view, and now the retail network that has supported it has gone substantially all in to Walmart, Amazon and Target.”— Mark A. Cohen
“The fittest have things that are highly differentiated, that are only available from them, or are the lowest price,” Cohen said. “Independents can differentiate on the basis of assortment and service, but they never can differentiate on the basis of lowest price because they just don’t have the leverage.”
That leaves the shopping experience as the major factor that could help toy stores, Dahlhoff said. She held up Build-A-Bear as a shining example of a store that saw the writing on the wall and pivoted. The stores, where kids can create their own customized stuffed animals, used to be found only in malls. Now, they are on cruise ships and in ball parks. The chain added also a digital component to its products.
“When the world went digital, they started to get more digital” by offering, for example, the ability to take a bear that you built online and bathe it in a virtual tub, Dahlhoff said. “It was just more interactive. You could pick your own customized sound for the bear. That’s an example of a company in that industry that tried to go with the changes and respond.”
Meanwhile, Cohen said, Toys R Us “did nothing but load the shelves with goods, and that isn’t good enough.”
Dahlhoff wondered about the future of play. She predicted that old-fashioned toys will come back into vogue as a sort of backlash to technology. That could be just the opening an innovative toy seller needs to carve out a new niche in the marketplace.
“It could also force them to cut costs and cut their assortments to just focus on the bestsellers and sell them to your big retail partners. However, that reduces variety and price competition between retailers,” she said. “Maybe the off-price channel will benefit from that. Maybe that’s a new channel to explore because that’s been a growing sector.”
Why Did Toys R Us Close Down? Toys R Us closed down because it had billions of dollars in debt and could no longer invest the money required to keep up with competition. This ultimately led to the company filing for bankruptcy and selling or closing its last remaining stores.What economic factors contributed to the failure of Toys R Us? ›
The company's debts were too much to bear.
Toys R Us was saddled with heavy debt acquired when Bain Capital and other firms took the company private in 2005. By the time the company was approaching bankruptcy in 2017, it still had about $5 billion in liabilities.
The company was further hampered by a significant debt load, the result of a leveraged buyout organized by private equity firms. The company filed for bankruptcy in 2017 and 2018, closing all of its US, British, and Australian locations, with the last US stores closing in 2021.What is the main problem in Toy Story? ›
In Toy Story specifically, the looming problem is that the moving van is getting away while Woody's options for reuniting with Andy are becoming increasingly slimmer. When RC Car's batteries run out, Woody tries to light the rocket with the match.What is the economic impact of the toy industry? ›
The toy industry's annual total economic impact in the U.S. is $102.4 billion. The estimated 3 billion toys sold annually in the U.S. generate approximately $40 billion in retail toy sales. The toy industry supports an estimated 572,006 jobs (FTE) generating approximately $33.7 billion in wages for U.S. workers.Why is Toys R Us a dead company? ›
Its revitalization efforts come after Toys R Us filed for chapter 11 bankruptcy in 2017 and — after failing to find a buyer to help refinance the company's mounting debt — ultimately shuttered and liquidated all 700-plus stores in an emotional farewell.Will Toys R Us ever come back? ›
toys R US is making a comeback by joining forces with Macy's and we'll be bringing toys, games and other gadgets to more than 400 department store locations and online. According to CNBC, people will be able to shop at toys R US in Macy starting next year.Who was Toys R Us biggest competitor? ›
toysrus.com's top 5 competitors in March 2023 are: babiesrus.com, toywiz.com, fao.com, etoys.com, and more. According to Similarweb data of monthly visits, toysrus.com's top competitor in March 2023 is babiesrus.com with 31.8K visits.How Toy Story was almost lost? ›
'Toy Story 2' Was Almost Deleted From Its Servers
According to him, some poor, thankfully unnamed, soul at Pixar was in the internal file servers doing some standard file clearance, when they mistakenly put in a deletion command on the root folder for the film. All the character models and assets began erasing.
As an example, in the field of artificial intelligence, classical puzzles, games and problems are often used as toy problems. These include sliding-block puzzles, N-Queens problem, missionaries and cannibals problem, tic-tac-toe, chess, Tower of Hanoi and others.
The 'Toy Story' spin-off, which has attracted controversy in many Muslim-majority countries, due to its depiction of a lesbian marriage and kiss, has so far been banned from release in 13 countries.What is the negative impact of toys to children? ›
Similar to cluttered pantries or office spaces, which make it hard for adults to focus, having too many toys around the house can make it difficult for children to concentrate, learn, and develop important skills around play.What are the threats to the toy industry? ›
- Lack Of Risk Diversification In Our Supply Chain. ...
- OUR DREAM TOY PRODUCTION HUB: CHINA, AND CHINA'S ONGOING ECONOMIC MIRACLE.
