Inside the 20-year decline of Toys R Us
Cost cuts, stressed employees, intercompany rivalries, dirty floors, dusty rafters, glitchy IT, fudged metrics: The people who ran the failed toy retailer's stores know what went wrong.
Anyone who wants to understand the failure of Toys R Us in bankruptcy is not going to suffer from a shortage of reasons: Amazon, Walmart, Target. E-commerce. Loss leaders. Price wars. Debt. Private equity. Kids who prefer screens to Super Soakers.
The story of the retailer's journey from big box dominance to liquidation — barring some last-minute salvation by an outsider — was long. And the people running the retailer's stores saw it firsthand. Over the decades, Toys R Us has amassed a devoted tribe of employees, tens of thousands strong, many of whom were caught offguard by the company's liquidation, if not its bankruptcy.
They have perhaps the most detailed, close-up view of the retailer as it went into decline and ultimately bankruptcy. Over the years, Toys R Us didn't just get undercut on toy prices or miss out on the e-commerce revolution. The retailer, especially after its 2005 leveraged buyout, continually underinvested in its business and employees, according to current and former employees.
Stores went without maintenance. Dust collected on the floors and rafters as cleaning services were cut back. Employees grappled with expanding work loads. Knowledgeable staff were let go in cost-cutting campaigns. Key customer satisfaction metrics were fudged. Shrink increased. Key IT systems failed at the worst times.
On paper, much of this may have represented fiscal conservatism to managers and owners, and may have been necessary as the company battled with price pressures and the interest burdens of a $5 billion debt load. But at the store level, where most of retail still happens, Toys R Us was, arguably, stripping itself of reasons for customers to shop as those reasons became more important than ever.
A Toys R Us spokesperson did not respond to request for comment on this story.
From reorganization to liquidation
The immediate reasons for the the collapse of Toys R Us in bankruptcy are fairly straightforward, at least given what we know. (And there are a lot of details, mainly having to do with backroom negotiations among stakeholders, that we don't know.)
After a terrible holiday performance last year, the toy retailer, totally outflanked by rivals, missed targets attached to its bankruptcy loan and breached covenants on the loan — the specifics of which few people beyond some very engaged creditors were aware of. Lenders, now with new legal leverage, also lost faith in the retailer's ability to repay after the poor holiday showing. Toys R Us tried to find a buyer, and reportedly had serious interest. But no deal emerged, and powerful groups of lenders (as they would time and again this year) saw more value in the company's parts than its sum. Liquidating immediately would prevent Toys R Us from burning through more lender-provided cash until the next holiday season, which would bring an uncertain outcome.
Toys R Us couldn't have filed for Chapter 11 at a worse time, as Debtwire retail analyst Philip Emma pointed out in an interview. It disrupted the retailer's supply chain at a critical time for building inventory ahead of the holiday season. The filing also rattled customers, causing them to buy fewer gift cards during the period and thus hurting sales, according to the retailer.
In CEO Dave Brandon's account, from September court papers, Toys R Us was forced into bankruptcy originally because of a media report that sent its suppliers into panic. (There had been, in fact, a swirl of media reports in the weeks before the filing noting that the company was mulling a bankruptcy and some vendors had halted shipments. But the reports suggested a filing was already, potentially, in the works.)
The timing of Toys R Us' Chapter 11 filing may have written its fate. Many analysts saw Toys R Us as having enough liquidity to make it through the holiday season and into the next year, when it had some debt maturities to deal with but no significantly large amounts due until 2019, when $2.6 billion in debt would come due.
Even if the retailer had muddled on through 2019, it would have faced a reckoning at some point on its massive debt load, and Toys R Us had yet to show the wherewithal to reinvent itself in a quickly changing competitive landscape. Bankruptcy, in 2017 or 2019 or whenever, may well have been inevitable with the company's leverage. Net sales had declined for most of the past 10 years, and EBITDA (earnings before interest, depreciation, taxes and amortization) fell by nearly half after 2012.
But the retailer's decline started long before it filed for bankruptcy, and it took many forms and had many drivers.
