Why Did Toys R Us Close? The Real Story Behind The Retail Giant's Fall

Toys R Us collapsed under a massive $5 billion debt load that demanded $400 million each year in payments. The retail giant once dominated 12.5% of the toy market and operated nearly 1,500 stores worldwide. The company ended up failing because of fierce competition from online retailers, big box stores, and poor strategic decisions.

The Rise of Toys R Us: From Baby Boom to Boom Years

Charles Lazarus never dreamed of building a toy empire. Back from World War II, where he worked as a cryptologist, he just wanted to start a small business. The 25-year-old Lazarus opened Children's Bargain Town in Washington, D.C. in 1948. He sold baby furniture to serve the post-war baby boom.

How Charles Lazarus built a toy empire

Lazarus discovered something interesting about retail: parents rarely bought a second crib or high chair for their next child. Yet they kept coming back to replace broken toys or buy new ones their children wanted. This discovery led him to add affordable toys to his store.

The toys sold so well that Lazarus completely switched from baby furniture by 1957. He rebranded the store as Toys "R" Us, with its famous backwards "R" that looked like a child wrote it. This move matched his dream to create "a supermarket for toys" where families could find any toy they wanted.

The big-box model that changed retail

Toys "R" Us revolutionized toy retail with a groundbreaking approach. Small family-owned shops with limited seasonal selections dominated the market before Lazarus came along. Toys "R" Us stores dwarfed their competition and offered "thousands of different toys" in one place.

Customers stood amazed at these massive stores filled with toys. Richard Gottlieb from Global Toy Experts noted that "Lazarus really captured this sense of American abundance after the war".

The business thrived on three advantages:

• A huge selection no other store could match

• Bulk buying that kept prices low

• Toys available all year long, not just during holidays

Gerald Storch, who led the company from 2006 to 2013, summed up Lazarus's strategy: "having more toys than anyone else, having great prices and being in stock when no one else is in stock".

Toys R Us in the 80s and 90s: Peak dominance

Toys "R" Us reached its golden age in the 1980s. The company turned toy shopping from a seasonal event into a family adventure that happened year-round. Geoffrey the Giraffe joined as the store's mascot in 1965, winning children's hearts everywhere.

Numbers tell an impressive story. The company controlled about 25% of the U.S. toy market by the mid-1980s. Success continued through the 1990s as the chain grew to more than 1,300 stores worldwide.

The store helped launch major toy trends, from Cabbage Patch Kids to the original Nintendo Entertainment System. The company went global in a big way - President George H.W. Bush even attended the first Japanese store opening with Lazarus in 1992.

Kids found magic in every Toys "R" Us visit. The stores became wonderlands where toys stretched out "as far as your eyes could see".

Early Warning Signs: The First Cracks in the Foundation

Toys R Us ruled the toy retail world for decades before showing worrying signs of weakness in the late 1990s. Three key developments would later signal the retail giant's eventual collapse.

The FTC ruling and its effect on suppliers

The Federal Trade Commission filed a complaint against Toys R Us in 1996. The company faced accusations of abusing its market position. The FTC charged that Toys R Us had pressured major toy manufacturers to keep popular toys away from warehouse clubs or sell them only in expensive combination packages.

The Commission's October 1998 ruling found that Toys R Us had "coordinated horizontal and vertical agreements with and among toy manufacturers to restrict the availability of popular toys to warehouse clubs". This key decision changed how the company dealt with suppliers, and the Seventh Circuit Court of Appeals upheld it in 2000.

The company's troubles with regulators continued. Toys R Us paid a $1.3 million civil penalty in 2011 because it kept interfering with supplier relationships, violating the original order.

Big box competition from Walmart and Target

At the same time, discount retailers emerged as a new threat. Walmart and Target expanded their toy departments aggressively and offered competitive prices that challenged Toys R Us's market dominance.

These big box competitors gained major advantages:

• They cut operational costs to offer lower prices than Toys R Us

• Families could do all their shopping in one place

• New inventory systems streamlined their operations

These retailers steadily cut into Toys R Us's market share by the late 1990s. The specialty retailer's profits suffered from the intense price competition.

The failed eCommerce launch in 1999

Worst of all was the company's disastrous move into online retail. Toys R Us launched Toysrus.com in 1998, but the 1999 holiday season turned into a catastrophe. The website crashed under heavy traffic, and countless Christmas gifts ordered weeks ahead never reached customers.

This failure led to a $350,000 FTC fine and destroyed consumer trust. While competitors embraced the digital age, Toys R Us struggled with its weak online presence. The company was poorly positioned for the rise of e-commerce.

These early problems would later play a major role in explaining why Toys R Us ended up failing.

The Amazon Deal and the Missed Digital Shift

Toys R Us made a decision that would devastate its digital future after its online operations failed during the significant 1999 holiday season. The company chose what looked like a smart shortcut instead of building its own e-commerce operations.

Why Toys R Us partnered with Amazon

SoftBank invested $60 million in Toys R Us in February 2000. The retailer signed a 10-year partnership with Amazon a few months later that changed its digital path completely. 

