[Updated 9/18/2017 – 11pm CST – Toys “R” Us filed for Chapter 11 Bankruptcy Protection]
There’s a big problem at Geoffrey’s house, and if you follow the toy industry or the retail sector in general, then you’ve no doubt seen it coming for years. Retail is a challenging space to begin with, and when you look at specialty retail, the landscape gets even bumpier. When it comes to toys, there’s only one major toy store left in the United States, and that’s New Jersey-based Toys “R” Us. While they’ve had their share of issues over the years, one thing that’s really bothered me has been the involvement of Bain Capital Partners since 2005, at which time they, along with Kohlberg Kravis Roberts and Vornado Realty Trust took part in a leveraged buyout of of the iconic toy retailer. There’s a lineage here in which Bain Capital has notoriously taken successful companies, saddled them with debt, and eventually flushed them down the toilet, all while the “partners” make out like bandits. One such victim was KB Toys, who Bain targeted as a profitable business with over $1.4B of annual sales. Strapped with debt, bankruptcy followed, and eventually KB was dead. History has been known to repeat itself, and it looks like Toys “R” Us could be the next victim. After all, Bain is playing the same game right now with another retailer – Gymboree, who was acquired in 2010 and filed for bankruptcy in 2017.
A 2012 Rolling Stone feature entitled “Greed and Debt: The True Story of Mitt Romney and Bain Capital” should be required reading for anyone interested in toys, retail or just business in general. It sheds light on the blueprint for how not to do things – a lesson in why just because you can do things, that doesn’t mean you should. That means legally dismantling successful American businesses that have been built the old-fashioned way (with hard work) just to kill them, strip the corpses and cash-in on a “dividend.”
A highly-cited CNBC report from earlier today reveals that Toys “R” Us has hired restructuring lawyers Kirkland & Ellis to address their massive debt, $400 million of which comes due in 2018. As news is further discussed by Business Insider and others, it has been noted that hiring a firm such as Kirkland & Ellis doesn’t always mean that bankruptcy is looming, but in the case of Toys “R” Us it appears to be a consideration. Even if they do file, you can bet that the the owners will still make out, and that’s troubling.
While we live in a new age, a store like Toys “R” Us has a place – and it needs to succeed. Here’s something that I wrote back in 2011 that still applies:
“Toys “R” Us is also important on a number of levels, from keeping the “big boxes” like Walmart and Target from completely monopolizing the toy market, to remaining a place for kids to get a memorable “experience.” TRU is the last warrior standing from an era that once included places like Child World, KB Toys, Circus World, and more.”
Big box retailers sell a huge quantity of a very small selection of toys. If Toys “R” Us were to fall, it would have a ripple effect through the entire industry and would ultimately destroy many smaller toymakers who rely upon the vast assortment that TRU stocks. Even with the internet, for a child there’s nothing that can match browsing the aisles to discover that one memorable toy. Taking away the biggest of the toy stores will lead to the rapid acceleration of driving future generations of kids right into the soulless world of “devices” and “apps.” That’s not cool.
In a strange bit of irony, the IP assets of KB Toys were acquired by Toys “R” Us in 2009, though nothing has really been done with them since. Likewise, TRU once owned the scraps of FAO Schwarz, holding onto those until selling them in the fall of 2016.
Stay tuned for updates…
