Features, Strategy & Operations

Toy Story…the Sequel

The game isn’t quite over…but the fun has certainly stopped.

As Toys”R”Us slogs through what looks like a fling with bankruptcy, it once again points to two very basic tenets of retailing:

  1. You better be a damn good merchant because the competition will eat you alive if you’re not.
  2. You better not have a lot of debt because the retailing business model just doesn’t throw off enough cash to pay the bills.

That Toys will be the latest victim of this one-two punch is both sad and somewhat ironic. It was after all the original category killer big box specialty chain, having practically invented the genre. It was also one of the early big retailers to go private, courtesy of a triumvirate of privileged equity – oops, meant private equity – players who saw the opportunity to make some serious money by playing the classic public-private-public flipping game. None of it went exactly according to plan.

The original plan for Toys”R”Us was a brilliant one. From the bones of a small juvenile furniture store in Washington, DC and an ill-fated takeover by a third-rate regional discounter, the retailer emerged as the powerhouse in toys and kids products in the 1980s and 1990s under the leadership of Charlie Lazarus, one of the great merchants in the history of retailing. Through a series of circumstances around the turn of the century – not the least of which was no more Charlie – Toys lost its mojo to Walmart, Target and this little upstart called Amazon.

In 2005 three big PE guns – KKR, Bain and Vornado – took Toys private and it was all going according to that plan…until 2008 hit. Like every retailer in the country, Toys struggled for several years to get its footing back during the Great Recession. Any hopes of the Big Flip were put on hold. All the while, the debt meter was running. When it went private the deal was valued at $6.6 billion. Yet 12 years later, the company’s debt still stands at $5.2 billion — including $400 million due next year – which means it has paid down just $1.4 billion over that period. For the math-challenged that’s about $117 million a year. There are degenerate gamblers in Vegas who pay their vigs back faster than that.

By the way, Toys hasn’t made any money in four years. In the meantime, it meandered along the retailing highway while its competition got bigger, better and faster.TRU’s initiatives have either hit dead-ends or petered out.

It opened a flagship store in New York’s Times Square that was a showplace for the brand in one of the country’s most important tourist markets. It was big – 110,000 square feet – and no doubt enormously expensive. Two years ago it moved out, citing the cost, and this Christmas it will open a substantially smaller pop-up store two blocks away.

Ask anyone in retailing how physical stores can compete with online and the first thing they’ll tell you is to make your stores destinations and experiential. That Times Square store was both and if it was costly to operate, it was the best branding Toys could ever have, worth far more than the business rung up on its registers. And it’s gone. Or how about when Toys bought FAO Schwarz in 2006? The best-known name in premium toys, the brand gave the company the platform to have a clearly differentiated position from other big box discounters. Yet in 2015 it closed the only existing store, on Fifth Avenue in New York – next store to the main Apple store for heaven’s sake – citing, you guessed it, the leasing cost. There’s this generation out there – the millennials, maybe you’ve heard of them – who are starting to have kids now and they want genuine, unique products and are willing to pay for them. If they want to go to FAO, they are OOL. TRU also bought the eToys.com business, or what was left of it, but when you enter that on our browser it takes you straight to the Toys site.

Maybe building your core brand is the best online strategy these days but is there not room for a niche sub-brand, as Wayfair has proven with All Modern, Joss & Main and its other nameplates? Whatever the ultimate outcome will be for Toys”R”Us, it’s safe to say that its best days are probably behind it and that its future success will be diminished thanks to both its balance sheet and its merchandising strategy.

Just another broken Toy in the world of retailing.

Warren Shoulberg is a contributing editor to the Progressive Business Media group of home furnishings publications and was too old to be a Toys ”R” Us kid.

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