Random Thoughts – Randocity!

Did Toys “R” Us have to fail?

Posted in bankruptcy, botch, business, ethics, fail by commorancy on September 9, 2019

If you’ve read various articles including this Bloomberg article, you might come away thinking that all of what happened to Toys “R” Us began a decade ago (i.e., the early 00s). In fact, you would be so wrong… and so would Bloomberg. Let’s explore.

The 80s

Around 1981 or 1982, I worked at Toys “R” Us. Even at that time, Toys “R” Us ran a questionable business model. A business model that, I might add, even store managers recognized and thought was unsustainable. In fact, after having discussions with store managers at my store, I got an earful about how they thought that the chain would likely fail within a decade if they kept on using that business model. This was the early 80s.

What business model?

Toys “R” Us sowed the seeds of its own destruction at least beginning in the 80s, perhaps as early as the 70s. What questionable business model is this? The model chosen was to operate the stores in the red (otherwise known as losing money) through 80-90% of the year (aka, “90 in the red”). Then, the management hoped to recoup those losses in the final 1-2 months of the year during holiday season sales. It didn’t always work out.

While this model seemed to work to keep most Toys “R” Us stores afloat through the 80s and 90s, it served to keep the company from really turning a solid profit and, ultimately, led to the company’s massive debt load. What that model meant to the stores is fully stocked shelves every day of the year. This was readily apparent walking into any Toys “R” Us store. The stores were not only full, they were positively brimming over with the latest toys. This also meant putting itself into massive debt each year in inventory and then hoping to pay off that debt at the end of the year when most of the stores finally ran “in the black” (read, turning a profit for the year).

Keep in mind that many of the stores didn’t turn a profit, but so long as enough stores did, they could cover for the debt they had been incurred company wide, or at least so that was the idea. Even the store manager at my Toys “R” Us location could see the handwriting on the wall in the early 80s. This store’s business model was not sustainable and I was, even as an standard employee, told this by various managers. These managers didn’t hold back their thoughts.

Bloomberg, Fads and Sustainability

What Bloomberg got right was that even a decade ago, TRU’s debt load had put them underwater. What Bloomberg didn’t address was that this debt began almost 2 decades earlier of overbuying, followed by hoping that a “hit toy” would kick them over the profit line at the end of every year.

“Hit Toys” were Toys “R” Us’s hopeful thing. They needed that Tickle Me Elmo or Nintendo Wii or Lazer Tag or Cabbage Patch Kid fad toy to carry the chain into the new year with profit on the books. Throughout the 80s and 90s, there were a string of these hit toys practically every year. Fad toys which flew off the shelves and brought Toys “R” Us to profitability each year. It was a risky move for Toys “R” Us to bank on a hot fad each year, but there it is.

Unfortunately, relying on this kind of yearly toy fad to sustain a business every year was not only risky, it began to burn Toys “R” Us as these yearly fads began to die off by the late 90s. Even during mid-late 90s, these fads were much less intense than they had been just a few years earlier. By the mid-00s, these fads were practically non-existent. Sure, there were hot toys, but no where near the levels of sales that Tickle Me Elmo or the Cabbage Patch Kid fads offered to Toys “R” Us’s bottom line… particularly when Best Buy, Walmart and Amazon concurrently began diluting the toy profits of TRU.

These fading fads were responsible for killing other toy stores chains as well, such as Kay Bee Toys and even the once high flying, high end FAO Schwarz. These fading fads also left Toys “R” Us holding a huge mound of debt.

Walmart

While Walmart did usurp the title of top toy seller from Toys “R” Us, that’s primarily because Toys “R” Us prices were always on the higher side. Walmart did carry toys, but not all toys. If you wanted something you couldn’t find at Walmart, you went to Toys “R” Us and it was pretty much guaranteed they would carry it (even though it might be out of stock). Walmart didn’t even stock many of these. The toy section in Walmart was always small by comparison. Sure, you could find better deals at Walmart, but only from the toys that they chose to carry.

Walmart was also not very kind to collectors in the 90s. If a collector showed up to buy toys, Walmart would try to do everything to keep that toy item away from the collectors… sometimes even going so far as to banning them from the store simply for buying toys. Does it really matter whose dollars are buying an item? Granted, I wasn’t particularly happy that a collector had gone to Walmart to buy out all of the “good” stock leaving tons of “peg warmers” sitting around that no one wanted. But, that’s how toy collecting worked in the 90s.

The whole collector market kind of died off with the advent of places where collectors could buy case packs, like Entertainment Earth. Instead of having to rummage around Walmart at 3AM (when they stocked new merchandise), you could order a full case of figures, guaranteeing that you’ll get at least one “rare” figure. This meant that the once Walmart and Toys “R” Us shopping locations for collectors became a thing of the past. Collectors took their money online to buy cases and stopped buying at Toys “R” Us. Buying case packs is easier, more convenient and doesn’t require the hassles of dealing with surly underpaid Walmart workers.

Toys “R” Us Kids Grew Up

Kids of the 80s became collectors in the 90s and became families on the 00s. The once popular collector market throughout the 90s fell apart into the 00s because the collector market changed and Toys “R” Us failed to understand this important change. The collector market is (or at least was) also a huge market that kept Toys “R” Us afloat in addition to the end-of-year-fads. However, brands like Hasbro and Mattel didn’t grow with the collector market. Sure, Hasbro tried, but the toys they made were tiny improvements over their (sub)standard toys. Mattel also tried with its collector Barbies, but, again they failed to understand the critical quality needed for what collectors really yearned.

