The Rise And Fall Of Toys R Us

[00:00:00] Speaker 1: The toy story that started nearly a century ago is coming to an end. Charles P. Lazarus, the son of a bicycle shop owner, was only 25 when he opened a baby furniture store, Children's Bargain Town in Washington DC. Two years later, he expanded into toys, laying the groundwork for what would become Toys R Us. Echoing childlike script, Lazarus reversed the R and the store became a sensation. In 1978, it would begin trading on the New York Stock Exchange as a public company. It was the go-to toy emporium. Competitors like Kitty City and Child World went out of business. In those glory days, there was no reason to do anything other than expand. [00:00:42] Speaker 2: Sometimes they ask me, "How did you ever get to be that big?" And I said, "Well, one day I decided to open a second store, and after that it seemed to get easier." Toys R Us [00:00:52] Speaker 1: ramped up its store footprint, bringing shelves and shelves of toys to children nationwide. But years of being the biggest name in town left it cavalier about managing its store base, pruning stores that weren't making money and putting resources towards those that were. It was unprepared for what no one saw coming, the dot-com era and the rise of the big box store. E-Toys, the internet toy startup, came seemingly out of nowhere, but it was a powerhouse. In need of a quick internet strategy, Toys R Us signed on to an expensive partnership with Amazon in 2000. The deal, one of the first of its kind, gave Amazon the exclusive rights to sell Toys R Us products on its website. But the pretty penny Toys R Us paid for the deal had some strings attached. Amazon soon began selling third-party items in direct competition with Toys R Us. Toys paid for exclusivity it didn't get. Toys R Us took Amazon to court to get out of the contract, but legal tussles sent them back financially and left them even farther behind on their e-commerce efforts. Then came the discount chains. Walmart, Target, and Kmart began selling toys, using childish delights as a loss leader to bring shoppers into their stores, undercutting Toys R Us on price. Toys R Us stock swooned. It was forced to review with strategic options, which, in Wall Street speak, is a for sale sign. A troubled retailer in the mid-2000s was no problem for a private equity firm. In fact, it was bait. Financial investors were diving into the industry, buoyed by a combination of low interest rates, recognizable names, and the view that a retailer steady cash flow would continue forever. The buyers for Toys R Us were a trio of investors, KKR, Bain, and Vornado, which paid $6.6 billion for the store in 2005. The hope was to revive the company and take it public, using those proceeds to finally pay down the debt they slashed on it. But neither of those goals would come to be. Debt payments made further investment impossible, and competitors, once again, began moving in. This time on Toys R Us's strong baby business, Babies R Us. Newly launched Diapers.com drained market share from the company. Bed Bath and Beyond launched Bye Bye Baby, investing money that Toys R Us didn't have into nicer and more modern stores. All the while, the toy industry was contracting. By the early 2000s, children who always wanted toys were switching to computers, video games, and tablets. From 2012 to 2017, the toy industry declined annually at a rate of 3.1 percent. There was trouble behind the scenes as well, and amid the business's struggles, ultimately, it missed its chance to go public. The retailer stayed private, and its business dwindled. By 2017, it was worried it would not be able to make its debt payments. It hired restructuring advisors, who began to craft plans for pre-packaged bankruptcy for after the holiday season. But in September, [00:03:59] Speaker 3: CNBC cut wind of the effort. Toys R Us isn't alone in its struggles. In fact, it joins other major retailers Payless and Radio Shack in filing for bankruptcy in 2017. Toymakers were stunned. Within a week of the [00:04:12] Speaker 1: article's publication, nearly 40 percent of its vendors refused to ship product without cash on delivery, fearful they would otherwise not be paid. It was a run on the bank. The company tumbled into bankruptcy, forced to file without a plan to emerge. It told the court, its vendors and shoppers, that under bankruptcy protection, it could finally make the changes it needed to compete. Toys R Us' competitors, smelling blood in the water, slashed their prices, their final attack against the legendary retailer. The crucial holiday season was dismal, and it would not be enough to keep it afloat. The weeks that followed included intense negotiations, but the conclusion soon became evident. Toys R Us would need to liquidate, and it would shutter its roughly 800 stores across the U.S. Its liquidation [00:05:04] Speaker 3: and expected to devastate the toy industry. Be sure to subscribe to stay up to date on all of the day's biggest stories. You can also click on any of the videos around me to watch the latest from CNBC. Thanks for watching.