Why Did Toys R Us Fail?
Remember the famous ad jingle which sang “I don’t want to grow up / I’m a Toys R Us kid”? Well, unfortunately, these days that Toys R Us kid might have some pretty serious financial problems.
March 18, 2018, was the beginning of the end for Toys R Us. While their financial condition had been in freefall for a while, the international retailer announced intentions to use bankruptcy as a shield for a reorganization.
Instead, they reversed course and closed all 200 U.S. locations as well as other facilities worldwide. Everything was liquidated and today Toys R Us is defunct. So, what happened? How did Toys R Us go from king of the toy industry to, well, nothing at all?
Here an in-depth look at why Toys R Us failed:
Location, Location, Location
Toys R Us first launched in the 1950s, when America’s retail landscape was vastly different than today. For decades, Toys R Us stuck to a singular, successful store-placement strategy. They built gigantic retail outlets with dedicated parking lots – and they built them on the outskirts of larger towns, where the land was cheap.
Retail shopping was more of an event and leisure activity from the 50s until the 80s. Consumers didn’t really have a problem driving a bit in order to shop. With free parking and even food to eat, a visit to Toys R Us was a common weekend outing for families.
Today, the retail landscape has changed. Customers are far less likely to drive to a single store in order to browse. Instead, people prefer to comparison shop online. If they want to walk around and shop in person, outdoor and indoor malls provide much more variety, and are usually located closer to home.
Toys R Us ended up stuck with large retail locations which most people had to drive far to reach, and which were unable to accommodate pedestrian traffic.
Bad Bankruptcy Timing
Toys R Us filed for bankruptcy in September 2017. As a toy retailer, the holiday season was typically their strongest. But the bankruptcy filing proved to be incredibly ill-timed.
For starters, the filing was incredibly distracting for both executives and employees. Focusing on the day-to-day company business can be incredibly difficult when you’re unsure if you’ll even have the job in a few months.
Plus, the bankruptcy was a big negative for customers. History has shown that customers aren’t necessarily concerned about bankruptcy. Several airlines and automakers have successfully operated after filing bankruptcy. But Toys R Us was different. Concern over the ability the return items or use gift cards kept many potential customers away.
(And these fears turned out to be justified. Gift cards were worthless just 30 days after the stores closed.)
2017 also marked the year when online retailers went all-in on guaranteed delivery before Christmas. Retailers are often appealing to last-minute shoppers because items can be bought last-minute. But with guaranteed delivery, many of these consumers decided to order online and beat the crowds.
Changing Tastes in Toys
Kids today love technology, from video games to apps to YouTube videos and more. Many types of digital entertainment can be downloaded from home, making a trip to the store obsolete.
Plus, Toys R Us had difficulty keeping up with the times. Electronic toys were available in Toys R Us, but they were placed in just one aisle. Toys R Us likely needed to do more in order to engage kids online.
Problems with Pricing
Back just 10 or 20 years ago, a trip to Toys R Us was an event. Maybe you were paying a bit more, but the extra costs didn’t matter because the whole family had fun. Plus, pre-internet, it wasn’t always so easy to know what competitors were charging for the same item.
Today, you can compare prices online with a single search engine query. This presents a huge problem for toy retailers. Generally, people care more about brands than retailers. For example, if someone wants to buy a Barbie doll, they care more about finding a lower price than shopping at any specific retailer.
Even after filing for bankruptcy, Toys R Us were still unable to guarantee the lowest prices around. Competitors, sensing blood in the water, took the opportunity to undercut Toys R Us at every opportunity.
Not-So-Great Customer Service
Shoppers noticed a general decline in customer service at Toys R Us stores. Of course, it’s hard to blame employees for not giving 110% when their jobs are in jeopardy. Additionally, employees were also leaving in droves for greener pastures.
Competitors once again stepped up. For example, LEGO employees greet each customer at the door and offer a variety of fun, free games and play stations. At Build-a-Bear, employees will walk a child through each step of creating their own bear. Toys R Us never attempted to implement a similar system.
Customer service is one of the biggest potential advantages brick-and-mortar stores have over online retailers. Kids and parents will both seek out fun, interactive shopping experiences. While certainly Toys R Us had many great employees over the years, the general “Toys R Us experience” was centered more on toy volume and quality than customer service.
Too Much Debt
Toys R Us might have never had a realistic chance of surviving. In 2005, the company was acquired by Bain Capital, KKR Group and others. By the time they filed for bankruptcy in 2017, Toys R Us had debt in excess of $5 billion.
A company as large as Toys R Us might have been able to overcome that debt in different circumstances. But Toys R Us was losing both suppliers and retailers. In the end, not even bankruptcy and restructuring could save them. The company was clearly not going to recover – investors, executives and customers all saw the writing on the wall.
All in All
In the end, there was no single reason why Toys R Us failed. Instead, a series of changing shopping habits and customer needs made the Toys R Us business model increasingly irrelevant. Plus, a series of questionable decisions, such as when to file for bankruptcy, only hastened the chain’s departure.