In essence, the toy brands themselves didn’t grow to provide what collectors wanted… which left Toys “R” Us mostly without collector money. However, collector brands did grow up for the collector market outside of Toys “R” Us, including Sideshow and Hot Toys brands. These brands are now considered the premiere collector “toy” brands for adult collectors. These “action figures” are some of the highest end, most expensive, most collectable toys out there, yet these are not sold at Walmart, Target or even Toys “R” Us (before they closed). Though, you can find them on Amazon via third party sellers. This is where Toys “R” Us failed to keep up with the kid-turned-adult collectors. Hot Toys figures cost anywhere between $150-350 per figure; a price point that collectors are more than willing to pay to get that level of craftsmanship. A price point that Toys “R” Us never carried. A quality that not Toys “R” Us nor Walmart nor Target ever carried.

While Toys “R” Us continued to sell these low-end toy products to kids, it failed to grow up and to sell high end collectibles to adults. Ironically, this runs counter to their jingle. The most prestigious type of collectibles that Toys “R” Us sold were the collector Barbies and McFarlane figures, offering price points at  $15-40. A price tag that cannot provide the levels of detail, paint jobs and overall craftsmanship that goes into a Hot Toys or Sideshow figure. Adult collectors want high end figures and Sideshow and Hot Toys fill that niche. Toys “R” Us management never recognized this growing trend.

“I don’t want to grow up, I want to be a Toys “R” Us kid”

This jingle is ultimately the rationale that appears to have led Toys “R” Us management down the wrong path. Instead of singing the praises of not growing up, the toy store should have realized that kids grow into adults; adults who still want to buy collectible toys, but who don’t want the junky, low priced Hasbro and Mattel versions. They want premiere brands like Hot Toys offering highly detailed, highly realistic, meticulously crafted and painted figures… not Hasbro’s now antiquated, poorly painted, robot-style 12 inch figures. You might give these cheap toys to your kids, but you wouldn’t display them in a display case.

This collectible market began with highly detailed military figures, but branched out into licenses with Marvel, DC, Star Wars, Warner Brothers and various other large movie franchise brands. Toys “R” Us failed to latch onto this market and, thus, failed to capture the once Toys “R” Us kid who had grown into an adult and now desires these highly detailed collectible toys. As kids grow into adults, tastes change and people want more sophisticated products. Hot Toys and Sideshow found that niche for sophisticated adult tastes. Yet, Toys “R” Us failed to recognize this niche.

If Toys “R” Us had realized this mistake and had added brands like Hot Toys to its shelves, it might have been able to entice the collector’s market back into its stores and pay down some of its debt. Every discount retailer has, so far, failed to realize the adult collectible toy market. However, this lack of foresight hurt Toys “R” Us the most.

Kid Tastes

Additionally, kids tastes have also changed as a result of brands like Hot Toys and products like the iPad. Kids don’t want want to buy Leap or other “toy” or “fake” tablets when they can ask their parents for the real thing. Kids also want the higher end Hot Toys than the poorly crafted Hasbro Ironman figures. While Toys “R” Us did begin carrying Apple products, the stores really thought of these more as a toy rather than treating them as something useful. Best Buy always treated their Apple section with the best possible displays. Toys “R” Us displayed its Apple tablets right next to random other tablets as though they weren’t anything special. I’m not even sure that I’d have felt comfortable buying an Apple tablet from Toys “R” Us. Not only did they have no one versed in this technology on staff, what they carried could have been 2 or even 3 generations old. Toys “R” Us just didn’t treat these products with the respect that they deserved.

As a result of kids changing tastes and higher levels of sophistication, kids really didn’t want much of what was in that toy store after a certain age. This meant that Toys “R” Us was primarily for kids of a certain age and below (probably 8-9 or younger). Even still, these ages were growing up faster.

Toys “R” Us Closure

Did Toys “R” Us have to close? Yes, it did. Without a management team capable of fully understanding the downsides of running its stores using the “90 in the red” model throughout the year (and failing to accommodate the changing tastes of adult collectors), the stores ultimately succumbed to closure. It was inevitable.

What tipped the scale, though, was 2005’s $6.6 billion leveraged buyout of Toys “R” Us by the KKR, Bain Capital, and Vornado Realty Trust; a purchase that saddled the corporation with at least $5 billion in debt, in addition to its already mounting toy inventory debt each operating year. There was simply no way Toys “R” Us could recover from and pay down that debt considering its interest each month.

In fact, it was this very same leveraged buyout that not only trashed Toys “R” Us, it also lost its original private equity investors at least $1.28 billion. Even these private equity firms were ignorant of Toys “R” Us’s “90 in the red” model. You’d think that between three different private equity firms, one would have had brain among them. I guess not. Toys “R” Us was not worth buying strictly because of that business model… and it was especially true when considering saddling an already debt overburdened company with even more debt. It was an insanely stupid buyout made more stupid because of the lack performing even the most basic of fiduciary responsibility. Those private equity firms got exactly what they deserved out of that deal. Make the wrong deal, get the wrong results.

If I had been sitting in the room when this buyout deal was being considered, I would have put the kibosh on that deal pronto. If managers of stores could recognize how badly Toys “R” Us was operating in the 80s, why couldn’t a bunch of suits at three different private equity firms see this before plopping down $6.6 billion?

Overvaluation

If anything, 2005’s TRU sale is a cautionary tale. There are way too many buyouts that are purchased at way too high a value. I’ve seen it happen time and time again. Companies worth maybe $500 million sell for $3 billion? It’s just insane the money that’s being overspent. Would you walk into Walmart and offer to pay $25 for a $5 tube of toothpaste? I don’t think so. So, why do these investors think it’s okay to spend $6.6 billion on a company worth maybe $1 billion at its best… and it was then likely actually worth much less considering the debt that it already carried. Its insane business model should have further reduced its value.

