The History & Eventual Murder of KB Toys

[00:00:00] Dan Larson: For 20 years they were known as the toy store in the mall and the second largest retailer of toys in the United States. They developed a strategy for selling toys above average retail price by selling toys for below average retail price and they might still be alive today if it wasn't for the premeditated murder at the hands of a toy store serial killer. Hi I'm Dan Larson and this is the history of KB Toys. KB Toys opened in 1922 as Kauffman Brothers, a candy wholesaler in Pittsfield, Mass. The Kauffman Brothers, Harry and Joseph, sold candy and soda fountain supplies. That's not like you know just carbonated water and coca-cola syrup. It's napkins, straws, sugar packets, paper hats, coffee, chocolate shakes, that kind of stuff. But mostly they sold candy at wholesale prices. They entered the toy business by chance when a client of theirs got a little too far behind on candy payments. The Kauffman Brothers, you know, made them an offer because the bill's the bill. Someone's going to pay one way or another. This is the candy business, yeah, but it's still a business. Faced with an offer they couldn't refuse, the client voluntarily traded their wholesale toy business to the Kauffman Brothers to settle their debt and I swear your honor nobody got hurt. So in 1946 the Kauffman Brothers opened a toy wholesale store also in Pittsfield, Mass. Their timing was perfect because coincidentally the candy business was in decline thanks to the World War II. Sugar was getting too expensive to import and as the saying goes, you can't sell candy at wholesale prices if sugar is too expensive. In 1948 they officially ditched the candy business because the future was plastics. And the best time to get in the toy business was right after the war when the troops came home and turned their attention to making babies. It's like the old saying goes, opening a toy business is as easy as taking candy from a baby due to a government-imposed sugar rationing effort. Eleven years later in 1959 they opened their first retail location in Connecticut under the name KB Toy and Hobby Stores. Fourteen years after that in 1973, with a total of 26 stores, they made the full shift from wholesale to a retail operation. Suburban malls were being built all across America and KB Toy and Hobby were positioned to grow with them. By 1976 KB had 65 stores all over New England and the tri-state area. In 1979 they opened 40 more stores and moved their home office to Lee, Massachusetts. They were the fastest growing toy company in the U.S. with locations reaching out into the Midwest. In 1981 with 210 stores they changed their name to KB Toy Stores, drawing a line between being a toy store as opposed to a hobby shop. Because toys aren't a hobby, they're a business. Just like the candy business but with toys. 1981 was also the year that KB Toy Stores was purchased by the Melville Corporation for $64 million. One year later in 1982 as part of Melville, KB purchased all 52 stores from their competitor Toy World. Then in 1990 they purchased Circus World which brought them 330 stores and in 1991 K&K Toys, 133 stores. Every time I said, what was the name of the company? Melville? Melville. All I could hear was the Grim Reaper and Bill and Ted going, "They Melvined me." I'd start to laugh. KB's growth was fueled by their unconventional sales approach and the advantage of their location. KB would purchase discontinued stock from toy manufacturers, price it aggressively and position it at the front entrance of their mall based locations. The idea was that once a customer was drawn into the store by the lower priced discontinued item, that customer would be more inclined to pay prices for new products that were actually higher than what their competitors were charging for the same product. See, their competitor was a store outside the mall and the customer was inside the mall, where KB was. For instance, a second stop in the Larson household, that was not always guaranteed. You passed Toys R Us on the way to the mall with the promise that you might stop on the way out. $25 burning a hole in your pocket, ten-year-old Dan might just blow it on the first action figure he sees. Ten-year-old Dan is not good at saving money, being patient, or making good decisions. Not to mention the fact that you might not find the toy at the second shop that you find at the first shop, so if you hit the first shop, the shop that is in the mall, you've got to make a choice: buy now or roll the dice on what might be at the other toy shop. It's like the old saying goes: the silver hawk in hand is worth more than the one that might never be in hand. That's fine. [00:04:36] Speaker 2: Where are you gonna find all the hottest toys? On the planet Mars? No! On a mountaintop? Uh-uh! Hot we got at KB Toy Stores, it's the place to shop, you'll see all the latest toys to choose from. Hot we got at KB! [00:04:57] Speaker 3: Can't find that popular new toy? If it's hot, then KB's got it. And you'll find a big selection of the hottest toy hits every day at all of our convenient locations. [00:05:06] Speaker 2: All the latest toys to choose from, hot we got at KB! [00:05:10] Dan Larson: KB was a company committed to family values and they did their best to align those beliefs with the manner in which they conducted their business and the types of products they stocked. In 1993, despite a partnership with Sega of America and the importance of video