Those Toys R Us kids who didn’t want to grow up are now going to outlive their favorite store. The latest news isn’t good for the beleagured retailer—its pre-Christmas hopes of reorganizing to continue operation didn’t hold up after a much weaker-than-expected holiday season.
It’s tempting to blame the big, bad Amazon for driving it out of business, but that’s not the whole story. In fact, while Amazon did play a direct role in TRU’s downfall, it actually wasn’t a very big one overall.
CNBC has a long article looking at how TRU went under. In summary, Toys R Us never was very good about maintaining its store base or making its stores the most welcoming places; it entered into an ill-conceived deal with Amazon to sell toys via Amazon.com; then it fell prey not so much to Amazon as to discount stores like Wal-Mart, Target, and K-Mart that could afford to cut prices on toys because they had other sidelines to make most of their profits.
The death knell came when TRU’s capitalization (that is, the total value of all its stock in circulation) fell below the value of its assets, which made it a tempting target for a leveraged buyout. In simple terms, a leveraged buyout (or LBO) is when investors borrow a lot of money to buy a business, ransack the business for all the capital they can get out of it, then stick that business with the debt they ran up in order to buy it. It’s a lot like someone you don’t even know taking out a credit card in your name, living high on the hog at your expense, then vanishing and leaving you to pay off the debts.
Once that happened to TRU, it was effectively a dead business walking. It had to pay $400 million a year to service the interest on that $5 billion in debt. And this came at a time when Amazon’s star was rising even higher than the big-box retail stores that had set TRU up for an LBO in the first place—and when kids were starting to lose interest in toys due to other new technological developments. CNBC cites data service IBIS World to say that the toy industry declined 3.1% per year from 2012 to 2017 as TRU’s target audience put down toys and picked up computers, video games, and tablets.
Toys R Us had planned to file for bankruptcy in early 2018, with the holiday season behind it and the cash flow it had picked up over those months available to bolster it. That would have let it reorganize, get rid of the debt, and stay in business. However, word leaked out early, and TRU had to make the announcement prematurely. Unfortunately, once TRU’s suppliers knew it was unlikely to be able to pay its debts, they cut their risks by slashing their shipments to the retailer. That, in turn, contributed to a lackluster holiday season that left TRU with no alternative but to go out of business entirely instead.
It’s interesting to note that TRU giving its online toy business to Amazon has a strong parallel in how Borders gave Amazon its online book sales at about the same time. It was easier, during the dot com boom, to let someone else do it and not have to take that risk or develop that expertise yourself. The problem was, after you outsourced cooking your lunch to someone else, the odds were very good that someone else would eventually turn around and eat it.
A more interesting part of the story for me is the way CNBC attributes a decline in the toy market to the rise in kids’ uses of tablets and other new technology. It’s not something I’d had cause to think about, but in retrospect it does seem obvious that kids who get involved with computer stuff are naturally going to want to spend a lot more time playing with interactive digital technology than with chunks of plastic that don’t do much other than sit there. They could even read ebooks on it!
That also brings up the irony that in Ben Bova’s Cyberbooks, a satirical take on how the publishing industry would deal with ebooks, written years before ebooks were even a thing in the real world, it was toy stores who saved the ebook after the publishers had managed to kill it—selling ereaders as “toys” and hence bypassing the publishers’ chokehold on the marketplace. In the real world, the bookstore that bypassed the publishers’ chokehold on ebooks helped to kill this major toy store chain, too.
But the really worrying thing is that Toys R Us may be only the first domino of many. In the decades leading up to the rise of Amazon, many retail chains became the subjects of leveraged buyouts, as the steady cash flow inherent in retail was seen as a near guarantee that the debt could be paid off in just a few years—or at the least, they’d be able to refinance the debt and buy a few more years in which to pay it down. But now Amazon and other e-tailers are changing the rules, and investors are becoming much more reluctant to let retailers refinance. Bloomberg writes:
The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.
The same problem just hit iHeartMedia (nee Clear Channel), owner of 850 radio stations and operator of the iHeartRadio streaming audio app. iHeartMedia just filed for bankruptcy to shed some of its $20 billion debt, much of it the result of a 2008 leveraged buyout of its own. Unlike TRU, iHeart will be able to continue operating after it reorganizes—though like TRU, iHeart’s business is endangered by the various alternative new media options available to modern consumers.
Even other big box stores are in trouble. We already saw Radio Shack go under. K-Mart is closing more and more stores. Sams Club just closed two of its stores in Indianapolis, and Carson’s is closing its department store location that anchors Indianapolis’s downtown Circle Centre Mall. And, of course, you already know about the troubles facing Barnes & Noble. It’s entirely possible that the retail landscape will look very different in another year or two.
Of course, on the bright side, the collapse of retail chains probably won’t have much effect on sale of ebooks that you buy via the Internet. But it remains to be seen what the rest of the market is going to look like.