A thousand cuts
Within and without the company, many see Toys R Us' leveraged buyout by Bain Capital, KKR & Co. and Vornado Realty as the key tipping point, given the multi-billion dollar debt load it left on the company's books. But in a different retail market, or even a different sector, the buyout wouldn't necessarily have doomed the company. Burlington and Dollar General, among others, have both previously gone through debt-fueled private equity acquisitions and today are strong, expanding retailers.
"If you're diverting your cash to make interest payments, that's money you're not spending on something else."
Retail Analyst, Debtwire
In the case of Toys R Us, the company was paying $400 million down on interest annually, in addition to millions in dividends and management fees paid back to its owners.
"If you're diverting your cash to make interest payments, that's money you're not spending on something else," Debtwire's Emma said.
One former Toys R Us executive from the time of Jerry Storch's tenure as CEO, which ran from 2006 to very early 2013, said the company did make investments, and they worked, but that many more were necessary to keep the company competitive.
Eduardo Pena, a former director of real estate under Storch, who has created a Facebook group to help former employees stay connected, worked on rolling out new store formats at the time, along with other efforts to better position Toys R Us, including pop-up stores, super stores, mall stores, concept stores — "all exciting things," in Pena's words.
With the need to get projects and deals approved by the company's private equity owners, Pena said he and his team were "very disciplined" and "meticulous" in how they spent money on stores and real estate. He added that the real estate team and company were "doing everything they can to compete," opening stores while other retailers were closing them in the late aughts.
But cost-cutting elsewhere in the business hurt Toys R Us, badly. Budgets would be slashed by ownership more and more as time went on. In practical terms, store staff could see the differences. "They even cut back on our floor care," Ann Marie Reinhart Smith, who started as a seasonal employee nearly 30 years ago and went on to work in management jobs at Toys R Us and Babies R Us stores in North Carolina, told Retail Dive. "They used to buff stores [i.e., the floors] once a week, then went to every two weeks, then once a month." More and more of that maintenance, if it was being done at all, fell to the company's own employees, as their numbers in the stores gradually shrank.
"Floor polishing, parking lot sweeping, painting … anything in way of maintenance that could be cut, was cut as an expense saving [measure]," Rick McGee, who spent 16 years with the company including as a district manager for stores on the West Coast before retiring several months before the bankruptcy, told Retail Dive. "They normally high-dusted every other year. That means dusting off the tops of fans and girders across stores, the lights. If you don't wipe that off, that dust starts falling. In later years, they started canceling high dusting."
Toys R Us also fell well behind its peers' in investments in its digital business and the infrastructure underlying it. Knowing it needed to compete better online, the retailer last summer relaunched its website which now boasted a redesigned look, faster checkout, user-friendly guideposts for bigger purchases, better navigation by category and a revamp of the registry process. The headline at USA Today was "Toys R Us finally gets serious about e-commerce." These were all necessary changes, but several current and former employees Retail Dive spoke with previously said that the company's backend IT infrastructure hadn't been improved to keep up with the new website.
The servers the retailer relied on to help fulfill orders had long suffered glitches. As then-current and former managers told Retail Dive earlier this year, the consumer-facing website in part drew from store inventories to notify customers of stock availability, but very often those numbers were not up-to-date, causing the website to show stock that wasn't actually available, employees said.
One manager told Retail Dive that the server suffered deleterious outages across the company the crucial week of Black Friday and Cyber Monday. The employee said that he knew of 6,000 orders that "the system couldn't physically process" during Cyber Week. Brandon only made oblique references to these problems publicly. In an open letter, he apologized to customers — some of whom were blowing up the company's Facebook account — for "operational missteps" during the holiday season that led to botched transactions.
'Good results sold everybody'
Over the years as Toys R Us' stores deteriorated with lack of investment and staffing, company officials may have had an inflated sense of how customers perceived them. Both Smith and McGee, who worked on opposite ends of the country, said they knew of store employees commonly manipulating customer surveys that served as an important performance metric to the retailer's home office.
Smith said that employees might build relationships with customers and ask them to give them high scores. They might hold new products for customers known to be collectors, and trade access to the products for high survey scores. McGee, who noted that bonuses were tied to the survey results, said holding prized toys for collectors was common practice, though he told the store managers under him not to do it.
"When trucks came, and the store opened the doors, they would have a line of people — mostly 30-ish men — who stormed in the door to see if a certain Hot Wheel was going to be there or a certain action figure that was going to be there," McGee said. "These guys owe you if you set that aside in the backroom. Stores would say, ‘You know what? Can you take a survey and make sure you give me a 100%.' The problem is, good results sold everybody, clear through to the CEO.'"
