Why Toys R Us Failed: An Entrepreneur’s Analysis
Toys R Us was once a giant in the toy retail industry. Kids would beg their parents to take them to the massive stores filled with every toy imaginable.
The brand was iconic.
However, in 2018, Toys R Us shut down its U.S. operations after filing for bankruptcy protection. So what went wrong? How could a beloved brand like Toys R Us fail so spectacularly?
As an entrepreneur, I’m going to analyze the key factors that led to the downfall of this iconic toy retailer.
The Rise and Fall of Toys R Us
Toys R Us was founded in 1948. It started as a baby furniture store but quickly shifted focus to toys. In the 1950s and 1960s, Toys R Us grew rapidly by following the newly built suburbs across America.
By the 1990s, Toys R Us was the undisputed king of toy retailers. It had:
- Nearly 900 stores in the U.S.
- Over 700 international stores
- Iconic mascot Geoffrey the Giraffe
- Famous jingle “I don’t wanna grow up, I’m a Toys R Us kid”
However, cracks started appearing in the early 2000s. Walmart became a major toy seller. Amazon rose as an e-commerce giant. Toys R Us began closing stores and laying off employees.
In 2005, the company was acquired in a $6.6 billion leveraged buyout. This saddled Toys R Us with massive debt just as online shopping was taking off. Ultimately, Toys R Us could not keep up and filed for bankruptcy in 2017, leading to its 2018 shutdown.
Mismanagement and Debt
One of the biggest factors in the downfall of Toys R Us was mismanagement, particularly the disastrous 2005 leveraged buyout. This loaded the company with $5 billion in debt that it could never recover from.
The interest payments alone totaled over $400 million per year – that’s money that could have been reinvested into the company’s operations and growth. Instead, Toys R Us was shackled by its debt burden.
As an entrepreneur, I know first-hand how crippling debt can be for a business. Cash flow is oxygen – without it, you cannot survive, let alone innovate and grow. The Toys R Us buyout was a classic case of private equity firms stripping assets without a long-term plan.
Failure to Adapt to E-Commerce
Perhaps the biggest strategic failure of Toys R Us was its inability to adapt to the rise of e-commerce and online shopping. Amazon completely disrupted the retail landscape, but Toys R Us was woefully behind:
- Its website was outdated and hard to navigate
- Online selection was limited compared to stores
- Shipping was slow and expensive
As more parents started shopping online for toys, Toys R Us kept investing in its big-box physical stores instead of its digital presence. By the time it tried catching up, it was too late – Amazon had become the go-to toy source online.
For any company today, having a strong e-commerce strategy is critical. Toys R Us failed to read the tea leaves and paid the ultimate price.
Competition from Big Box Stores
While Amazon posed an online threat, Toys R Us also faced intensifying competition from big-box retailers like Walmart and Target. These major chains started carrying wider toy selections at cheaper prices.
With their higher buying power, big-box stores could undercut Toys R Us on pricing for popular toys during the crucial holiday shopping season. They also had the advantage of selling toys alongside other household essentials, creating a one-stop shop experience.
Toys R Us tried fighting back by opening its own big-box concept, Toys R Us Kids World, but it never gained traction. As a specialty retailer, Toys R Us simply could not compete with the scale and pricing power of diversified big-box chains.
Overreliance on Holiday Sales
One underlying problem for Toys R Us was its overreliance on the holiday shopping season for the majority of its annual sales and profits. Historically, the company generated 40% of its net revenues during the fourth quarter.
This made Toys R Us extremely vulnerable to any disruptions during the holiday period. A short Christmas shopping season, supply issues, or aggressive discounting from competitors could decimate the company’s revenues for the entire year.
For a company already struggling with high debt and operational issues, this overreliance on the holidays magnified problems. I’ve seen many retail startups make the mistake of going all-in on peak seasons without having a balanced sales strategy year-round.
Lack of Innovation
Another factor in Toys R Us’ downfall was its failure to innovate and evolve its shopping experience. For decades, the retailer relied on the same big-box format filled with row after row of toys.
While the sheer scale and selection wowed kids, the monotonous layout grew stale over time. Toys R Us made little effort to reimagine the in-store experience or create a distinct brand identity beyond Geoffrey the Giraffe.
In contrast, look at how brands like Apple, IKEA and Disney have continuously reinvented the retail experience. For products geared towards kids, injecting fun, interaction and storytelling into stores is crucial. Toys R Us failed to innovate in any meaningful way.
Poor Customer Experience
Exacerbating these other issues was Toys R Us’ declining customer experience and service levels, especially in its later years:
- Stores were often messy and disorganized
- Inventory was poorly managed, with frequent stockouts
- Employee morale and training were low
- Loyalty programs were non-existent
- Long checkout lines, especially during holidays
As e-commerce made shopping more seamless, Toys R Us’ clunky in-store experience felt increasingly outdated to today’s time-strapped parents. No amount of nostalgia could make up for a subpar customer experience.
In business, continually delighting customers is paramount. Toys R Us clearly lost that focus as its financial troubles mounted. For any retail brand, reinvesting in optimizing operations and service should be an unwavering priority.
TL;DR
In summary, the key reasons for the downfall of Toys R Us included:
- Crippling debt load from a disastrous leveraged buyout
- Failure to adapt and invest in e-commerce as Amazon rose
- Intense competition and underpricing from big-box retailers
- Over-reliance on the holiday shopping season
- Lack of innovation in stores and the customer experience
- General mismanagement amidst financial troubles
The toy retail giant’s spectacular bankruptcy showed how quickly an iconic company can unravel without evolving its business model and prioritizing innovation. For entrepreneurs, it serves as a cautionary tale of the need to future-proof your business.
Q&A
Q: Could Toys R Us have been saved?
A: It’s possible Toys R Us could have been saved if it received a major injection of capital and new leadership to aggressively reinvent the business. However, given the mounting debt and challenges on multiple fronts, a turnaround would have been extremely difficult. Many experts felt bankruptcy was inevitable.
Q: What does the future hold for toy retailing?
A: The toy retail landscape is increasingly being dominated by e-commerce, led by Amazon. Traditional toy stores will need to find ways to create exceptional in-person experiences to complement their online sales channels. We may also see toy brands selling more direct-to-consumer.
Q: What lessons can entrepreneurs learn from Toys R Us?
A: Some key lessons include:
- Avoid crippling debt that handcuffs your ability to invest and innovate
- Adapt quickly to disruptive threats like e-commerce before it’s too late
- Differentiate from major competitors and avoid being commoditized
- Continually improve the customer experience through innovation
- Don’t over-rely on seasonal drivers – build a balanced business model
- Maintain financial discipline and don’t let mismanagement derail operations
Q: Could this happen to other major retail brands?
A: Absolutely. We’re already seeing disruption across many retail verticals. Legacy brands like Sears, JCPenney, and RadioShack have all faced their own struggles and store closures. Malls are becoming ghost towns as e-commerce takes over. Any retailer resting on past success while failing to evolve is at risk of a Toys R Us-like downfall.
Q: What’s one creative idea you would have tried to reinvent Toys R Us?
A: One wild idea: Toys R Us could have doubled down on experiential retail by turning its stores into hybrid toy museumplexes. Envision an entertainment space with cool toy exhibits, interactive demos, theme park-esque activities, and special events. Pair that with a streamlined online/delivery operation. It could have differentiated the brand while still innovatively selling toys. Of course, that’s an oversimplified idea – the financials and execution would have been extremely challenging. But companies like Toys R Us needed think-big, disruptive concepts.
