Adapt or Die – the Changing Face of UK Retailing

What lessons can retailers learn from the demise of Toys R Us?

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In July 2005, the 50-year old toy retailing giant Toys R Us was sold to private equity buyers for around US$7.5 billion. At its peak it operated 800 stores in the US, with a similar number overseas, including more than 100 in the UK.

Today, Toys R Us is dead in the water. In late 2017, the company filed for Chapter 11 bankruptcy in the US, and in March 2018, it announced that it would close all 885 US branches, putting more than 30,000 jobs at risk. And just last month, all UK branches also closed, ending the brand’s 34-year presence here.

During its halcyon days, Toys R Us was considered a perfect example of a ‘category killer’, a company that specialised so ruthlessly and efficiently in a single sector that it forced out competition from smaller specialist toy shops and also larger general retailers.

So what on earth went wrong at Toys R Us? Why did this giant of toy retailing on both sides of the pond fall from grace so spectacularly within just over a decade, so that any chance of business recovery was doomed to fail? And what lessons can all retailers learn to avoid a similar fate?

1. Increasing competition in retailing

Like all retailers, Toys R Us has had to deal with ever-increasing competition, especially from eCommerce giant Amazon, whose toy sales in the UK have surged by more than 60% over the past five years.

But this is not just a story about the rise of online toy shipping. In fact, almost two-thirds of toy purchases are still made in ‘brick and mortar’ stores in the UK (more on this later). The most successful retailers seem to be using an ‘omni-channel’ approach, combining physical stores with online sales. John Lewis, for example, remains very much a ‘brick and mortar’ loyalist. However, it still tripled its online toy sales in the period 2011-2016.

2. Failure to rejuvenate the customer experience

A bigger problem for Toys R Us was that it simply didn’t do enough to keep customers engaged.

First, its business model focused on huge out-of-town stores. These worked well in the 1990s, which also saw the spectacular rise of other warehouse-style retail concepts from the likes of Ikea and PC World. People were quite happy to drive across town to browse an entire universe of products under one roof, at the most competitive prices available anywhere.

Then along came Amazon and online retailing, and Toys R Us quickly lost its pricing advantage. Customers were now less likely to bother to drive across town, when everything they needed could now be purchased with a few mouse clicks. And toys, unlike say clothes or electronic equipment, rarely need to be looked at or tested before purchasing. In this sense they are similar to books, and it’s no surprise to learn that Amazon’s two largest selling product categories are books and toys, in that order.

Second, Toys R Us failed to inject magic and excitement into the customer experience. If you can’t compete on price, then at least offer some excitement or theatre. Anyone who has been to Hamleys in London or F.A.O. Schwartz in Manhattan is unlikely to have forgotten the experience.

Toys R Us, unfortunately, quickly became tired, its dusty warehouse stores dated and behind the times. Management must have known this? Surely they could clearly see the shifting trend away from the huge out-of-town stores and towards online shopping?

So why didn’t they do something about it to freshen up the brand, to move with the times?

3. Mountains of debt made it impossible to rejuvenate the brand

The US$7 billion private equity buyout in 2005 was actually an ‘LBO’ – a Leveraged Buyout. This means that the acquisition was funded largely with debt, and the US$5.2 billion debt pile required interest payments of some US$400 million per year.

To make matters worse, operating profit margins were being steadily squeezed due to the competition from Amazon and other large retailers such as Walmart in the US (and its UK subsidiary Asda, acquired in 1999).

So, even though Toys R Us continued to generate good revenues and operating profits, they were being eaten up by the huge interest expense. As a result, there was simply very little left to spend on refreshing the brand and keeping it relevant and appealing.

Business recovery never really looked likely, with the end result sadly inevitable.

4. ‘The Entertainer’ shows that bricks and mortar toy retailing can still succeed

With a different management team and strategy, perhaps Toys R Us would still be alive and kicking today. But the success of high street toy retailer The Entertainer clearly shows that physical toy stores can be successful, and this should give hope to any brand in need of rejuvenation.

The family-run business now has 150 stores across the UK, with plans to open a further 15 in 2018. Sales and gross margins are healthy and rising, and the company has managed to succeed in the crucial areas where Toys R Us failed:

  • Location: store locations are focused on high streets and shopping centres.
  • Customer experience: the stores are lively and animated.
  • Staying current: expert industry knowledge, together with a tight family ownership and management structure, has helped it adapt quickly to market trends. For example, The Entertainer still had stock of Elsa dolls (from the movie Frozen) right up to Christmas, long after everywhere else had sold out.

Lessons for everyone

Sadly, Toys R Us looks destined to become a business school case study on how not to adapt and rejuvenate a once very successful business.

However, rumours of the death of traditional bricks and mortar retailing are greatly exaggerated. But in order to survive and thrive, retail businesses do need to have a clear strategy about physical stores versus online.

Does John Lewis’ omni-channel model work for your business, and is your retail store footprint appropriate for that model? Do you need to think about downsizing your retail premises, or updating and refreshing the brand? Does your capital structure give you the flexibility to invest, if needed?

Ultimately, remaining on top of market developments in your particular industry or product remains as vital as ever, as does nimble management that is able to respond and adapt quickly. Without those, all businesses run the risk of being swept away by fast moving industry currents, to a point well beyond where business recovery options are still possible.

Experienced in all areas of corporate and personal insolvency

Combined experience of over 30 years in all areas of corporate and personal insolvency. Read more...

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