Toys R Us shut down mainly because it owed $5 billion in debt, which cost them $400 million each year just to keep up with payments. The company had 1,697 stores when it filed for bankruptcy – more than at any other time in its history. Still, they couldn’t make enough money to overcome this financial burden. The once-mighty toy store filed Chapter 11 bankruptcy in September 2017 and ended up closing 735 stores in 2018.
The story of Toys R Us shows what happens when bad management decisions meet changing markets. Their problems started way before the final shutdown, when a 2005 buyout left them with $5.3 billion in debt. During this time, Walmart and Target became the most important players in the toy market. These giants sold more than twice the toys that Toys R Us did. Big toy makers like Mattel and Hasbro were selling about $1 billion worth of toys through Walmart alone.
The company’s bankruptcy wasn’t just about debt. People called them “guilty of serial mismanagement” because they failed to invent new business approaches or keep up with how customers shop. Kids started playing more online video games, which hurt toy sales overall. On top of that, they waited far too long to close stores that weren’t doing well. They planned to close just 182 US locations right before declaring bankruptcy, but by then it was already too late.
The Real Reason Toys R Us Closed
The story of Toys R Us’s collapse began with a crucial 2005 buyout that changed the company from a public retailer to a private entity drowning in debt. Investment firms Vornado, KKR, and Bain Capital’s $6.6 billion deal pushed the company’s debt from $1.86 billion to $5 billion. This massive financial burden became the retail giant’s downfall, as it needed $400 million each year just to pay the interest.
A mix of internal missteps and external pressures
Several critical mistakes accelerated Toys R Us’s decline. The company struck a deal with Amazon in 2000, paying $50 million yearly plus a percentage of sales to be Amazon’s exclusive toy seller. This strategy backfired badly. The company couldn’t build its own online presence, and Amazon started selling other companies’ products.
The company also failed to create new experiences or improve its stores. Money that should have gone into store improvements went to debt payments instead. A retail analyst summed it up: Toys R Us was “guilty of serial mismanagement.” The stores were “too big, jammed full of inventory, poorly merchandised, and customer service was virtually nonexistent”.
When did Toys R Us go out of business?
The end came faster than expected. The company filed for Chapter 11 bankruptcy protection in September 2017, hoping to rebuild and stay open. A disappointing 2017 holiday season and growing financial pressures forced Toys R Us to announce on March 15, 2018, that it would close or sell all its 800 U.S. stores.
The company took several months to wind down operations. The last U.S. stores closed on June 29, 2018, ending a 70-year retail legacy.
What happened to Toys R Us: a quick recap
The company’s executives called it “the perfect storm”. The massive debt combined with changing shopping habits created impossible challenges. Kids turned to digital entertainment instead of traditional toys. Walmart and Target sold toys at lower prices, often losing money on them during holidays to attract customers.
The retail giant that changed the industry with its warehouse-style stores couldn’t keep up with market changes or escape its debt. Management tried to make changes, but time had already run out.
How Management Decisions Led to the Downfall
Poor management decisions and massive debt led to the downfall of Toys R Us. The retail giant’s leadership made several mistakes they couldn’t recover from.
The Amazon partnership that backfired
Toys R Us signed what looked like a smart deal with Amazon in 2000. They agreed to pay $50 million yearly plus a percentage of sales to become Amazon’s exclusive toy vendor. This 10-year partnership turned into a disaster.
The agreement stopped Toys R Us from building their own online store while Amazon gained valuable insights into the toy business. Amazon started selling toys from other vendors within three years. This violated their exclusivity agreement.
Toys R Us won their lawsuit and ended the contract in 2006, but Amazon had already become a major toy seller. Toys R Us lost valuable time they needed to develop their digital presence.
The 2005 leveraged buyout and its consequences
Private equity firms KKR, Bain Capital, and Vornado Realty Trust bought out Toys R Us in 2005. This move left the company with $5.2 billion in debt and $400 million in yearly interest payments. The company couldn’t invest in better stores or state-of-the-art technology because they had to pay their debt. The leadership focused on surviving rather than growing the business.
Lack of innovation and digital strategy
Toys R Us didn’t see how important online shopping would become. They launched their website in 2006 after ending the Amazon partnership but spent little money on it. The company finally decided to improve their website in 2017. They promised to spend $100 million on their online business over three years, but it was too late.
Outdated store formats and poor customer experience
Toys R Us stores changed from exciting destinations to messy, understaffed warehouses. They kept electronic toys behind gates right when they became popular. Target and Walmart created cleaner, more welcoming spaces for families.
CEO Dave Brandon said in 2016 that creating better shopping experiences would help them survive, but nothing changed. Customers often described the stores as chaotic, and popular items were frequently sold out due to poor inventory management.
The Role of Competition and Changing Consumer Behavior
Amazon, Walmart, and Target’s systematic price cuts devastated Toys R Us, especially during vital holiday seasons. These competitors could afford to sell toys at deep discounts or even at a loss, while Toys R Us relied “exclusively on toys for profit”.
Why did Toys R Us go bankrupt in the age of Amazon?
Amazon brought a fundamental change to customer expectations about convenience. This especially affected millennial parents who made up Toys R Us’s main demographic. The e-commerce giant wasn’t “concerned with making a profit at this juncture, rendering their pricing model impossible to compete with”.
On top of that, Toys R Us lacked the strong digital infrastructure to work well after ending its Amazon partnership. The company set aside only $100 million for e-commerce over three years—nowhere near what its competitors invested.