The toy industry uses 40 tons of plastic for every $1 million in revenues and is the most plastic-intensive industry in the world. 90% of the toys on the market are made of plastic.Who owns Toys R Us now? › What is the history of Toys R Us? ›
Founded in 1948 by Charles Lazarus, The Toys "R" Us name made its debut in 1957. Operates over 1,500 stores in 35 countries and jurisdictions around the world under the Toys "R" Us, Babies "R" Us and FAO Schwarz banners. These locations sell toys, educational products, baby merchandise and children's apparel.What is the meaning of the name Toys R Us? ›
Etymology. After Toys "R" Us, American toy-store chain, itself a phonetic rendering of "toys are us".What states is Toys R Us coming back to? ›
According to Macy's website, Toy R Us currently has more than 40 locations inside its stores in California, Georgia, New Jersey, Illinois, Nevada, Louisiana, New York, Maryland and Missouri. More than 50 others are expected to open soon in other states, including Oregon, South Carolina, Texas, Michigan and Connecticut.Is Toys R Us coming back in 2023? ›
Babies “R” Us To Reopen Retail Stores Summer 2023. With Toys "R" Us announcing their own comeback just ahead of the 2022 holiday season, I guess it really is no surprise that a similar announcement came from sister brand Babies "R" Us in the new year.What is the most sold toy in the United States ever? ›
It was initially designed as a teaching tool to help his students understand 3D geometry. However, it soon became a global sensation, with people of all ages trying to solve the puzzle. The Rubik's Cube is now recognized as the best-selling toy!
The Lego Group, the Danish company known for its instantly recognizable interlocking plastic bricks, made nearly eight and a half billion U.S. dollars in revenue in 2021. In other words, the Lego Group is the leading toy company in the world.Who is Toys R Us target audience? ›
Toys”R”Us Asia, a top retailer of toys, educational products, and leisure equipment, operates more than 470 stores across many geographies. Hence, the company's target audiences are children and their parents or the family.Why did Toys R Us fail in the era of digital marketing? ›
taking market share or twenty-somethings spending more on experiences than things.” The problem clearly lay with the inability of a large organization like Toys “R” Us to adapt to a new model where digital interactions have to be combined with physical retail to create a unified omni-channel experience.What is the economic growth of the toy industry? ›
In 2021, the toy industry's annual total economic impact in the U.S. was more than 100 billion U.S. dollars, while just over 572,000 jobs related to the American toy industry were generated.Why did Toys R Us fail Forbes? ›
The company's stock floundered as investors realized it was in big trouble, so management put the company up for sale. Toys R Us had over $11B in revenues, but 75% of its almost non-existent operating profits came from Babies R Us, which was only 24% of stores. And the trends were not going its way.What key factors made Toys R Us successful? ›
Its success was attributed to its ability to consistently offer the toys shoppers were most interested in buying. By 1987 the company had 37 additional domestic Toys "R" Us stores, 11 new overseas outlets, and 14 new Kids "R" Us stores; its market share now stood at 15 percent of the $12 billion toy industry.Why did Toys R Us have so much debt? ›
The death of Toys R Us did not come due to increased competition from the internet. It died -- at least in the United States -- because the company had a tremendous amount of debt due to a leveraged buyout used to take the company private.Who were the major competitors against Toys R Us? ›
toysrus.com's top 5 competitors in March 2023 are: babiesrus.com, toywiz.com, fao.com, etoys.com, and more. According to Similarweb data of monthly visits, toysrus.com's top competitor in March 2023 is babiesrus.com with 31.8K visits.Is the toy market declining? ›
January 26, 2023 | U.S. toy industry sales generated $29.2 billion in 2022, a decrease of 0.2 percent year over year, or $49 million, according to The NPD Group. Unit sales declined by 4 percent and the average selling price (ASP) was 3 percent higher than in 2021.What is the impact of the toy industry on the environment? ›
The toy industry uses 40 tons of plastic for every $1 million in revenues and is the most plastic-intensive industry in the world. 90% of the toys on the market are made of plastic. Plastic toys can contain heavy metals such as lead or cadmium or other harmful chemicals such as dioxins.
“But two things really crippled them. First, they were slow to adapt to online shopping, suffered from marketing myopia. They could have been the online leader in toy sales, but their first foray into online sales was a disaster. They were never competitive in that arena, a problem shared by Barnes & Noble.”How did Amazon shut down Toys R Us? ›
Amazon was incredibly calculated in gaining a strategic first mover advantage over Toys R Us and waited patiently until they had compromised Toy R Us's business model to a point where they would be unable to defend themselves before ultimately putting the retail giant out of business.Did Toys R Us make a comeback? ›
Iconic brand that went bankrupt making comeback with new flagship store. Toys R Us is back! Toy shops coming to 400 Macy's stores in 2022.Why fewer toys will benefit? ›
Fewer toys encourage more creative & imaginative play
But too many toys often distract them and prevent them from using and developing their creativity and imagination. When children have fewer toys, they find ways to use them in creative ways. They use their imaginations and resourcefulness to create their own fun.
Barbie. Barbie has not only stood the test of time but also evolved with time to be one of the largest-selling toys of all time.What helped Toys R Us succeed over the years? ›
The company had help. As television reached more and more households, Toys 'R' Us benefited from advertising by toy manufacturers. Companies like Mattel could now market their newest offerings to kids directly, which fueled demand for the toys Lazarus stocked. TV helped consolidate Toys 'R' Us's brand, too.