The inflated survey metrics helped justify continuous staff reductions and other cost cuts that further hurt stores, in McGee's view.
Unworkable work loads
Those staffing cuts may have been the biggest drag on the company's operations and retail trajectory.
Debbie Beard started with the company as a seasonal associate with a California store nearly 30 years ago and most recently was working as an assistant manager at an Arizona store that was liquidating. She said in the days when founder Charles Lazarus was still involved with the company, Toys R Us "made you feel like family." They company offered stock options, health benefits to full-time workers and paid close attention to staff development.
That started to change in the late 1990s and accelerated with the 2005 buyout. "They cut payroll costs, cut out different positions. I saw a lot of my peers lose their jobs," Beard said.
McGee said that the company started eliminating non-manager full-time staff even before the buyout. Toys R Us, in his view, started following the lead of retailers like Circuit City, which fired thousands of employees over the years leading up to that retailer's collapse, trading out well-paid sales staff for part-time newcomers.
In the spring of 2004, McGee was at a manager training meeting at the company's New Jersey headquarters when he received a corporate email outlining a plan to move toward 70% part-time staffing, with most of those staff earning minimum wage. The plan, at the time, called actually for more bodies in stores but ultimately led to some of the most experienced staff leaving.
"The end result was that if you wanted to work for us you had to be willing to be available at any time, willing to work a different schedule every week, willing to take a paycheck that was different every week and learn what your schedule was a few days in advance. Oh, and little-to-no company benefits."
Former Toys R Us District Manager
At the same time, the company started using scheduling software to better match work hours with sales fluctuations. "The end result was that if you wanted to work for us you had to be willing to be available at any time, willing to work a different schedule every week, willing to take a paycheck that was different every week and learn what your schedule was a few days in advance," McGee said. "Oh, and little-to-no company benefits."
Smith said full-time employees at her store were told that if they wanted to stay with the company, they had to move to part-time, and lose their health benefits as well as income in doing so. Maryjane Williams, who began at the company more than 20 years ago at stores in New York, told Retail Dive her manager cried when she demoted her, a mother of five, to part-time status in the early 2000s.
Williams would find another full-time position within the company, but management ultimately eliminated the position type she once held, that of a registry consultant at Babies R Us. The job was a high-touch, customer-focused one, with employees working closely with new mothers who, Williams says, were often "overwhelmed." Those positions often brought business into the store, according to Williams.
Across the company, the elimination of staff and full-time positions frequently meant more work per employee. Smith said the workload on store staff doubled as corporate cut more and more staff and hours. "The amount of work was — you couldn't do it," she said. Morale slumped with the home office "asking people to do work that physically couldn't be done," Smith added. "So, obviously the store suffered also, the appearance of the store itself." Customer service suffered too, several employees told Retail Dive.
The payroll cuts continued for years after the buyout, until payroll hours in McGee's district were down about 75% compared to the early 2000s, he said. And as the cuts continued, corporate started allotting work hour figures for specific operational tasks that simply didn't match reality. "As time went by and the stores were allotted fewer and fewer hours, these estimates ultimately became a joke," he said.
In recent years, 40,000-square-foot stores might run with just two or three employees at a time. Among other issues, McGee said the understaffing led to "major inventory shortages," given that a store might close with just three people, just one of whom might be on the floor with customers.
Toys against Babies
Lazarus, who died this year, just a week after the retailer he founded announced plans to liquidate, started the company that would become Toys R Us as a baby furniture store. Almost 50 years later, in the mid-1990s, the company opened its first Babies R Us store, broadening its market and helping to offset the brutally seasonal nature of the toy business.
For years, Babies R Us was a prized and profitable unit. CNN Money reported in 2005 that it accounted for about 75% of the company's total operating income while making up just 15% of sales. The original buyout plan for Toys R Us called for the toy and baby units to be split apart, but the ultimate deal with Bain, KKR and Vornado kept Toys R Us and Babies R Us together.
