From The Washington Examiner:
On Thursday, Toys “R” Us announced that, after 70 years as the major toy chain, it was going defunct. Immediately there was a nostalgic backlash of adults humming the theme song, “I don’t wanna grow up, I’m a Toys ‘R’ Us kid…” to coincide with news reports of their closing.
Still, let’s be honest: This wasn’t Mom ‘n Pops book store being put under by Barnes & Noble, this was savvy, online retailers outdoing a smaller, specialized chain — peak free-market capitalism. The fact that it went under isn’t necessarily a cause for celebration, but nor is it an invitation to whine or feel sad. Would you rather live with Toys “R” Us and without Amazon?
Competition is ground zero for the marketplace. Those who stay in the ring, compete, and improve, go on to fight another match. Those who fail to observe their opponent, improve, and implement that knowledge will experience net loss and eventually shutdown. Chief Executive David Brandon blamed Target, Walmart, and Amazon for the store’s death. The New York Post reported: “the first self-inflicted wound came in 2000, when Toys ‘R’ Us, struggling without a viable e-commerce platform, inked a 10-year deal to become the exclusive toy seller on Amazon. At the time, shoppers going to toysrus.com would end up on Amazon.” To add insult to injury, Toys “R” Us could not seem to grasp the new era of online shopping and failed to lower the prices of its products to compete with other outlets.
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Adults (or kids) shouldn’t feel nostalgic that they can no longer be a “Toys ‘R’ Us kid,” they can just be happy they got their Nerf gun $10 cheaper at Walmart. As Milton Friedman said, “Underlying most arguments against the free market, is a lack of belief in freedom itself.”
Link to the rest at The Washington Examiner
I worked on a project with them back in 2007. The biggest problem then that I saw was that the leadership team the private equity guys put in did not understand the category or the brand. They didn’t appear to be trying to understand them either. The HQ was stuffed with TVs running non-stop financial news channels and had precious little direction to focus the employees on delivering experience.
The purchase was a bad strategic move in that the private equity team was trying to make a consolidation play, presumably with an increase in prices once they got there, while the writing was already on the wall that price competition was only going to get worse. Walmart and Target were the obvious threats then, but it wasn’t that difficult to see the potential in Amazon and other online platforms.
Thanks for sharing your experience, Sean.
“The New York Post reported: “the first self-inflicted wound came in 2000, when Toys ‘R’ Us, struggling without a viable e-commerce platform, inked a 10-year deal to become the exclusive toy seller on Amazon. At the time, shoppers going to toysrus.com would end up on Amazon.” To add insult to injury, Toys “R” Us could not seem to grasp the new era of online shopping and failed to lower the prices of its products to compete with other outlets. ”
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Borders did the same thing.
So did Target.
But Target used that time to build up their own website and refocus their stores on aspirational middle class shoppers.
The idea to buy time letting Amazon run your site for a while wasn’t inherently bad. Followup and execution made a difference.
For some reason, most of these articles are glossing over the leveraged buyout by private capital in 2005 which saddled Toys R Us with 5 BILLION in debt (while the investors paid themselves back, of course). The article is right that capitalism killed the store, just not Amazon or competition. It was a hedge fund buyout.
https://www.nytimes.com/2018/03/15/business/toys-r-us-bankruptcy.html
The Washington Post thinks it’s because americans aren’t having enough babies.
https://www.washingtonpost.com/news/wonk/wp/2018/03/15/toys-r-uss-baby-problem-is-everybodys-baby-problem/?utm_term=.186570c67961
(With a hint that more immigration is the solution.)
Agreed, Sarah.
Very true, Sarah. Death by malevolent financing. Just takes a little while to die from it.
What’s worse is that TRU may be just the first domino of many. Many, many retail chains were subject to leveraged buyouts over the last couple decades. Now Amazon’s changed the rules, and investors are becoming a lot more reluctant to let those retail chains refinance all that debt. The retail field may look very different in just a couple of years.
CBSNEWS agrees with you:
https://www.cbsnews.com/news/some-of-americas-biggest-retailers-are-looking-wobbly/
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“Running a retailer with high balance sheet leverage is really tough, especially now,” said Charlie O’Shea, an analyst at Moody’s. The industry “has changed so much since the Toys ‘R’ Us buyout that if you don’t have a fair amount of financial flexibility — and that’s not a profile that a leveraged retailer has — you are going to have a tough time out there.”
In part, that’s because any hint of financial troubles can spook a retailer’s suppliers, making manufacturers hesitant to send products to a struggling store for fear they won’t receive payment. When speculation about Toys “R” Us’ financial health arose last fall, vendors started demanding cash up front. That can create a vicious circle, with shoppers snubbing stores because of lack of inventory or poor selection, which can then lead to lower sales and less money to pay vendors as well as lenders. ”
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That is exactly what happened with Borders.
They were living off returns credits for months and went chapter 11 when the big publishers cut back on their orders. And ended up in liquidation when they insisted on full payment.
While most non-book retailers don’t have full return regimes they do have credit windows and “float”. With tighter terms, things get iffy real fast.
This is actually a big part of the argument why the Trump administration won’t let Broadcom buy Qualcomm. Broadcom is already highly levered and will have to raise ~$30B more in debt to make the acquisition and will also exhaust ~$27B of Qualcomm’s cash. The thinking is that Qualcomm’s revenue stream will be burdened by debt service, which will prevent them from making the necessary investments in 5G technology to stay at the forefront of the industry. The important part of this that it would provide Chinese company Huawei an opening to be a leading player in next generation cellular technology.
The investors in Toys R Us may not make out so well. Maybe they pulled one over on the banks, but when there’s a lot of debt on the books, they can’t just treat the company like a piggy bank. Also, if they have, then they won’t be able to borrow anymore, which could jeopardize current holdings and will prevent future deals. For this reason, it is almost certain that the investors are losing all of the capital they put into Toys R Us.
I doubt private capital ( is that what corporate raiders are called now ? ) could buy a firm whose stock was on the rise. All the analysis I have see indicates that Toy R Us was failing before the buy out, the falling stock price made the buy out possible. Increased competition from Walmart & target drained away customers. The buy out was a band aid over an open sore.
I wonder how many more of these misalocation of funds will come to light as interest rates start rising.
Raiders are a subset of Private equity.
There’s also Venture Capital and Incubator funding ventures, that help startups ramp up. They too make money when taking the company public but their business is building up companies instead of stripping them down.
Some private equity deals are about preserving and restructuring a company that might flounder under Wall Street rules. Michael Dell taking DELL COMPUTERS private is a notable success story, BAM going private is still an ongoing story.
It’s not all slash and burn plunder.
Exactly!
I wonder how many of these ‘Amazon killed ’em’ stories have leveraged buyouts in the closet with the rest of the skeletons.
Capitalism is awesome?
Not so much, it seems, if your competition is flooding the market with cheaper goods or raw materials, that’s when protectionism and tariffs kick in.
Apply tariffs to Amazon?
I’m seeing the same problem as the megabookstore chains – far too much overhead in the form of “prime retail space”, when fewer people want to invest half of an evening fighting traffic and schlepping through a “brick and mortar” store.
That demographic would be overrepresented by “twentysomethings with kids and even less free time than the rest of the potential customers.”
I understand there are people who view “going to the store” as a form of entertainment. But they’re a shrinking demographic.
Toys’R’Us’ management at least had the smarts to realize their business model was dying, cashed out, and walked away instead of scrabbling at the corners of a shrinking market of declining profitability like, oh, B&N.
My mom’s favorite entertainment is going to the store. Any store. But at 81, toy stores aren’t her thing.