Could Toys “R” Us have been saved?

Probably not. At least, not with its status quo business model. But, it might have been saved IF Toys “R” Us had adopted a more balanced approach to its store sales and more sane merchandise ordering in combination with letting managers actually handle full store merchandising instead of relying on nice looking, but misguided corporate-standard planograms.

Only stock enough merchandise in a specific store that that store can actually sell. Let managers move stock around on shelves and place the merchandise in their store where it’s most likely to sell. Additionally, don’t send stock to a store where the buying demographic isn’t buying that type of merchandise. If Barbies aren’t popular in a particular store’s demographic region, send limited amounts of Barbies there. It’s a waste of money and effort to stock merchandise that doesn’t sell. One of Toys “R” Us’s biggest foibles was its cookie-cutter store approach. That meant it was sending the same stock to all stores regardless of popularity in that local store’s area. It also meant that it way overspent on toys that would never sell at certain stores. Eventually, they simply had to clearance out those toys. Each store’s inventory should have been customized based on buying habits of local consumers and by the local manager. Only the local store team knows what’s the “hot sellers” in their store.

Clearance merchandise is actually a red flag in the retail business. It means that, as a store, you way overspent on merchandise that you couldn’t sell. If you have excessive clearance merchandise, then your merchandise spends are way off. It also means that your buyer is overbuying stuff that isn’t selling. It means you need to rethink your buyer and it means your new buyer needs to rethink how much to spend on similar types of products.

One of Toys “R” Us’s other foibles was its inability to recognize and stock the “hottest toys” rapidly. If you send 5 of something to a store and it sells out in 10 minutes, you need to stock more of it and you need to do it pronto. Yet, it might take Toys “R” Us 30 or more days to get that merchandise back in stock. That’s 30 days of zero sales… sales that could have been had the next day and the day after that. Missed sales were one of TRU’s biggest problems. Having merchandise in stock that you can sell day after day is a huge win. Yet, if the corporate buyers don’t even know to reorder this thing again, the store is blind. This is why the next part was so important to improving TRU.

Instead, this toy chain should have let the local managers have autonomy via cutting merchandise from their store that isn’t selling and placing rush orders on the hottest toys. By letting the managers, you know, actually manage the store’s inventory properly, the stores could have cut costs and raised profits. The managers could have done this by buying more of popular hot sellers in that area, shuffling cold merchandise to other stores that can sell it and cutting non-sellers from the inventory. In fact, managers should have actually had access to every store’s inventory throughout the chain and when that item last sold there. If a particular item is selling hot in one store, but is completely dead in other stores, the hot item store manager should be able to request stock moved from the cold stores to their store. This way, managers could have directly moved inventory from store to store instead of placing orders for more stock, thus causing more debt. Only after the existing in-store inventory was exhausted should a new order need to be placed. The buyers from the chain should have endorsed this manager autonomy.

Unfortunately, that wasn’t a priority for the very rigid corporate run TRU. I could walk into a store in Texas and find specific toys always out of stock. Then walk into a TRU in St. Louis a week later and find twenty of them sitting on the shelf with dust on the top. If stores had been able to request the hottest toys moved from other stores, the chain could have saved a lot of money on new stock orders.

This change in business model could have drastically improved Toys “R” Us’s profitability throughout the year. It probably would have cut down on orders to toy sellers, but something’s got to give when you’re running a retail store chain. If the toy manufacturers had to suffer a little to let Toys “R” Us recover and be a whole lot more profitable, then so be it.

Unfortunately, TRU’s status quo model endured. Even if the leveraged buyout hadn’t occurred in 2005, Toys “R” Us’s fate was pretty much sealed strictly by is “90 in the red” (cookie cutter) mentality. It was only a matter of time before it succumbed to its own debt burden even if it hadn’t incurred a ton more debt after that poor sale. The 2005 unwise sale simply accelerated Toys “R” Us’s already looming demise.

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Toys R Us: Say Goodbye to an Era

Posted in botch, business, tanking by commorancy on March 14, 2018

tru-logoFor many, we grew up with Toys Я Us as the go to place to find that cool new toy, game, doll, action figure, Teddy Ruxpin, train set, learning toy, crayons, movie or even video games. Times are a changin’ folks and Toys R Us is now finds itself way less than one Barbie away from permanent closure. Let’s explore.

Update from the News Desk — 2018-03-14

Toys R Us headquarters has apparently informed all US and UK employees on Wednesday, March 14th that all US and UK locations would be closed, a move that would lose 33,000 jobs. This would be one of the biggest retailer liquidations. CEO David Brandon intended to file paperwork to begin the liquidation proceedings on Wednesday.

From small to BIG to defunct

In the 70s, I remember toy stores primarily consisting of smaller retailers in malls, usually carrying Lincoln logs, wooden toys or learning toys. While I didn’t mind visiting these places, they felt more like a library than a toy store. They also didn’t carry much of the things that I liked. It wouldn’t be until sometime the mid-70s when a Toy R Us opened near my house. That’s when toy shopping all changed, at least for me.

I’m sure my parents hated taking me to Toys R Us,  just as so many parents do. For us kids, it was like a day at Disneyland: a gold mine, a treasure trove, a place of dreams. Unfortunately, the parents were having none of it… or at least, as little as they could walk out of the store carrying. Good on them, but that didn’t make Toys R Us any less magical to a 8-10 year old. We loved it, we loved going there and we especially loved it when we got to take something home with us.

Geoffrey

I was never a super big giraffe fan, but Geoffrey was a fun and charming mascot constantly pointing out cool new things in the store. I would come to see Geoffrey as cute mascot designed to help me find new stuff. Not always, but a good bit of the time. Sometimes he was just present, like Mickey Mouse. That Giraffe always made me smile because I knew that I was at that magical place, like Disneyland but local. Over the years, Geoffrey began being used less and less by TRU, but he’s still considered their mascot.

