How the Iconic Toy Retailer Toys R US Rose to Dominance and Suddenly Went Bankrupt
You probably have fond memories of visiting Toys R Us as a kid. With aisles packed with every toy imaginable, it was a playground for children and a one-stop shop for parents. For decades, Toys R Us dominated the toy industry, becoming one of the largest specialty retailers in the world.
But behind the scenes, Toys R Us was struggling under billions in debt. Despite once having over 1,500 stores worldwide, the company declared bankruptcy in 2017 and liquidated all of its US operations in 2018.
So what happened to Toys R Us? How did this icon of childhood go from toy titan to bankruptcy? Here’s the story behind the dramatic rise and fall of Toys R Us.
Humble Beginnings In 1948, Charles Lazarus began selling baby furniture out of his father’s bike shop in Washington, DC. He quickly realized the big money was in toys, not bikes or cribs. Lazarus opened the first Toys R Us in 1957, stocking it wall-to-wall with toys to capture kid’s imagination.
By 1965, Lazarus owned five Toys R Us stores. He had hit upon a winning formula pile every toy a kid could want under one roof. Parents could find anything their children desired without running all over town.
Lazarus Sells Toys R Us to Focus on Growth
Despite this early success, Lazarus knew Toys R Us needed more resources to reach its potential. In 1966, he sold control of the company to Interstate Department Stores Inc. to raise expansion capital.
Interstate bought Toys R Us for $7.5 million and took the company public. Lazarus stayed on as CEO, maintaining day-to-day control of the company he built.
Aggressive Growth and Market Domination With the influx of cash, Lazarus aggressively expanded Toys R Us nationwide throughout the 1970s. By 1978, Toys R Us was the largest toy retailer in the country with 182 stores generating $1 billion in sales.
Toys R Us continued expanding at breakneck speed, opening 236 stores in 1983 alone. By the mid-1980s, Toys R Us accounted for a quarter of all toy sales in the United States. The company had over 1,300 stores worldwide by 1990.
Toys R Us achieved this by using tactics like loss leader pricing — offering hot toys at or below wholesale prices to lure shoppers into stores. Loss leaders were mixed with higher regular prices across the rest of the merchandise.
This approach helped Toys R Us become the first-stop toy destination for multiple generations of children. Parents knew they could find the latest hit toy their kid was begging for.
When Challenges Emerged
Increased Competition Toys R Us dominated the toy market throughout the 1980s and early 1990s. But the landscape was starting to shift. Mass merchants like Walmart and Target realized how lucrative toys were and expanded their toy selection.
Armed with sophisticated supply chain management, these mega retailers could afford to undercut Toys R Us on pricing. Walmart and Target quickly captured toy market share by offering loss leaders on the hottest toys.
At the same time, online shopping was emerging as a threat. Specialty toy stores like KB Toys offered a more focused selection than the superstore approach of Toys R Us.
By the late 1990s, Toys R Us was losing ground. Its share of overall toy sales dropped from 25% in 1990 to 18% in 1997. Profits were also squeezed, with operating margins falling from over 12% to 8% over the same period.
Toys R Us Faces Bankruptcy for the First Time Falling market share and declining profits left Toys R Us vulnerable. Management realized the company needed an infusion of cash to update stores and invest in e-commerce to compete with ascendant rivals.
In 1998, Toys R Us filed for Chapter 11 bankruptcy protection. This allowed Toys R Us to restructure debt while continuing normal business operations.
Toys R Us rebounded quickly from its first bankruptcy by right-sizing operations. But another threat to market share was just around the corner…
Here Come the Big Box Stores In the 2000s, big box stores became an even bigger thorn in Toys R Us’ side. Retail giants like Walmart and Target redoubled their toy selection, allocating more space to high profit toys & games.
Toys R Us was stuck with hundreds of cavernous stores that were expensive to staff and operate. The category killers had much lower overhead costs. Their massive buying power allowed them to consistently undercut Toys R Us on price.
This intense competition caused Toys R Us profits to stagnate. From 2000 to 2004, net earnings hovered between $85 million and $105 million. The company was struggling to stay relevant in the rapidly evolving retail landscape.