games to their business, KB pulled the controversial game Night Trap due to its mature content. The following year in 1994, KB discontinued sales of realistic-looking guns when a 13-year-old boy was shot and killed by a police officer in New York. During the 90s, KB expanded outside of traditional malls with shops called KB Toy Works and strip malls. The production of new malls had slowed way down, the market was heavily saturated, and you can't open new mall-based locations if locations aren't being built. In 1996, with sales of $1.1 billion, KB was sold to Consolidated Stores Corporation for $315 million. Consolidated Stores Corporation, as far as I can tell, was not named by a computer program designed to generate names for faceless corporations in movies about Christmases that almost didn't happen. Melville Corporation didn't need KB since it already operated an assortment of clearance retail outlets such as Toys Liquidators, Toys Unlimited, and amazing toy store closeout stores. Not to mention their other bargain brands: Odd Lots, Big Lots, All For One, and the It's Really A Dollar Stores. In 1998, with $1.6 billion in sales, KB Toy Stores changed their name to KB and launched a website. On the internet! By 1999, KB reached their peak with 1,324 stores. They were the second largest toy retailer in the U.S. behind only Toys R Us. They had locations in all 50 states, Guam, and Puerto Rico. They employed over 16,000 employees and rang the registers to the tune of $1.8 billion. Business was good. In 2000, Consolidated announced plans to go public with an initial evaluation of the company at $210 million. However, due to losses taken from launching the website in 1998, they decided instead to sell the company. How much did we spend on the website? $43 million. Is that a lot? How much do they usually cost? What is a website? So in December of 2000, KB was purchased for $305 million by a consortium. A consortium composed of 200 KB Toys managers and Bain Capital. Bain put up $18 million of the $305 million purchase price and the rest was covered by loans taken out against the value of KB Toys by the 200 managers of the KB Toy Stores. It was Bain's signature move: identify a company flush with liquid cash, then convince them to buy themselves and cut Bain in on the deal. And if that isn't cold enough, if that isn't ruthless enough, in 2002, Bain requested a dividend payout from their original investment in the amount of $85 million. This was financed by KB taking out more loans from banks and giving cash to Bain Capital. In two years, Bain had profited to the tune of $67 million. KB was officially dead, but the hollow, stunned body would continue to walk around for another two years. Physical retail locations and malls in particular were losing traffic to the internet. Leases were going up as the malls themselves tried to recoup some of their losses. 950 of KB's 1,217 stores were in malls and they were carrying $300 million in debt. In January of 2004, KB Toys filed for Chapter 11 bankruptcy protection and closed 600 stores, leaving roughly one quarter of their workforce unemployed. Creditors agreed that the 2002 payout to Bain had left KB insolvent. Bain argued that KB Toys was fine before the deal and that anything happened after that payout was unrelated. And besides, you can't prove anything. And I never even heard of this KB you're talking about. Hasbro and Lego, two of the bigger creditors with KB, argued that the giant payments made to executives and majority shareholders just before the bankruptcy were primarily responsible for the performance of the company thereafter. In 2005, the bankruptcy court awarded ownership of the remaining 644 stores to a different investment company called Prentice Capital Management. And Bain, we'll come back to them in a moment. Prentice attempted to restructure the company, first by paring down to 566 stores and then also closing another 122. By December of 2008, KB was back in bankruptcy court. They shed a few more stores but officially began the process of going out of business. By February of 2009, everything including the website was closed. In September, the remains of KB, the name and the branding were purchased by Toys R Us for $2.1 million. In 2016, Strategic Marks LLC purchased the license after Toys R Us let it lapse. In 2018, after Toys R Us closed, Strategic Marks announced that they were going to open a bunch of pop-up stores for Black Friday 2018. After considering the market, stepped back and said, "Maybe in 2019." But whatever happened to Bain Capital after the bankruptcy court awarded KB Toys to Prentice in 2005? They identified another company flush with cash and made their move on Toys R Us. Who then, in 2009, purchased FAO Schwartz. And by 2018, the three largest toy stores in America were all out of business. The killer is still at large today. Thanks for watching. Please hit like, hit subscribe if you're not already a subscriber. Thank you very much to those of you who already are. Please share this video, and if you're in the position to help the channel grow, visit our Patreon at patreon.com/toygalaxy and join this list of names that is flying by to my left. It's on this side. It's on this side. And let us know in the comments down below if you'd rather be in the candy business, the toy business, or the business murdering business. At the end of the day, we all gotta work, and if you're lucky, you get to choose the line you end up working in. God. That's so dumb.