What happened to Toys “R” Us?

The company filed for bankruptcy in September 2017 after almost 70 years in operation, with stores closing in the United States, United Kingdom, and Australia the following year. Stores in Canada, Europe, and Asia were also sold to third parties. While many casual observers may attribute the failure of Toys “R” Us to competitors such as Amazon, several causes contributed to its failure.

Background

Toys “R” Us is an American toy, clothing, and baby product retailer founded in 1948 by Charles Lazarus.

At its peak, the company operated around 1600 stories worldwide and was a prime example of a category killer – or a retailer gaining massive competitive advantage through pricing, diverse product selection, and market penetration.

Serial mismanagement

Modern retailers need to be progressive, flexible, adaptable, and responsive to change in an industry dominated by intense competition and eCommerce.

For one reason or another, Toys “R” Us management failed to embody these characteristics. Critics suggest its bricks-and-mortar stores were too large and packed with too much inventory

The shopping experience was also poor, with customer service non-existent. This caused consumers to shop at Target instead where they could buy toys in addition to homewares, school supplies, and other home essentials. 

Instead of engaging with consumers, management held on to the belief that the company was at the center of the toy industry universe.

Debt

Toys “R” Us was saddled with billions of dollars in debt – even before the boom in online shopping.

This hindered the company’s ability to open new stores, with former CEO David Brandon admitting that debt had caused Toys “R” Us to fall behind competitors ”on many fronts, including with regard to general upkeep and the condition of our stores.” 

It also forced the company to cut costs on employee wages, meaning its vast stores with similarly vast product ranges were devoid of appropriate customer service.

Changing consumer preferences and competition

Further to the above points around mismanagement and debt are changing consumer preferences. 

As children spent more time playing video games and less with physical toys, parents no longer had a reason to visit a Toys “R” Us store. 

The few physical toys that are purchased tend to be sourced online. But this was also problematic for the company because of fierce and established competition from Amazon, Walmart, and Target.

Amazon in particular influenced consumer expectations for the next generation of parents, who quickly became used to the convenience of ordering toys online.

Partnership with Amazon

In 2000, Toys “R” Us partnered with Amazon in a 10-year deal to become the eCommerce giant’s exclusive seller of toys and products. For this privilege, the company paid Amazon $50 million annually plus a percentage of all sales.

The partnership was a success from a financial point of view, but it would prove to have serious long-term ramifications for the company. The first side effect of the deal was that Toys “R” Us had no online presence – customers trying to access its website were redirected to Amazon.

What’s more, Amazon began entering into partnerships with other brands after witnessing the success of the deal with Toys “R” Us. Everything Amazon learned about selling toys came from the toy retailer and importantly, it kept toy sales limited to its own platform.

The company would ultimately sue Amazon for its troubles, allowing it to terminate the deal. While Toys “R” Us had won the battle, they were already losing the war. The deal with Amazon set the company back years in developing its own online presence and eCommerce strategy

Key takeaways:

  • Toys “R” Us is an American toy retailer founded in 1948 by Charles Lazarus. The company filed for bankruptcy in 2017 after more than seven decades in operation.
  • Toys “R” Us suffered from mismanagement, choosing not to invest in eCommerce and believing its physical stores would always attract patrons. High debt levels caused the maintenance and customer service levels in these stores to be sub-standard at best.
  • Toys “R” Us entered into a financially successful partnership with Amazon as the exclusive seller of toys. However, this partnership caused Toys “R” us to neglect its own eCommerce platform. It also surrendered important insights regarding toy retailing to its biggest competitor.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"