Bain Capital & KKR Take Over in Leveraged Buyout By the mid-2000s, it was clear Toys R Us needed a strategy overhaul to survive. Outsiders took notice of the company’s struggles. In 2005, private equity firms Bain Capital and KKR engineered a $6.6 billion leveraged buyout of Toys R Us.
This saddled the company with over $5 billion in debt including $400 million per year in interest payments alone. However, it also gave management more flexibility to turn operations around.
The heavy debt load severely hampered Toys R Us. The company was forced to rely on existing cash flow to fund interest payments and store maintenance. Toys R Us could not afford to invest in bold initiatives needed to revive the brand.
Toys R Us Limps Along Mid-2000s Under the ownership of Bain Capital and KKR, Toys R Us plodded along for over a decade. Minor efforts were made to revamp stores and improve the online shopping experience. But the magic was gone. Shoppers were increasingly bored by the selection and store experience.
Despite the debt anchor, Toys R Us remained the largest dedicated toy retailer in the US with over 800 stores and $11 billion in annual sales. However, profits continued to be elusive. From 2006 to 2013, Toys R Us had just one profitable year.
The Closing Of Toys R US
In early 2017, Toys R Us announced plans to shutter 180 US stores in an effort to stabilize the company. But it was too little too late. The decades of falling market share, competitive pressure and massive debt burden had taken their toll.
Holiday sales came in far below expectations in 2017. In September, Toys R Us filed for bankruptcy. After an extremely disappointing 2017 holiday season, the company realized there was no way out of this hole.
In March 2018, Toys R Us announced it would close or sell all of its over 700 remaining US stores. Efforts to find a buyer or restructure debt had failed. Soon the iconic Toys R Us name vanished from the American retail landscape.
Key Factors That Led to Toys R Us Demise The saga of Toys R Us serves as a cautionary tale of how even the most dominant retailers can quickly falter. What key factors caused this titan of toys to collapse?
Failure to Adapt to Evolving Retail Toys R Us struggled to adapt its big box store model. They couldn’t provide the discount pricing or focused selection smaller competitors offered. Toys R Us also failed to quickly embrace e-commerce, allowing rivals to own online toy sales.
Inability to Shake 1980s Brand Identity Toys R Us didn’t update its brand identity from the mega toy store kids loved in the 80s and 90s. Walmart and Target offered a more enjoyable shopping experience for time-strapped parents. Toys R Us stores became stale and uninspiring.
Unmanageable Debt Load The leveraged buyout loaded Toys R Us with debt they had no way to pay off. Interest costs ate into profits and prevented reinvestment. Toys R Us needed radical change to survive, but debt handcuffed management.
Failure to Differentiate
Bigger competitors beat Toys R Us on price, smaller specialty retailers had better selection. By the 2010s, Toys R Us didn’t offer anything shoppers couldn’t find elsewhere. They lost their niche as the go-to toy destination.
What We Can Learn from the Downfall of Toys R Us While the collapse of Toys R Us made many nostalgic for a piece of their childhood, this retrospective offers important business lessons:
Evolve Your Business Model Toys R Us relied too heavily on the big box store formula that initially fueled its dominance. They failed to adapt their model to compete as consumer preferences changed.
Don’t Let Debt Cripple Your Company
The buyout saddled Toys R Us with unsustainable debt just as they needed to invest aggressively in e-commerce and store revitalization. Debt can be a prison.
Fight Commoditization As bigger retailers expanded toy offerings, Toys R Us struggled to differentiate themselves. They could no longer compete just on product when consumers saw toys as commodities.
The Toys R Us brand is not completely dead. In 2019, Tru Kids Inc. acquired the rights to Toys R Us and opened two new US stores. However, with the scars of debt and divergence from consumer needs still fresh, it’s unclear if Toys R Us can reclaim its former glory.
The Rise and Fall of Toys R Us: Conclusion For over half a century, Toys R Us embodied the magic of toys for millions of children. Its massive stores packed with every toy imaginable led to dominance of the market.
However, Toys R Us failed to adapt to evolving consumer preferences and competition. This left the company vulnerable to outside acquisition and unsustainable debt obligations. Despite its nostalgic connection to generations of shoppers, Toys R Us could not escape its fundamental business challenges.
The dramatic demise of Toys R Us teaches us no company, no matter how beloved, is immune to disruption or safe from poor strategy. In the rapidly changing retail industry, brands that cease to offer value to consumers end up relegated to the past.