Failory - Why Toys R Us Failed

Hey — It's Nico.

In October, I'm publishing articles analyzing various companies' failures. This week, we dived into What Happened to Toys R Us.

🙌 Welcome to the 493 founders who joined this week.

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What Was Toys R Us? Toys R Us was a toy, baby, and clothing retail store founded in 1957 by Charles P. Lazarus in Rockville, Maryland.

How Was Toys R Us Started? Charles Lazarus saw an opportunity to capitalize on the post-war “baby boom” by selling baby furniture and other children’s goods.

In 1948, he founded a baby furniture store called Children's Bargaintown, which he later sold. In 1957, he started another company focused solely on toys, thus leading to the founding of the first Toys R Us.

How Did Toys R Grow? Over the first few decades, Lazarus was able to dominate the toy sales market by negotiating lucrative contracts and selling toys at prices 20% to 50% lower than competitors.

By the early 90s, Toys R Us dominated toy sales so much that it forced other popular toy retailers, such as Child World and Lionel, to file for bankruptcy.

When Did Problems Begin? In the late 90s, Toys R Us started experiencing the first big problems, related to market competition.

Toys R Us experienced its first major competition from affordable “big box” stores like Walmart, Target, and Costco. This competition gradually started to eat away at Toys R Us’s sales, and the company began racking up billions of dollars of debt, trying to maintain its stores and operations.

In 2000, Toys R Us partnered with Amazon in a 10-year contract, paying the eCommerce company $50 million a year plus a percentage of their sales to be the exclusive seller of toys and baby products on Amazon.

While this partnership was initially a successful one, it had major implications for the future of Toys R Us — instead of building their own eCommerce business, as they probably should have, Toys R Us was completely reliant on Amazon for online sales.

Amazon learned from its partnership with Toys R Us and eventually branched out and started working with competitors, which further hurt Toys R Us’s market share and online sales at a time when eCommerce was taking off.

When Was Toys R Us Shut Down? By 2017, the toy industry and retail as a whole were on a decline, and Toys R Us couldn’t hang on any longer.

The company announced that it was filing for bankruptcy in 2017, citing $5 billion in debt and costs of around $400 million a year just to pay that debt back. Toys R Us started liquidating, selling, and closing its stores the following year.

What Killed Toys R Us?

Competition: Big box stores like Walmart, Target, and Costco expanded rapidly towards the end of the 1990s and began offering lower prices on toys.

But the nail in the coffin for Toys R Us was the rise of eCommerce toy sales. Amazon drastically reduced prices and offered perks like free shipping, which solidified their place at the top of the toy sales market.

Debt: Toys R Us had accumulated around $5 billion in debt by 2017.

A big reason behind this debt was that, faced with declining sales and profits, Toys R Us put itself up for sale in 2004, and a leveraged buyout took the company private in 2005. Investment firms bought out the company for $6.6 billion, using borrowed capital.

The debt meant the company had very little cash to reinvest into the business. Customers who continued to shop at Toys R Us stores complained of poor merchandising, lack of employees to help them, and a general decline in the quality of the shopping experience.

Market: Much of children’s entertainment shifted to digital during the first two decades of the 2000s, and there just wasn’t the same demand for physical toys as there had been up to the end of the 90s.

This trend was reflected in the wider toy sales industry, with many independent toy retailers closing during the same era because business wasn’t profitable anymore.

If you're interested in learning more about Toys R Us:

• beginnings & growth story
• problems & shut down
• recent comeback

➡️ What Happened to Toys R Us?​

This week I spent some time reading various startup-related resources and selected 3 of the best:

• ​Lessons from High-Profile Failures: Warren Craddock worked on a number of high-profile failures, like Google Glass. In this Twitter thread, he analyzes what went wrong with these projects.
• ​Shein and the Tech Cold War: Shein is the 3rd most valuable private company, just behind ByteDance and SpaceX. This article explores their business model and how they've leveraged TikTok to grow.
• ​Braintrust - Fighting Capitalism with Capitalism: Braintrust is a user-owned talent network, or in other words, a decentralized Upwork. This article analyzes Braintrust's business model and the benefits of its decentralization.

Hope you enjoyed this week's article and curated resources ;)

Cheers,

Nico