Toys ‘R’ Us: Success Spelled Backwards

For many, the demise of Toys ‘R’ Us comes as something of a shock.

True, there were warning signs. The world’s leading toy store had been in decline for several years. By July 2017, Toys ‘R’ Us was fighting just to survive. The empire of fun wasn’t so much fun anymore, as the company entered into a restructuring scheme to pay off $400 million in debt looming in 2018.

The company secured a $3.1 billion bankruptcy loan in September, and there were hopes that Geoffrey the Giraffe (the company’s “spokesanimal”) would keep his head above Chapter 11.

But this week, creditors were horrified to learn that they might never see all — or in some cases any — of the money they are owed, as the biggest toy business in history heads for liquidation.

Not only the toy business, but the entire U.S. economy is affected. As some 800 Toys ‘R’ Us branches are shut down or sold in the coming weeks and months, shopping malls that housed the big-box stores will have to try and fill the empty shells with new tenants, and toymakers that supplied it with their products will search for new outlets. Thousands of jobs are at risk.

It won’t be a total wipeout, since some of the stores are still profitable and they will likely find buyers who will keep the business going both in the U.S. and abroad.

But it’s still a shock. What happened? How did such a successful business — which had been on top of the world for decades in the U.S., Canada, Europe and Japan — fall apart?

There is no shortage of culprits in this story. The analysts are pointing to multiple factors, human and otherwise.

Its original (in both senses) entrepreneur, Charles P. Lazarus — who had built the business from nothing, from Children’s Bargaintown to the iconic Toys ‘R’ Us (and was the one who wrote the “R” backward) — handed the business over to others in 1994. Those “others” did not seem to have the same sure touch as the founder.

They stand accused of complacency; of missing opportunities, of losing touch with the moms and kids, and of allowing inspiration to deteriorate into merely running a business.

The bogeyman of all conventional enterprises — online competition— got to Toys ‘R’ Us as well. Not that the company didn’t try to adapt, but a deal with Amazon in 2000 went awry and ended in a financially costly squabble over exclusivity rights, for which Toys ‘R’ Us reportedly paid about $50 million a year. Amazon used the platform to build a marketplace for selling other toy brands.

In the 1980s and ’90s, Toys ‘R’ Us had a virtual monopoly on the idea of a store devoted to toys and nothing else. Inevitably, the discount giants — Walmart and the rest of the gang — moved in, offering a massive selection of the same toys at lower prices, thereby cutting into the market share.

All of these are reasonable explanations. They are factual, they make sense. Yet, Toys ‘R’ Us had had its ups and downs and weathered competition in the past.

When Lazarus relinquished his position as CEO, it wasn’t to some bottom-line-obsessed ogre from Wall Street with no feeling for the playthings of childhood. It was to Michael Goldstein, who was known for expertise in the toy business.

But Goldstein didn’t last long, and those who succeeded him were less in love with toys than with making money.

As for fending off the new wave of online purveyors, the company had thrived on innovation — indeed had made a name for itself for its sophisticated use of computers in keeping track of customer preferences. As a 1985 Wall Street Journal article said, “Each product is tracked by computer, and that helps the chain spot hot-selling items weeks before most competitors do.”

Apparently, it was this combination of a liking for toys and genuinely smart business methods that enabled the little upstart to grow into a giant, and a target for other giants to knock down.

If another Goldstein had come along, the story might have had a happier ending. Had the Amazon deal gone well and the partners had managed to settle their differences amicably, Toys ‘R’ Us might have successfully parried the threat of online competition.

But these are the ifs and might-have-beens that accompany every great business that descends from the heights of profitability to the depths of bankruptcy.

Furthermore, the implosion of Toys ‘R’ Us comes at a time when the overall market for toys has, if anything, improved. According to the market research group NPD, toy sales grew by 3 percent in the first half of 2017. Research seems to indicate that smaller, independent stores are doing better; and for some reason, Toys ‘R’ Us wasn’t able to adapt, even as other biggies are doing so, even though it had adapted to other changes in the past.

The analyses are plausible. But in the final analysis, the story of Toys ‘R’ Us defies them all. There was a time when it was meant to be a success, and then came a time when it wasn’t meant to be. When it was bashert, and when it wasn’t. All the innovation and all the clever marketing cannot change that.