Every once in a while, Toys R Us would offer an enter-to-win a fill-your-cart shopping spree. I always wanted to win one of those as a child, but alas never did. To think what I would have filled my cart with. The mind boggles, if only because some of those toys are considered highly collectible today. Though, those toys most assuredly would not have remained closed in their packaging after making their way home.

Growing Up

As I grew into my 20s, got my own car and job, my relationship with Toys R Us changed. No longer was it that magical place, but it now had firmly become a store and I was a consumer. Still, it was a place to go to find that hot new toy that everyone’s talking about. It also became the place to find computers and video games. If I couldn’t find it at Target or Kmart or, later, Walmart, I could almost certainly find it at Toys R Us or Kaybee or Children’s Palace (competitors at the time) and to a much lesser degree FAO Schwarz. Toys R Us was always the first place to go, then the others as they were less reliable.

Dominoes

As the competitors fell over one at a time, first Children’s Palace in 90s, FAO Schwarz in early 00s, then in the middle 00’s, Kaybee Toys, Toys R Us was still standing and, in 2009 would acquire the FAO Schwarz brand, but would sell it off in 2014. It was (and currently is) the place to go to find all things toys. Unlike Target and Walmart that choose to stock limited toy items, Toys R Us (like the previous Children’s Palance and Kaybee) still carries aisle after aisle of wide ranging toys you can only find at Toys R Us. You simply can’t find this selection of toy items at a discount department store. This is why I always ended up at Toys R Us in search of fun, exciting new things.

The Mistakes

Throughout the later years, I’ve grown a love-hate relationship with the Toys R Us chain. Not only because I worked there for a short time while in my 20s, but also because the management does a lot of things that don’t make sense. For example, Babies R Us. For a time, Toys R Us stores devoted half of their space to baby goods. I don’t have a baby, so there’s no interest in that. Yet, Toys R Us decided to kill half of their store space to devote to these products. This meant, less space for toys, games and other items.

I understand that the management wanted to expand their selection into babyland, but it was a mistake to take away valuable Toys R Us aisle space to devote to all-things-baby. This, in my opinion, was one of the biggest mistakes the Toys R Us management foisted upon its stores. That was, until they finally spun Babies R Us into its own stores and gave it its own space.

Later, the management decided to do away with separate Babies R Us stores and chose to abut the two stores together for one seamless one-store experience. That was at least better than taking away shelf space from an already cramped toy store, but even that was unnecessary and, in my opinion, a mistake. They can be next to each other, but walled off and separate stores with separate stock and separate staff. I know why they did chose to hook them together. They did it so they could use one set of checkout lanes, one set of cashiers and one set of staff to stock both stores.

The X

At around the time that Babies R Us was coming into its own as a separate store chain, Toys R Us decided to change its shelving layout. Instead of the more logical long rows running from the front to the back of the store (with middle store aisle breaks) which made it easy to find everything, the store layout designer decided to change the aisles to be side to side and then create X shaped rows in the middle of the store. Not only were these rows much harder to navigate, the layout of the aisles were crippled as a result. This layout made finding things incredibly hard and it seemed like they had less shelf space.

Not only was everything now moved around haphazardly, it made finding what you’re looking for overly hard. Meaning, now you had to navigate the whole store looking at everything just to find that thing.

Maybe the designers thought this was a good idea? It wasn’t. This is the second mistake from Toys R Us management.

Overbuying and Stocking the Wrong Toys

I don’t know how many times I visited Toys R Us in the 90s only to find the same toys every time I visited, sometimes months apart. These we affectionately call peg warmers. This mistake continues to plague Toys R Us to this day. Not only did Toys R Us have incredible buying power way back when, they just didn’t use it to their advantage. Instead, they would continually overbuy on dud toys and not buy enough on the hot toys.

You can’t sell toys that you don’t have in stock. For example, Cabbage Patch kids. When that craze hit, they couldn’t keep them on the shelves. You’d think Toys R Us could have negotiated with the manufacturer and buy 10x the amount they originally bought… simply so they could fill the demand. Sure, there might be a drought while the manufacturer created more, but eventually they would have enough stock quickly to satisfy demand. Alas, they didn’t and the shelves remained bare until the toys were so cold you couldn’t even give them away. Too little, too late.

Further, Toys R Us needed to let the local managers order stock for their specific location to stock toys that are regionally hot. Not every toy sells the same in every store, yet Toys R Us felt the need to send cookie cutter stock out to every single store. If you walked into a Toys R Us in any state, you’d see identical stock. Each store manager needed to be given free reign to specifically order stock in sizes that made sense for amount of local demand they were seeing for a given toy item. If they couldn’t keep a specific skateboard stocked, then the manager should be able to order the proper amount to cover the local demand from their store. In fact, stores that couldn’t sell the item should have shuffled the stock over to stores where the demand was high. That’s smart inventory management. Nope.

Store managers should also be able to nix slow selling items from their shelves and replace it more hit items. Why continue to carry that obscure toy that you can’t even clearance out when you can sell 100x as many Tickle Me Elmos? Having great selection is fine as long as you’re not stocking 50 of an item you can’t even give away. Again, smart inventory management people. Stock them in small quantities, sure, but not in the quantities that each store was getting. Shuffle extra stock to other stores that have none. Remember, I worked there, I saw the stock amounts in the stock room.

Nope. Toys R Us continued to make this mistake year after year.

