I think that it’s reasonable to say that there are two main causes for the recent demise of Toys ‘R’ Us. The first was the excessive debt burden put upon the company by owners KKR, Bain Capital and Vornado Realty. TRU’s heavy debt service came at a time of massive change in the world of retail and made it difficult for the company to invest in the changes needed to survive during this period of disruption. That said even if they didn’t have the debt burden, it is far from certain that TRU would have had the correct strategy or the ability to execute it. With their brand equity they should have been a leader in toy E-commerce but have botched that so many times that recently they haven’t even been one of the top five online sellers of toys. Additionally, their stores were a mess and there really wasn’t any compelling reason to visit them. If only TRU could have figured out how to attract as many people to its stores as attorneys to its legal hearings, things might have turned out differently. I think it’s reasonably to say that the business has been serially mismanaged since the recently deceased founder Charles Lazarus and his original team retired.
Corporate bankruptcies are always messy and the Toys ‘R’ Us case is no different. I am no big fan of US corporate bankruptcy laws having been burned by them a couple of times in my career. They seem a bit topsy turvy to me. Debt holders and financial institutions who are supposed to be professional evaluators of creditworthiness are first in line ahead of suppliers who are doing business with the company in good faith. Games almost always get played. I’m not privy to the details but it is pretty easy to imagine both product and service suppliers to Toys ‘R’ Us being lead on and lied to.
So, where does that leave us today? The patient is dead but there is still time for another attempt or two at resuscitation. To the Paddles! Toys ‘R’ Us is currently undergoing liquidation (even though the bargain prices don’t seem so low) but there are apparently still a few serious and non-serious attempts to revive the collapsing retailer.
There have been whispers of Toys ‘R’ Us trying to spin out or sell its house brands either with or without its internal product development team. However, those brands are not particularly strong, and I would imagine that the chances of this being successful are slim to nil even if they try it. The world will have to learn to survive without a brand called “Animal Alley”.
In better news, Toys ‘R’ Us attorneys have said in court that they have received multiple offers for a majority stake in its Asian subsidiary. Toys ‘R’ Us Canada has also been a viable business and there is talk of multiple offers in the works for the division.
Then we have the strange case of Isaac Larian. In what can only be described as a publicity stunt, Mr. Larian started a GoFundMe campaign purported to be an effort to buy Toys ‘R’ Us. The skinny is that if people donate enough money to buy Toys ‘R’ Us then Mr. Larian is willing to accept ownership of the company. In return, donors will receive not equity but rather bumper stickers and T-shirts which Mr. Larian imagines will be highly prized. I have to ask why such a scheme should be limited to the toy business. There are other troubled companies out there that Mr. Larian might like to own. Perhaps people will also donate money to buy General Electric for him. And why should we limit this to companies in trouble? I may consider asking donors to purchase Apple Inc. for me. It’s not surprising that this absurd effort only attracted $59,000.00 out of the billion dollars Mr. Larian has requested.
Mr. Larian also purports to have made another more serious bid to purchase some Toys ‘R’ Us assets. While his GoFundMe shenanigans do make this plan less credible that does not mean that it is not credible at all. Mr. Larian has said that he has offered $675 million for the U.S. stores of Toys ‘R’ Us and another $215 million to purchase the Canadian operations. As the very least, the offer for the Canadian division appears to have some legs. Should either of these efforts come to pass, toy manufacturers will have to carefully consider whether to do business with a retailer owned by a major competitor. Mr. Larian has said that he will not be involved in day to day operations but people who know or have worked with Mr. Larian have never described him as being hands-off. One has to wonder if other toy manufacturers will be eager to “open their kimonos” on pricing, costs and early peeks at their product lines to a competitor in a secretive and often ruthless business. Time will tell.
Better news is coming out of the K.B. Toys camp. Strategic Marks which owns the brand has been in talks with Spirit Halloween, Party City and others to open up 1,000 pop-up stores to sell toys during the holiday sales season. This should help manufacturers in their search for more shelf space to replace that which they have lost at Toys ‘R’ Us even while fighting against their own unpaid for merchandise which is being sold at a discount during TRU’s liquidation.
Other potential turbulence in Toyland comes from the possibility of a trade war breaking out right at the beginning of the holiday shopping season. Thus far most of the tariff talk appears to be rhetoric rather than policy. Both the Trump Administration and China appear to be engaged in posturing ahead of what will likely be protracted negotiations rather than an all-out trade war. The two sides now have a period of about seven months during which they will seek to negotiate a new normal. Hopefully that will turn out to be the case because a game of chicken can end badly, especially when conducted in public by men with enormous egos. Sooner or later somebody is going to call your bluff.
What does this mean for toy industry hiring? So far, things are much better this year than last. Last year at this time, toy industry executives were telling me that they needed to add staff but were going to “hold off for now” due to uncertainty at Toys ‘R’ Us. Chapter 11 brought “certainty” but it wasn’t exactly helpful and left many companies wide-eyed and immobile like deer in the headlights. In 2018, toy manufacturers were expecting trouble at TRU and planned for it. Very few were expecting that trouble to hit as deep or as fast as it did, especially since Toys ‘R’ Us executives were leading them to believe otherwise. What I see in the toy employment now is total turmoil. Some companies are laying off. Some are hiring. Many are doing a little of each as they seek to realign their staff with their go forward strategies. Few companies are standing pat and most are making changes to meet the challenges of the shifting retail landscape. That means there will be winners and losers. There are few jobs right now for Sales Executives in the northeast, even as opportunities for people with sales experience calling on mid-tier and value channel retailers as well as E-commerce expand rapidly. Some will see new opportunities opening up while others will have to retool and learn new skill sets.
After a brief period of confusion, the toy industry is going to be alright. Consumers still want toys and five years from now manufacturers will have found new ways of getting their product to them. From the early eighties with the rapid succession of toy company shutdowns of – Mego, Lesney, Coleco and CBS Toys – the toy industry has been ever changing and always in turmoil. Same as it ever was.
“Crossing the River by Feeling the Stones”,
Tom Keoughan
Leave A Comment