The agreement required:

• Toys R Us to pay Amazon $50 million yearly plus a percentage of sales

• Amazon to manage site development, order fulfillment, and customer service

• ToysRUs.com to send all traffic straight to Amazon's website

• Toys R Us to become Amazon's exclusive seller of toys and baby products

The partnership showed early promise as the joint toy store became the top site for kids by 2002.

How the deal backfired and delayed online growth

Amazon's real strategy caught Toys R Us off guard. Other merchants started selling toys and baby goods on Amazon by spring 2003, which went against the exclusivity agreement.

The setup made Toys R Us depend on Amazon instead of creating its own e-commerce platform. Amazon learned about what sold well, the best selling times, and which products failed by watching everything firsthand.

The lawsuit and its aftermath

Toys R Us sued Amazon in May 2004 for breaking their agreement. The toy retailer won the case in 2006, and Amazon paid $51 million to settle, but the damage was already done.

The retailer missed vital years of building its online presence during a key period in retail progress. Experts pointed out that Toys R Us "had '10 years of innovation' to catch up on" after the partnership ended.

Yes, it is clear that Amazon "used the Toys R Us brand to condition American consumers to buy their toys online" while stopping the toy retailer from growing its own digital capabilities.

The Final Years: Debt, Decline, and Closure

Toys R Us started its decline in 2004 when the board put the company up for sale due to flat sales and falling profits. The events that followed would speed up the retail giant's collapse.

The 2005 leveraged buyout and rising debt

A group of private equity firms – Bain Capital, KKR & Co., and Vornado Realty Trust – bought Toys R Us for $6.6 billion in 2005. This deal left the retailer struggling with a crushing $5.3 billion in debt that changed its financial future forever.

The company couldn't handle this huge debt load. They had to spend about $400 million each year just on interest payments. This money should have gone toward making stores better, improving their online presence, and fighting off new competitors.

A financial expert pointed out that "If Toys R Us had half of the debt they had, the firm would have been profitable and totally fine".

Poor in-store experience and customer loss

The debt started choking operations and store conditions got worse faster. Nobody maintained the stores anymore. Dust piled up on floors and rafters because cleaning services were cut back. 

The core team left during cost-cutting efforts. The shopping experience seemed stuck in time – the stores looked almost the same as when Charles Lazarus created his "toy supermarket" concept more than 60 years ago.

Staff shortages hurt the business badly. Their huge 40,000-square-foot stores ran with just two or three employees at a time in recent years. So inventory ran low and customers became unhappy.

Bankruptcy, liquidation, and the end of an era

Toys R Us filed for Chapter 11 bankruptcy protection in September 2017, still carrying $5 billion in debt. The company hoped to rebuild and come back stronger, but a terrible 2017 holiday season with sales dropping more than 10% sealed their fate.

Lenders lost faith in the company's recovery chances by March 2018. Toys R Us announced plans to close or sell all 800+ U.S. stores. This decision ended their 70-year retail legacy and left about 30,000 employees without jobs.

Conclusion

Toys R Us's downfall ended up being a perfect storm of business missteps. Of course, the crushing $5.3 billion debt burden crippled operations, and competitors steadily eroded market share. The retailer's inability to adapt to e-commerce sealed its fate. This marked the end of a 70-year legacy that shaped American toy retail.

FAQs

Q1. What were the main reasons for Toys R Us closing down? 

Toys R Us closed primarily due to a massive $5 billion debt burden, intense competition from online retailers and big box stores, and failure to adapt to changing consumer behaviors, particularly in e-commerce. The debt, stemming from a 2005 leveraged buyout, prevented the company from investing in necessary improvements to stay competitive.

Q2. Is there any chance of Toys R Us making a comeback? 

Yes, Toys R Us is making a comeback. WHP Global plans to open up to 24 new flagship stores in prime U.S. cities, as well as shops in airports and on cruise ships. The company is also expanding its online presence and has partnered with Macy's to offer Toys R Us-branded stores within Macy's locations.

Q3. How did Toys R Us's partnership with Amazon affect its future? 

The partnership with Amazon significantly hindered Toys R Us's digital growth. While initially beneficial, it prevented Toys R Us from developing its own e-commerce capabilities during a critical period of retail evolution. When the partnership ended, Toys R Us found itself years behind in online innovation.

Q4. What impact did the 2005 leveraged buyout have on Toys R Us? 

The 2005 leveraged buyout by private equity firms saddled Toys R Us with $5.3 billion in debt. This massive debt burden forced the company to allocate about $400 million annually just to service interest payments, diverting funds from crucial areas like store modernization and online capabilities.

Q5. How did Toys R Us's in-store experience change in its final years? 

In its final years, Toys R Us's in-store experience deteriorated significantly. Cost-cutting measures led to poor maintenance, understaffing, and inventory shortages. Stores remained largely unchanged from their original concept, failing to provide the interactive and personalized shopping experience that modern consumers expected.