Toys R Us Downfall Due to Debt, Not Competition

September 20, 2017, 4:13 PM UTC

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If you study and internalize one article about the bankruptcy filing of beleaguered toy retailer Toys R Us, I recommend this one from today’s Wall Street Journal.

It is tempting to chalk up the company’s stumbles to an inability to effect a “digital transformation,” the justifiably hot buzztopic that is enriching management consultants across the land. And Toys R Us certainly never adequately transformed itself digitally. The Journal reports that in 2009, the year before Toys filed an unsuccessful attempt to go public, e-commerce represented a mere 4% of sales.

In hindsight, the company’s failure to launch a credible digital strategy never had a chance. It spent years and years larded up with more than $5 billion in debt, the result of a leveraged buyout by two private-equity firms (Bain and KKR) and a real estate investment trust (Vornado (VNO)). The private-equity firms often make money even when their targets fail. In this case, they didn’t. They’ll lose $1.4 billion in equity, and they never managed to milk much from Toys R Us in the form of advisory fees, one of their favorite tricks.

Two things to note. First, Toys isn’t done. Just as General Motors (GM) didn’t go out of business when it declared Chapter 11, Toys intends to polish up its balance sheet and keep operating. Second, Toys was in fact a dot-com survivor. Years after the demise of dot-com, flash-in-the-pan eToys, Toys R Us bought its assets.

It wasn’t enough.


Writer B.J. Mendelson is annoyed people are just getting around to agreeing with his thesis that, to quote from the title of his five-year-old book, Social Media Is Bullshit. He sent me a link to a PDF of his book so people can read it for free. “I could have saved a lot of businesses and politicians a lot of money had they listened,” he said.

They never do, B.J. They never do.

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