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Toys R Us is an iconic American company. According to recent surveys, Toys R Us has a market share of more than 15%. With this market share, the company should be in a commanding position in the toys market. However, ironically it is filing for Chapter 11 bankruptcy. This means that it is still likely that Toys R Us will be in business after restructuring its debt. However, the fact that this iconic corporation has filed for bankruptcy has come as a shock for many. In such cases, the most obvious culprit is companies like Amazon. Online sales are being blamed for the death of every brick and mortar retail organization across the world. However, the case of Toys R Us is not so simple. There are many factors that have led to the eventual collapse of Toys R Us.
In this article, we will list down some of the prominent reasons which caused the Toys R Us bankruptcy. This should explain that Amazon and other companies selling products online are not the sole reason behind the poor performance and eventual bankruptcy of this company.
Toys R Us was started in 1949. This means that the company has been surviving for several decades. Most of the adults in the United States had visited Toys R Us when they were kids. This is what has made the company iconic.
For many decades, Toys R Us was a very profitable firm with very limited competition. They were listed on the stock exchange, and their stock was highly valued. However, all this changed in the year 2005.
Toys R Us became the target of a leveraged buyout. This means that the company bought all the shares outstanding from current shareholders. The price paid for the company was $6.6 billion.
Since the company did not have as much in cash reserves, most of the money used to purchase the organization was borrowed from a syndicate of private equity led by KKR. Not much financial information about Toys R Us has been available in the public domain since 2005. This is because the company went private and it was no longer necessary to publish their results. It is for this reason that most people were shocked to know that Toys R Us is in financial disarray.
The most obvious reason given by people for Toys R Us bankruptcy is Amazon. It is true that Amazon is nearly impossible to compete with. However, in case of Toys R Us it was not the only or in fact even the biggest reason. This is because Toys R Us woes had started much before Amazon became a force to reckon with.
The company has been in trouble since 2005. Most of the financial distress was because of the high levels of indebtedness that resulted from the leveraged buyout. The death of Toys R Us can be attributed more to its humungous debt than to its competition with Amazon.
As per recent estimates, Toys R Us had as much as $5 billion in debt. This meant that the company was paying more than $500 million as interest payments every year. It is a known fact that Toys R Us would struggle to manage its operating cash flow because of these massive debt payments.
Also, because of these massive debt payments, Toys R Us was not able to allocate enough money towards its online presence. If Toys R Us had spent $500 million per annum on increasing its online presence, it would have been in a much better position by now. The story of Toys R Us is, therefore, a story about the perils of leveraged buyouts. In this case, a perfectly good company with 15% market share has been driven to the verge of bankruptcy because of unending and unmanageable debt servicing payments.
It also needs to be noted that Amazon was not really the number one competitor for Toys R Us. Instead, the company was facing fierce competition from discount retailers like Wal-Mart, Costco, Macy’s and Sears.
All these discount retailers account for more than 50% of the market share for toys. This is opposed to the meager 7% market share that is controlled by online companies like Amazon. There are two major reasons why Toys R Us was losing out to these retailers.
Firstly, these places would provide toys at a much cheaper rate. Since Toys R Us was burdened with debt, they could not drop their prices in order to compete. As a result, Toys R Us went from being the place to shop for toys to the “expensive” place to shop for toys.
Also, making toy purchases at large departmental stores is simply more convenient. Toys can be purchased along with other grocery items and a separate trip to a specialty toy store is not warranted.
With the advent of smartphones and tablets, most of the games are available for free online. As a result, the number of games being bought from physical stores has dropped. Also, kids nowadays are fonder of playing LAN based video games. Much of the inventory being stocked by Toys R Us and other specialty toy stores is simply obsolete.
To sum it up, Toys R Us was facing several financial obstacles. A poor capital structure, strong competitors, and obsolescence of their products are some of the many factors that led to the downfall of this once iconic corporation.
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