Walmart and Target’s growing dominance
Walmart and Target became powerful players in the toy market:
- Toymakers Mattel and Hasbro sold about $1 billion worth of toys through Walmart—more than double their sales through Toys R Us
- Walmart’s prices for popular toys were 54% lower on average than Amazon’s
- Target matched Toys R Us’s sales volume while letting customers do all their shopping in one place
The change to online shopping and digital play
The toy industry went through substantial transformation. By 2018, when Toys R Us closed its 735 US stores, online sales made up 31.2% of all toy purchases. This number was expected to reach 45.4% shortly after and 63.7% by 2017. Kids also started preferring digital entertainment, and they now “spend way more time playing online video games”.
Millennial parents and new expectations
Millennial shopping habits stood apart from earlier generations. Bureau of Labor Statistics data showed most households had no stay-at-home parent, which meant “squeezing in a trip to the store [was] often impossible”.
Birth rates dropped steadily from the early 1990s, which reduced the chain’s potential customer base. In spite of that, about 16 million millennial mothers represented a big market that Toys R Us failed to tap into effectively.
Could Toys R Us Have Survived?
Toys R Us could have survived its crushing debt and fierce competition if the company had made different strategic choices. The toy retailer’s downfall wasn’t set in stone but came from missed chances and not knowing how to adapt.
Missed opportunities in eCommerce
Toys R Us broke off its restrictive Amazon partnership in 2006 but failed to build a strong online presence. Target ended a similar Amazon deal in 2009 and built its own e-commerce platform, growing digital sales 30% each quarter. The toy giant waited until 2017 to put just $100 million into its website over three years. Amazon had already dominated online toy sales by then, making Toys R Us’s late digital push too little too late.
The rise of experiential retail
Physical retail evolved beyond just selling products, and successful toy retailers created immersive experiences. Build-A-Bear changed its stores with customization stations and digital elements. Toys R Us finally got it right when it came back briefly in 2019 after bankruptcy.
The company opened 6,000 square-foot stores with play areas and interactive displays—just one-seventh the size of its old superstores. This smart approach could have saved the original business if implemented earlier.
Why no one wanted to buy Toys R Us
A massive $5 billion debt and outdated, huge store formats made Toys R Us unappealing to potential buyers. A retail expert pointed out, “There’s so much excess [retail space] that’s been developed over the last 30 or 40 years that’s now going vacant through these serial bankruptcies…you’d have to be crazy to make any kind of concerted bid”. The toy industry’s shrinking margins and tough competition scared investors away.
Lessons from Best Buy and Build-A-Bear
Best Buy beat Amazon’s threat by matching prices and using its showroom advantage and expert staff. Build-A-Bear grew beyond malls to cruise ships and ballparks. They added digital features to physical products. Both companies saw how consumer behavior was changing and gave people compelling reasons to visit stores—exactly what Toys R Us failed to do.
Conclusion
Toys R Us stands as a classic example of a retail giant that crumbled under multiple pressures – crushing debt, poor management decisions, and its inability to keep up with market changes. The $5 billion debt from the 2005 leveraged buyout became the main anchor that kept the company from staying afloat. They needed $400 million each year just to pay interest. The financial burden tells only part of the story.
The company’s path shows several mistakes that sped up its fall. Their disastrous Amazon partnership stopped them from building their own online shopping platform during the vital early days of e-commerce growth. Walmart and Target took advantage of this gap. These competitors sold twice as many toys at lower prices and gave shoppers a better experience.
The company missed clear signs of change in toy retail and customer priorities. Kids started choosing digital entertainment over traditional toys. Toys R Us stores stayed frozen in time – they were understaffed with poor upkeep and offered nothing special to bring customers back.
Toys R Us had built an amazing 70-year legacy and brand recognition that other retailers could only imagine. These strengths proved useless against a string of bad strategic choices. Best Buy and Build-A-Bear showed that survival was possible, even with Amazon’s market power. They matched prices, created exciting store experiences, and grew beyond traditional retail.
The real story behind Toys R Us’s fall goes beyond market forces or changing shopping habits. It warns us what happens when companies refuse to change. They had more stores than ever when bankruptcy hit, but the retail giant couldn’t overcome its past decisions. The iconic store that shaped toy shopping for generations of Americans closed forever on June 29, 2018. This ending could have been very different.
FAQs
Q1. What was the primary reason for Toys R Us closing?
Toys R Us closed mainly due to its massive $5 billion debt burden, which required about $400 million annually just to service. This financial strain, coupled with increased competition and changing consumer habits, made it impossible for the company to remain profitable.
Q2. Is there a chance Toys R Us will make a comeback?
While Toys R Us has made attempts to return to the market, including opening new flagship stores and partnering with Macy’s, it’s unlikely to regain its former dominance. The company now focuses on smaller-format stores and an online presence, adapting to current retail trends.
Q3. How did competition affect Toys R Us?
Competitors like Walmart, Target, and Amazon significantly impacted Toys R Us by offering lower prices and more convenient shopping experiences. These retailers could afford to sell toys at steep discounts or as loss-leaders, while Toys R Us relied exclusively on toys for profit.
Q4. What management mistakes contributed to Toys R Us’s downfall?
Key management errors included the ill-fated Amazon partnership, which hindered their own e-commerce development, the 2005 leveraged buyout that led to massive debt, and failure to innovate or improve the in-store experience. These decisions left Toys R Us unable to adapt to changing market conditions.
Q5. Could Toys R Us have survived if it had made different choices?
Yes, Toys R Us could have potentially survived by investing more in e-commerce, embracing experiential retail earlier, and adapting to changing consumer preferences. Successful strategies from competitors like Best Buy and Build-A-Bear, such as price-matching and creating immersive in-store experiences, could have helped Toys R Us remain competitive.