Over-expansion

Nearly every business thinks they should open as many stores as physically possible. But, you can’t do this when most of your stores are operating in the RED. Toys R Us was no exception. This chain continually felt the need to open new stores rather than trying to shore up their existing stores and get them each to an individually profitable status. If the management had stopped their expansion plans and, instead, focused their efforts on making each store profitable by the end of Q1 each year, Toys R Us would not be in this predicament.

Dated Store Displays

Not too long ago (perhaps early 00s), Toys R Us did away with the X aisle layout and converted them back into horizontal rows once again. However, the aisles now run left to right in-store rather than the original front to back design (which was arguably its best floor plan). Unfortunately, their fixtures are all incredibly dated pegboard and 70s style metal fixtures. They look like they’re straight out of a 70s store… even when the store is brand new. Maybe these are the cheapest fixtures they can buy? No idea, but they don’t look modern.

The store is also incredibly jam packed with stuff. The shelves are always full of stock yes, but it doesn’t help when the stock is old and is sitting on dated shelving units lit by 70s style fluorescent lighting fixtures.

The Business

Here’s Toys R Us’s primary operational problem and the problem that ultimately leads to where we are today. Toys R Us always relied on the holiday shopping season to pull its stores into the black. Meaning, Toys R Us always operated its stores in the RED through 80-90% of the year hoping for the holiday season to pull each store up and out and operate in the black for that year. This was the chain’s primary mistake. This operating model had been ongoing since the 80s. This was the way that TRU intentionally chose to operate its stores. This was also entirely their biggest operating failure and it’s the mistake that is now what’s threatening closure and costing TRU its business.

In addition to operating in the red, Toys R Us also didn’t wield its buying power to get the best possible credit terms, the best possible deals and the best possible return arrangements. If a toy doesn’t sell, package it up, send it to another store that can sell it or send it back to the manufacturer for full or partial credit. Let the manufacturer deal with that stock rather than trying to organically clearance out items on the shelves years later. No, get these old toys off of the shelves to make way for new toys. Fill the shelves with toys that can sell and that will pay the bills.

If you can’t pay your bills, you can’t stay in business. Business 101. Yet, Toys R Us management felt that they were above these rules. The management team felt they could continually run their stores in the red without ramifications. Well, fate has now caught up with you, Toys R Us.

Being Acquired by Private Equity Firms

Because of the way Toys R Us chose to operate its stores, it could not support being acquired in this way. This acquisition was entirely shortsighted on the part of the private equity companies involved and they (and us consumers) are the ones who are now paying the ultimate price.

In 2005, Toys R Us was acquired by a set of private equity firms. These firms included KKR & Co., Bain Capital and Vornado Realty Trust in a $7.5 billion buyout deal. These three companies (and their investors) sank $1.3 billion of their own funds into the purchase, leaving the rest of the purchase price of $6.2 billion to be made up in loans. These loans saddled Toys R Us with an over $6 billion debt burden. A debt that, because of the rather nonsensical business model that the stores had been following since the 80s, could never be recouped. All of this leads to…

Bankruptcy

In late September 2017, Toy R Us filed for bankruptcy protection against its creditors. This means that its creditors can no longer go after Toys R Us for not paying bills. It also meant that the loans left over from that terrible 2005 buyout deal could no longer collect on those loans. Of course, in return for this court issued bankruptcy protection, the company has chosen Chapter 11 to work through a plan to reorganize in a way to get themselves back to profitability and pay their creditors over time before time runs out. For the Toy R Us management, that meant finding a suitor to buy the business… because, of course, they couldn’t be bothered with actually trying to restructure the stores in a way to make them profitable. Oh, no no no.. that’s just too much work.

What? Are you kidding? Are you really expecting some well funded company to swoop into this ailing business holding onto a mountain of debt and offer to buy you? Really? The way that TRU operates is textbook operating procedure for failure. It cannot continue to operate in the way that it does. Even closing half of the stores may not be enough to solve this operating problem. It’s only surprising that it took this long for this toy chain to make it to this point. I expected this day to come a lot sooner.

Toy Collectors and Toys R Us

I full well expected to see Toys R Us fail in the 90s.  However, Star Wars saw to it to keep Toys R Us in business. The Star Wars collectors came out in wild abandon to snap up tons of revamped Star Wars merchandise for not only the previous trilogy (including the Orange and Green carded Power of the Force series). These toys still remained hot even after 1983’s Return of the Jedi cooled down. It all heated up again when the Prequels began in earnst in 1999 (toys beginning to appear in stores about a year earlier). Toys R Us got a reprieve from their red ledger problems due primarily to Star Wars collectors, Hasbro and a few other unrelated hot toys during the 90s (Tickle Me Elmo). Almost every year, there was some new fad that kept Toys R Us’s year end strategy in check. Though, this strategy would ultimately fail them when, in the last 10 years or so when there just haven’t been those must-have toys or collectible Star Wars toys. Even the Zhu-Zhu pets weren’t enough. Even the latest Star Wars trilogy from Disney has not had the merchandising power that the 90s saw. Though, Disney isn’t crying over what they have sold.

In fact, I’d venture to guess that the 90s collectors have all but stopped collecting and have moved on with their lives… which put a huge crimp in the Toys R Us budget. In fact, during the collector heyday of the 90s, Toys R Us did their very level best to chase away the collectors. Much to their own chagrin, they succeeded in doing so by the mid-2000s. It also doesn’t help that collectors can now buy full cases directly from places like Entertainment Earth, which no longer meant the need to scour the pegs at Toys R Us in the wee hours of the morning. You could order cases directly from the comfort of your own home, then see them delivered to your doorstep.

