I’m sure you’ve heard about the misfortune facing one of the largest toy, game and children’s retailers in the world, Toys R Us.
This mammoth retail player is in dire financial straits in North America and filed for bankruptcy protection last September in the United States, and is in much the same situation here in Canada (although some stores closed, some remain open).
Of course, the first thing the talking heads claimed was that Toys R Us is a casualty of the Internet. According to them, shoppers prefer the internet and TRU is being put out of business because shoppers want to spend their money at eBay and Amazon. An interesting theory…and completely untrue.
The truth of the matter is that Toys R Us was doing rather well financially until they committed a huge gaffe of their own which placed them in this current situation. In effect, they blew their rent money at the mall and now can’t pay their bills.
Interestingly enough, Toys R Us originally began as a furniture store in Washington, DC, owned by Charles P. Lazarus in 1957. Lazarus noticed many parents coming into his store to buy furniture, and had an epiphany: parents will buy toys for their kids. He began to stock toys, and further noticed toys wore out a lot faster than furniture, and the parents were forever coming back to buy more toys. Hence Toys R Us, a play on the Lazarus name, was born.
Over the next 50 or so years Toys R Us grew into one of the largest international retailers in the world, opening hundreds of stores in North America, Europe and elsewhere. Toys R Us complimented itself with other chains like Kids R Us and Babies R Us.
Toys R Us has been characterized by some critics as one of the old guard, an old retailer that didn’t adapt well to the modern online retail world. That’s not true. Toys R Us seems to have embraced online sales and in 2012 was named one of the top 500 online retailers. So it wasn’t internet that caused its trouble.
Toys R Us in North America made the same mistake a number of modern retailers have made: It financed itself up the wazoo so intensely, it wasn’t able to pay its bills.
In 2005 Toys R Us wanted to become a privately traded company, rather than owned by shareholders. To this end it borrowed billions of dollars to buy back stock. In simple terms Toys R Us borrowed so much money in fact, that by 2006 it had almost tripled its debt load. This is like owing $1,000 a month for rent, utilities and car loan and earning about $1,050 a month on your pay cheque. Very close margin. You’d better hope no surprises come along.
In a 2008 annual report, Toys R Us itself noted its huge debt load could affect the company’s operation. It has.
Competition increased for Toys R Us too. As Walmart, Target and Costco picked up market share, Toys R Us lost. The toy chain also over the past 10 to 15 years developed a reputation for having high prices for the same toys available elsewhere. Being known as the most expensive guys doesn’t help a retailer.
It’s fashionable among certain circles to claim our traditional world is gone, replaced by a world of smartphones, tablets and web-only society and I suspect it’s some kind of attempt to appear wiser than the rest of us. Too bad it’s untrue, especially when it comes to retail. Take it from someone who sells on eBay, with astronomical shipping costs and screwed-up customs laws in Canada, online retail in this country has inherent limits that it’s probably already reached.
Stu Salkeld is the editor of The Pipestone Flyer and writes a regular column for the newspaper.