I’ve been watching the fall of Toys R Us with mixed feelings. In my twenties, I worked for a multi-location independent toy store. Despite doing everything right – competing on service, offering innovative product lines not available elsewhere, and keeping up with technology trends – the stores eventually buckled under competition from the reigning category killer at the time, Toys R Us.
Now the corporate giant Toys R Us, which went into bankruptcy last September, has begun the liquidation process, and 30,000 jobs are at risk. The reasons behind the demise of Toys R Us present an interesting lesson for buying groups.
Why did Toys R Us Fail?
Contrary to first impressions, increased competition from Amazon did not put the nail in the toy chain’s coffin. Toys R Us still had 15% of the U.S. toy chain market. Yes, Amazon had an effect, like it has on all industries. But Amazon alone didn’t kill the category killer.
Toys R Us suffered from poor financial decisions coupled with an unwillingness to adapt their business model with changes in the industry. Increased competition from Walmart and declining profitability opened the door to a debt-financed takeover by KKR and Bain Capital in 2005.
With any debt-financed takeover, the main strategy is to improve cash flow by cutting costs so that the interest can be paid. In other words, the new ownership team took their focus off the marketplace, making them unaware of key changes taking place.
Rather than wanting toys, kids wanted electronics and apps. Like the rest of us, they craved experiences rather than possessions. The toy chain was now competing against Best Buy, the Apple store, trampoline parks, and laser tag. While they should have been reinvigorating their shopping experience with interactive displays and magical shopping environments (like the LEGO store, for example), their stores remained mundane and unwelcoming.
To make matters worse, declining retail real estate prices crippled the chain’s strategy of selling off key assets to pay off their debt.
Lessons learned
The lesson of Toys R Us is how the wrong financial decisions can doom your members and your group. How changes in the market can doom an old business model, leaving you unable to compete.
To succeed, independents need both the resources and the strategic vision to invest in change, otherwise they will lose relevancy like Toys R Us, Circuit City, and Borders.
This is where your buying group comes in. What kind of strategic leadership are you offering your members? How are you providing cost-effective resources critical to keeping your members current in the marketplace? How do you predict the changes that are going to disrupt your industry? What is your role do you take with financial planning for your members?