Amazon and Online Shopping

Because of the power of the Internet, Amazon and eBay, it’s pretty easy to find that hot toy at more reasonable prices. Yes, Toys R Us is still a staple in the current shopping landscape. When it closes, both Amazon and Entertainment Earth will simply pick up where Toy R Us left off without missing a beat. If anything, I’d suggest that Amazon pick up the Toys R Us branding at a fire sale during liquidation and rebrand the Amazon toy section to Toys R Us. Keep the TRU brand alive, but not with all of that bloated store baggage. Then, dump the Babies R Us brand entirely. You can still sell baby things, but branded as Toys R Us.

Toys R Us Closing

As I said, I have a love-hate relationship with Toys R Us. I do enjoy visiting and seeing what’s new, but every time I walk into a store, I’m confronted with the dated shelving and decoration, the continual nagging reminder of just how careless the management is and how much of a wasted opportunity that Toys R Us had to be the become the biggest profitable toy chain in the world. Yet, they’ve failed.

If Toys R Us can manage to pull a rabbit out of a hat at the last minute and keep the lights on, I’ll be fine with that. Sadly, I think this is likely where it will all end for Toys R Us.

Gift Cards or Rewards — Use em’ or lose ’em

toys-r-us-gift-cardIf you have any remaining unused gift cards from Toys R Us, be sure to visit a store now and use them immediately. Don’t wait until after Toys R Us begins closing its stores.

Likewise, if you have any rewards points left on your rewards card, log into Toys R Us Rewards, issue certificates and use them up now. Same for Babies R Us Cashback Endless Rewards program. Otherwise, forfeit your chance to convert those points into dollars. Representatives for Toys R Us have said that they will honor gift cards, rewards points and cashback programs for 30 days. The 30 day clock likely began on Wednesday March 14th, when they filed their liquidation paperwork with the court.

I guess in an odd way, I do kind of get that shopping spree after all, and many years later. I just found that I have over 2500 points in my rewards account. That equates to a $100 shopping spree.

For my $100 in rewards points, I got a Nintendo Monopoly set, a Care Bear Grumpy Bear, Two Schliech Geoffrey branded figurines, 5 different Halo Hot Wheels, a Pit Amiibo, a Pain-Yatta Skylander, a Playmation Vision figure and two Geoffrey branded reusable shopping bags. I ended up paying $9 to cover the tax. I also bought a $5 Geoffrey gift card and immediately used it to get dock protector straps for a Nintendo Switch. I wanted the Geoffrey branded gift card as a souvenir. I’d also previously purchased the day before, two Geoffrey 18″ plush and one Geoffrey plush gift card holder, which I’ll put that used Geoffrey gift card in.

Returns and Exchanges During Liquidation

Check any purchased merchandise thoroughly for defects the same day you buy it. If there are any problems, return it the same or next day and exchange it. Don’t wait even a few days to exchange as you may not be able to find the same item. According to Toys R Us representatives, all sales are final. This means, no refunds. However, they may continue to honor exchanges for a period of time. If you’re uncertain of any of this, ask for details at the service desk before you buy.

If you’re thinking of shopping for gift items, you might want to buy elsewhere. Buying a gift for someone could mean the gift recipient can’t return or exchange the item. You don’t want to force a gift onto someone when it’s not something they want only for them to find they cannot return it.

Be that Toys R Us Kid one last time

If you grew up visiting and are as fond of Toys R Us as I am, I’d suggest for you to take a few minutes out of your day and visit your local Toys R Us to reminisce about the good ole days. Once the liquidation sales start, they’re quickly going to look like half-filled shells of a store. Note that the deadline for Toys R Us to find a buyer is early April of 2018, so visit them quick. You have less than a month.

You might even want to pick up a souvenir, such as a plush Geoffrey, to remember what was Toys R Us and what it meant to us as kids. If you want a plush Geoffrey, ask at the Customer Service desk. It seems they keep them there for some reason.

How not to run a business (Part 10.3) — Case Study: Sears Holdings

Posted in bailout, bankruptcy, best practices, business by commorancy on February 10, 2017

Back in late 2004 when Kmart and Sears merged to create Sears Holdings, I had to wonder what one failing retail chain could do to help another failing chain. However since 2004, the one thing this new company has proven is that these brands die hard. In 2017, however, I think the answer has come back to conclusively nothing has been gained. Let’s explore.

Back in 2004, I didn’t really dig deep into the $11B dollar merger deal to get the nitty gritty details mostly because I had no interest in two failing retail chains (where I personally never shopped). Though, I already knew the handwriting was on the wall for both of these chains. It was just a matter of time before both chains closed their doors. That they’ve managed to hang on another nearly 17 years is a testament to the cash infusions from a billionaire. I digress.

After deciding to finally dig into this merger deal, however, I have come to find that this deal was instrumented by a former Wall Street darling Eddie Lampert. A wiz bang former Goldman Sachs employee who started his own hedge fund and apparently made mad cash. Though, I’d have questioned why a Wall Street darling would have any interest in the failing retail space. It’s clear, though, Lampert still has no knowledge of retail even after 17 years of floundering with Sears Holdings. Lampert pretends he wants to be the next Jeff Bezos with this investment, but is failing at this for two really big reasons: 1) Lack of innovation and 2) Lack of involvement.

According to his executive staff, Eddie spends most of his time at his home on a private island community in Florida. A community of apparently 86 residents and a staff of private police to ‘protect’ the island. Based on his executive meetings, he literally phones in his CEO job day in and out. He rarely, if ever, makes an appearance in the office.

Running a company by remote control

It’s one thing to be an individual contributor who works remote. Typically, these are task oriented jobs which can be easily monitored for task completion. However, as CEO, there is no possible way you can run a company from behind Skype. However, if Lampert had had substantial previous retail management experience, he might be able to get away with this. Because Lampert has no knowledge of retail after merging Kmart and Sears, he’s effectively flying blind. Even nearly 17 years later doesn’t automatically impart knowledge of retail. It’s clear, Lampert has no business operating this company. Unfortunately, whatever is left of the Sears Holding company is entirely dependent on Lampert for his continual cash infusions (up to $1B) which have kept this listing barge from sinking. However, some boats are best left to sink.

