A wide variety of factors led Toys ‘R Us, the well-known toy retailer, to file for Chapter 11 bankruptcy recently. Most of those factors are clear. But what will happen to the retailer in the aftermath of this strategic choice remains vastly uncertain.
Toys ‘R Us was challenged, of course, by the growth of competitors such as Amazon and Walmart, which sold toys, along with thousands of other products, often at lower price points. Parents could conveniently grab a doll for their child or pick up a baby gift for a friend, at the same time as they were shopping for groceries or a new shirt. Thus fewer of them were willing to make a separate trip to Toys ‘R Us, leaving the specialty retailer with declining sales.
To deal with this competitive environment, Toys ‘R Us sought funding from various sources, including venture capital firms. That step, though logical at the time, also left the retail chain with a massive debt load that hindered its ability to be nimble and adjust to changing needs and shifting tastes. As a result of this debt load, it found itself unable to pay suppliers such as Mattel and Lego, which slowed or halted shipments to stores until they were confident that they would be paid for the toys they already had placed on shelves.
It had become a negative spiral, so Toys ‘R Us sought bankruptcy protection, which allowed it to attract approximately $3 billion in financing to support its operations. The vendors are being paid, and toys are again flowing in to stores. Moreover, Toys ‘R Us has asserted that it has no plans to close any of its approximately 1600 stores, seeking to make sure that consumers still have a place to go to find a wealth of toys and children’s products.
But bankruptcy proceedings often lead to unforeseen outcomes, such that the retailer might be forced to close some stores in the near future, if it cannot attain a profitable position. Furthermore, the disruption to its supply chain means that its inventory is somewhat precarious, in the months leading in to the holiday shopping season. And of course, the competitive dynamics that started all these recent developments continue to impose pressures; people still like grabbing the latest toys on Amazon and having them delivered to their doors.
Discussion Questions:
- Why did Toys ‘R Us enter into Chapter 11 bankruptcy?
- How are its strategic profit model financial ratios affected by this action?
- What can Toys ‘R Us do to return to profitability?
Source: Michael Corkery, “Toys ‘R’ Us Files for Bankruptcy, Crippled by Competition and Debt,” The New York Times, September 19, 2017; Michelle Ma, “Toys ‘R’ Us Bankruptcy Poses Challenge for Toy Makers,” The Wall Street Journal, September 19, 2017; Lillian Rizzo and Suzanne Kapner, “Toys ‘R’ Us, Once a Category Killer, Is Forced into Bankruptcy,” The Wall Street Journal, September 19, 2017