Toys “R” Us is closing its stores, and most analyses blame Amazon and online retailing generally. The explanations are misdirected and, at best, incomplete.
Three trends combined in a complex, somewhat perfect storm to whack Toys “R” Us:
First, people buy different toys nowadays, and buy them differently. Kids increasingly prefer playing digital games on smartphones, tablets, and consoles, and all the major traditional toymakers have reported drops in sales (Lego even laid off staff last September). Out of toys sold during a year, almost half of all sales happen during the holiday season.
This begs the question of what are all those brick-and-mortar stores doing during the other 10 1/2 months of the year.
Second, consumers are buying more online, and toys are smack dab in the center of this transition: Half of all toys are bought digitally. There are a variety of reasons why, from the low-priced nature of toys (the digital shift tends to favor such commodity items) and the seasonal concentration of purchasing intent (i.e. consumers just want to get it done), to consumers losing patience with the imperfections of all geophysical retail, such as missing inventory and the indignities of having to wait in lines with other shoppers.
2017 saw a 178% increase over 2016 in announced store closings, coming from such well-known brands as Sears/Kmart, Payless, Gymboree, and RadioShack. So we know that stores selling other stuff are lying fallow for most of the year, too, and what’s happening to them.
Third, and perhaps most importantly, the private equity firms that own Toys “R” Us hobbled it; by financing most of the purchase price, Bain and KKR Capital annually collected somewhere close to $500 million to pay interest on their leveraged buyout (and took $200 million in fees). This left the company with little flexibility to invest in new things, or even keep its stores in some semblance of presentable order. So the stores will close, putting 33,000 people out of their jobs.
This end was not unavoidable.
Toys “R” Us could have reconfigured itself, with new formats of stores — new experiences, different sizes, and in a variety of unique locations — and experimented with ways to partner with content providers to do something other than hawk useless movie-related crap. It could have extended its brand online in a meaningful way, as there’s enough thinking on making such omni-channel selling work to choke a horse.
But in a challenging marketplace that threatened to starve the company of its customer lifeblood, its owners sucked it dry instead.
Amazon does a great job, but it didn’t put Toys “R” Us out of business.
That dubious honor goes to its owners and management.