It’s crystal clear, when you buy into a business you know nothing about, you have two choices. One, sit on your arse and assume you’ll figure it out eventually (which usually doesn’t work). Two, dive in head first and learn everything you can about running a retail business. I think it’s a relatively safe bet that Lampert is in the former camp rather than the latter. Instead of being available and actively engaging in the day to day affairs of the business, he sits comfortably at his private island home and dictates policy from a Skype conference call. It’s no wonder this business is being slowly driven into the ground.

For any would-be business owner

As an owner / CEO, you need to be actively engaged in and have passion to drive your business forward, whatever that business is. You can’t sit behind a computer screen at home literally phoning in your CEO day job. That may work for a short period of time, but it won’t work forever. It’s clear, Kmart and Sears are both on the brink of collapse. Why? Because the merger of two ailing turned failing companies was a foregone conclusion without an engaged leader. A CEO / owner is there to drive and guide the business forward. To make the tough choices and ensure the business remains viable and becomes / remains profitable. Your underlings won’t do this on your behalf. They’ll do whatever it is to take their paycheck home, but they won’t go out of their way to run your business. That’s your job.

The takeaway from this case study is that you cannot sit on your arse and expect others to do your work for you. You need to be available in the office often to drive your business. If you don’t take your business seriously, no one around you will either. You need to understand your sales numbers, what’s selling and what isn’t. You need to make strategic partnerships to bring exclusive merchandise (as in the case of a retailer) onto your shelves at a low price as a way to drive customers into your store. You also need to be shrewd to get costs down and profits up. You need to hire a kick-ass marketing team who can bring the demographics into your store. In short, learn your business, understand it, live it, breath it and make it your passion. Own your business’s problems and own its solutions. Also, you need to think outside the box to continue driving all demographics into your establishment(s).

Yes, it would be nice to sit on the beach sipping margaritas all day or behind a gated community in a big mansion and also be a successful CEO of a profitable corporation. That’s a pipe dream that doesn’t happen. You only get that beach time after you’ve done your in-office time and made your money. Retail doesn’t just automatically make money for you. It requires active involvement. You need to actively drive new business into your business. It’s not like your hedge fund where you crunch numbers at a desk and move out bad performers. You need to be in the office driving your staff. You will need to reinvent your business, brand and ideas every so often to remain ‘the place to go for cool new stuff’. Once your retail business is thought of as a mom and dad store, your store is considered antiquated. The mom and dad demographic does make some money, but it isn’t the only demographic spending money and that single demographic will not convert your company from a million dollar company into a multi-billion dollar company.

Why phoning in as CEO doesn’t work

If you aren’t showing up to the office day in and out, you are missing critical verbal queues, having meaningful conversation with your staff and learning the problems that face your business. Keep in mind that some problems are outside problems. Like, for example, the threat to Kmart and Sears has been the internet retailers like Amazon. This means you need to spend quality in office time hammering through new plans to counter growing trends, like Amazon’s quick ship, quick deliver model… like Amazon’s Kindle services. If you don’t keep-up-with-the-joneses, your business is lost. Sometimes the problems are internal problems, like horribly outdated decor and fixtures. Sometimes they are supply chain related.

Since the merger in 2004, Kmart and Sears have both failed to change anything substantial with their store merchandising or, indeed, updating their store look and feel to accommodate new growing trends. Instead, they left their stores looking like something out of the 80s. Who wants to shop in a place with horribly dirty floors, drab coffee stain colored walls and fixtures with chipped paint and rust? Not to mention, that horrid glaring 80s fluorescent lighting job. You want to make your stores inviting and modern, not be a turn off. This is where it takes regularly entering and visiting stores to see how they look, how they feel to a shopper and how the merchandise is being faced. Then draw up plans to remodel your stores.

Being a Billionaire

Not everyone has this luxury. As with Lampert, he’s apparently got lots of money to spend. But, that doesn’t make it spending money smart. The saying, “throwing good money after bad” actually applies here. Why would you want to continue to invest more and more money into a chain not producing returns on your investment? That’s not a good investment strategy. For a Wall Street darling, it really makes no sense at all. Use your gift of understanding good investments and then apply that knowledge to Sears and Kmart. You’ll quickly see your error. It just takes an outside party looking in from the outside to see what someone so close to the matter can’t.

Can Kmart and Sears be turned around? While anything is possible, I’d personally say, “not at this point”. If Lampert had started the turn around back in 2004, he might have been able to pull this listing ship up right. However, because he has become a complacent mostly home bound recluse for many of the last 17 years, a turnaround for this venture is likely impossible with this leadership team. It’s too bad, too. Sometimes we just need to say goodbye to some beloved old brands to let newer brands take us to the next level.

Using time (and lighting) wisely

As a business owner, don’t let your business become a victim of complacency. Expect to reinvent your business every few years to not only keep your business fresh, but also to keep people coming in to see what’s new. Customers value companies that invest in making their stores better. Having a refreshed store means you care about your business. It also means you care about how your merchandise looks on the shelves. If your stores look old and trashy, so will your merchandise. If your store looks new, fresh and well lit, so will the merchandise. It’s literally all about creating the proper mood and perspective in your stores. Lighting has a huge amount to do with this. So, expect to replace old outdated fluorescent lighting with updated LED lighting concepts.

