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Editor’s note: Game over for Toys ‘R’ Us

4/19/2018
What killed Toys “R” Us?

If you think it was a combination of intense competition from other traditional retailers and online operations like Amazon, you are only half right — if that.

The rest of the load falls squarely on the private equity companies that bought Toys “R” Us over a decade ago and saddled the company with more than $5 billion in debt. That is billions with a capital B, and it was enough to prevent the chain, which was already under intense pressure from Wall Street for some previous serious missteps, to keep pace with its competition.

In case I am not totally clear here, let me put it another way. Toys “R” Us will go down in retail business history as a poster child for just how badly private equity operators can ruin a business — a venture so big that at one point some said it was simply too large to fail. By the way, that says a lot, because private equity does not have a very good record when it comes to the retail industry.



The problem with private equity money is that it comes with a very crucial string attached: make lots of money and do it quickly. The folks that got involved with Toys “R” Us and some other retailers have failed to see that retail requires constant investments in infrastructure, marketing, assortment and advertising. Starting a new venture a few billion or more in the hole caused the leadership to forgo some of these necessary investments in hopes of returning dividends to the investors. Just a wild guess here, but I do not think those investors in Toys “R” Us are very happy right about now.

Consumers noticed the lack of attention pretty quickly. I know that I did. Organized clean stores with the right assortment of products turned into a maze of junk on messy shelves, and not enough in-store help at crucial times of the year. Shoppers left in a hurry, most to chains like Walmart and Target and, of course, Amazon, which offered more basic assortments but in much neater surroundings and often at lower prices.

Many people will say that the chain had it coming to it. The bottom line is that Toys “R” Us did a great job of putting just about everyone else out of the retail toy business over the last 30-plus years. It did so at one time by using devastating firepower — a lethal mix of great prices, broad assortment and strong advertising — to make toy retailing virtually impossible to be profitable for other retailers.

The lesson, of course, is that to be successful retail needs to be run by professional merchants, those individuals who know that this is not a sprint, but a marathon. And private equity does not normally work very well with retailers. Just ask the folks at Toys “R” Us.
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