What Went Wrong at Toys ‘R’ Us?

Toys ‘R’ Us is closing. Allow me to pause for a second and wipe my eyes as one of the happiest places of my youth begins to sell itself off and fade into memory.

Last week the retailer announced that after 70 years the massive toy store chain is ceasing its U.S. operations, citing massive financial responsibilities and a changing retail landscape for its failure.

“I am very disappointed with the result, but we no longer have the financial support to continue the company’s U.S. operations,” Toys ‘R’ Us CEO and chairman Dave Brandon said in a statement. “We are therefore implementing an orderly process to shutter our U.S. operations.”

I cover retail so I knew Toys ‘R’ Us was in trouble, but I guess I kind of just figured they would pull out of it. I have two young kids so between gifts for them and the seemingly never-ending birthday party invites, I am constantly in the toy market. Toys ‘R’ Us is my go to retailer. In fact, most times when I go to my local Northern New Jersey location, the place is pretty hoping.

Obviously, you cannot judge an entire chain on one successful location. I guess my nostalgic view of the brand, coupled with my continued patronage led me to believe the toy store would find a way to survive…I was wrong.

“Toys ‘R Us is going under for one reason only,” says Greg Buzek, founder and president, IHL Group. “KKR, Bain Capital and Vornado Realty Trust leveraged them with over $7 billion in debt for expansion in spite of increased competition from Walmart, Amazon, Target and others. Private equity in and of itself is not evil, but when it is used for only short-term views and short-term gains, without thinking about overall market dynamics, we end up with a disaster impacting thousands of lives. That is what happened here.”

For a kid who grew up in the ‘80s, the iconic Toys ‘R’ Us theme song will be forever cemented in my memory. I can clearly remember singing along with the commercials and would still join in to this day if anyone sings the first few lines. “I don't wanna grow up, cause maybe if I did...I couldn't be a Toys R Us kid!” Unfortunately the catching theme song was unknowingly predicting the retailer’s death.  

“Toys R Us’ tag line foreshadowed its demise,” says Jeff Roster, VP of retail strategy, IHL Group. “’I don’t want to grow up, I’m a Toys R Us kid.’ The problem is we all did grow up and had digital natives. Our kids weren’t buying Risk the board game. They were buying Risk the app. Pretty hard to compete with that.”

Brendan Witcher, principle analysts at Forrester echoes Buzek’s comments. “The Toys R’ Us failure was a result of an inability to support the massive debt burden placed on it by overly optimistic PE firms,” he says. “While some have pointed to management’s inability to execute on core retail strategies and investments, those are actually just symptoms of the debt problem. PE firms often make the mistake of assuming a company’s growth can be achieved by simply adjusting strategy and operations, but retail success today requires financial models that generate cash flow for the tech and resource investments needed to execute in this highly competitive market.”

It is not as if Toys ‘R’ Us was not trying to succeed in the current retail climate, it was just not able to find a way to digitally transform while continuing to meet its monumental debt responsibilities. "Toys R’ Us did a decent job of rolling out omnichannel strategies like buy online pick-up in-store and being data-driven with inventory visibility on their websites,” says Tushar Patel, CMO, Kibo. “However, those are table stakes when it comes to the future of retail. Toys ‘R’ Us needed to think through the entire buying experience and reinvent their in-store experience and personalize their e-commerce. Innovation in retail is imperative, and unfortunately Toys R Us fell short.”

Ken Morris, principal at BRP, takes it a step further. To him it was not just the crippling debt and technological issues that did Toys ‘R’ Us in, it was a changing marketplace that has made commodity retailers easily beaten by the nimble digital-first competition.

“The other big challenge was the nature of their business of selling “commodity items” that can be easily purchased online at Amazon and delivered to their doorstep or at their local Walmart – where customers can also buy groceries, clothes, electronics, and other needed items in one trip,” he says. “The survival of retailers selling commodity merchandise requires new approaches to differentiate the brand with personalized services and experiences. Maybe Toys “R” Us would have been more successful if they had established their stores as destinations by creating interactive experiences and events in the store. People enjoy the theater of shopping – that is the value of the physical store.”

While Toys ‘R’ Us has begun the slow and painful process of liquidizing its assets, the Toys ‘R’ Us name will likely live on. Someone will sweep in and pay a handsome price for the brand’s moniker and will leverage it to draw in nostalgic shoppers (me sheepishly raising hand) and solidify their place in the toy market.