It just comes down to investing money in the right things for your business. It’s clear, Eddie has no clue where to have Sears and Kmart use the money he’s investing. Instead of just throwing good money after bad, ensure that that money is being used to remodel stores, being used to draw consumers in and being used to buy merchandise that fits with the store’s branding.

Unfortunately, both Kmart and Sears haven’t been ‘goto’ places in a very long time. That’s primarily because these chains have not focused on any one area to be proficient at any. For example, Target has revamped its 80s retail-only stance into becoming a neighborhood grocery as well. So, not only can you go to Target to get the latest blu-ray movie, you can also pick up some hamburger and fixings to go with it. It’s a well rounded shopping experience. However, heading into Kmart, for example, yields many deficiencies. For example, the electronics area doesn’t even carry video games any longer. How can you possibly operate a general merchandise store and not carry any video games?

Takeaway

Drive your business smart. Invest money into your business wisely. Remain focused on your goals. Most of all, remain engaged and passionate in everything you do. If you don’t do all of the things that continue to make your business a success, you may end up with a failure. Unlike Eddie Lampert with seemingly endless funds, you may find your doors shut. Though, I believe at some point soon, even Eddie’s pet project of Sears Holding will close. However, if you find yourself as wealthy as Eddie, spend your money however you feel. It’s your money. For the rest of us, driving your business smart is the obvious answer to eventual success. Though, I will say that even as passionate as you may be about your business and as much work as you may put in, there’s still the possibility that your business may fail. Predicting success or failure in any new business venture is tricky as there are so many unpredictable market forces outside of your control. For the things that you can control, you most can certainly guide your business success in the right direction and reduce your chances for failure.

Sears Bankruptcy

I would be remiss at not updating this article in 2018 to add in the recent bankruptcy and closure of the 146 Sears stores. On October 15, 2018, Sears announced it has entered chapter 11 bankruptcy protection while it attempts a reorganization. It will close these 146 stores in this reorganization process to help reduce its massive debt load.

Whether this signifies the last few breaths of a dying chain or whether this chain can actually reorg in some meaningful way and survive is yet to be determined. In my view, this is the last dying gasp of an organization that is about to close. I would highly suggest that you plan to visit a Sears near you for one last nostalgic view before this chain becomes a mere memory. If there are any Sears specific brands that you like and buy, I highly recommend that you stock up now as they are likely to forever become a memory.

Part 10 | Chapter Index | Part 11

If you like what you’ve read here or disagree, please leave a comment below.

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$5 billion given to GMAC Financial

Posted in bailout, banking, bankruptcy by commorancy on January 2, 2009

GMAC Financing (GM’s financing arm) has been given $5 billion in addition to the already $17.5 billion given to GM in order for GM to sell vehicles.  It was stated that GMAC had gotten tangled up in bad mortgage debt.  Um, hello, what business did GMAC have in giving out HOME loans?  I thought this company originated for the purpose of auto financing?  If auto loan companies are sticking their hands into markets where they don’t belong, they deserve to get them slapped.

Again, here is another bailout that was unnecessary.  Yes, I do understand that GM can’t sell cars without its financing arm.  Again, who’s problem is this?  GM needs to work through its issues itself.  The citizens of the US do not need to be propping up these badly run organization through these bailouts.  What business did GMAC have even issuing home loans? Yes, I realize they are a financing arm, but GM should have been keeping careful watch over them to prevent GMAC from offering loans on items other than cars or vehicles.  Again, another company with no oversight that does not deserve a bailout, yet the government is handing them $5 billion.  I understand the reasoning behind the money, but it doesn’t make the pill any less bitter to swallow.

Oh, and the worst part of all of these auto bailouts is that there is no guarantee they won’t go belly-up anyway. Giving the auto makers  this money may all be completely pointless, but we the taxpayers will have to pay the price in the end no matter the outcome.

Does CitiGroup deserve a government umbrella?

Posted in bailout, banking, bankruptcy, economy, tanking by commorancy on November 24, 2008

 

CitiGroup Logo

I guess the broader question, does any large commercial business deserve to be bailed out?  Well, clearly Mom and Pop businesses fail every day.  Yet, the government does nothing.  Why do large conglomerates deserve special treatment? 

The short answer is that there is some magical threshold where there are too many people who would lose their jobs as a result of the failure combined with possible economic ramifications.  But, still, does that warrant a bailout?  No.

If a business cannot run itself in a fiscally appropriate manner (large or small) it deserves to fail and go away.  If any of your family is employed by CitiGroup or any financial company caught up in the turmoil of the financial sector crisis, I feel for you.  But, that doesn’t mean that the company deserves to continue to exist if they cannot maintain profitability even in the toughest of times.  Fiscal responsibility starts at the top of the company and trickles down to even the most bottom level employee.

What does this mean?  It means, don’t request a new computer every year.  Don’t ask for Herman Miller chairs and the most expensive ergonomic keyboard simply because you can.  If the item is considered ergonomic, the company is almost obligated to make sure you get it.  Buying all of these expensive amenities for your desk makes you fiscally irresponsible to the company if you don’t really need it (and, in most cases, you don’t).  But, that’s not to say that this is responsible for CitiGroup’s problems.  

Who knows where the money hemmorage is going inside these companies.  But, clearly, it’s not going back into the business.  Again, I ask, why do these companies deserved to be bailed out?  What makes them special?  I have no sympathy for large companies that can’t properly manage themselves.  Neither should the government.  Spending all of this money to prop up these badly run organizations is clearly counter to free enterprise. 

In Free Enterprise you have to take the good with the bad.  That means, when business is good, you profit.  When it’s bad, you bankrupt and close.   There needs to be no governmental cushion here to soften the fall.

Does CitiGroup or any other badly run business deserve an umbrella?  What do you think?

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