Under Storch, the two units didn't just stay connected financially — they came together physically with a broad roll out of stores that combined Toys R Us and Babies R Us under a single roof. The company was consolidating its store base where it could, closing nearby single-format stores if could add a combined toy and baby store. (Brandon made further consolidation of Toys R Us and Babies R Us stores the lynchpin of the company's post-bankruptcy strategy, to the extent that there was one, before the company moved to liquidate.)
Storch's team would also consolidate operations for the toy and baby units, with district managers assigned to oversee both. Not everyone saw wisdom in the integration. Beard said that Babies R Us "was what kept Toys R Us afloat" for many years, and after the private equity owners took over, it became a "sidekick" to the toys side, with little investment in the business until it was too late.
McGee, who came from the Babies R Us side, says there was a constant rivalry between the toy and baby units. When the company started building combined stores, "I could immediately tell the Babies side of these stores were not going to produce the results they expected," he said. The square footage devoted to baby products was cut in about half from normal Babies R Us stores, which headquarters dealt with by carrying less baby furniture, McGee said. Moreover, toys enjoyed more space in the combined stores, which McGee thinks hurt the sales on the babies side.
New mothers often "envision this nursery in their mind that is perfect, with this perfect angel sleeping in there," McGee added. "Where do they start in their mind? They start with the crib and the linen and the nursery. Baby furniture is almost a nonprofit enterprise [i.e., due to low margins]. But if you cut that down, the mother who comes in has a much more difficult time envisioning that nursery. … What did you see when you walked in the store? Toys. Spiderman."
Further, managing the two units were very different. In McGee's view, the babies unit was a high-touch, customer service-oriented enterprise, while toy sales were more of a commodity business, where customers could "mostly self-service," he said.
Whatever the reasons, Babies R Us declined, eventually hitting a crisis point in the months leading up to the company's unwinding and falling behind the (also challenged) toy business. "In hindsight, it was the baby business that was the core problem, not the toy business," Debtwire's Emma said. "I'm not sure what the ramp of market share was for Amazon's Prime subscription business — but I suspect it hit them hard directly and indirectly with the loss of traffic."
"[Babies R Us] has shown degradation in margin continuously even though we were told by customers that our prices were too high."
Former Toys R Us CEO
Last September, the retailer logged a 6.8% decline in comps it attributed primarily to a decline in the baby category, which in turn was caused by a decline in infant care products, baby gear and consumables like formula, according to regulatory filings.
Brandon told employees in March that the retailer, when still hoping to reorganize and survive bankruptcy, planned to shrink the Babies R Us business. Results had "shown degradation in margin continuously even though we were told by customers that our prices were too high," he said. Market share and sales were "plummeting," Brandon added. "We came to the conclusion it was a very hard category for us to compete in."
'You can never take away the memories'
As Brandon and the company's attorneys have spelled out, the decision to wind down Toys R Us came from outside the company. It can be seen as a financial decision by the company's lenders to protect their investments in a bankrupt company. The CEO told his employees to view as their severance the next 60 days of work, as liquidation sales cleared out the inventory of their stores.
The wind-down leaves around 30,000 employees in the lurch, in a market without a ton of brick-and-mortar retail hiring going on. Some are downright angry, pushing for severance pay and changes to laws around leveraged buyouts that would protect employees. An online petition for severance for Toys R Us employees garnered more than 50,000 signatures. Employees have discussed the issue on the social media group Pena created as well, and some have worked with organizations including the Center for Popular Democracy and the activist group United 4 Respect, best known for the Our Walmart campaign. Smith, Beard and Williams have been part of the effort after being contacted by outside groups.
"I built this company. I helped build it. ... My severance was to work for the liquidator for the next 60 days. I'm still walking away with nothing."
Toys R Us Assistant Manager
Much as they miss — and depend on — their jobs with Toys R Us, employees are mourning the loss of the Toys R Us brand and the experiences they had in their stores. That is the main reason why Pena created the Facebook group, dubbed the "Dead Giraffe Society," a reference to what managers let go after the buyout were called. "It's a kind of bridge to the past," Pena said. "You can close down schools or shut down a business, but you can never take away the memories." According to Pena, the group grew to 7,000 members in just four days. As a rule, he wants the group to be a storehouse for positive memories, not recriminations.
When you talk to people who have served with the company, it's clear many see it as a special place. Every current and former employee Retail Dive spoke with had positive things to say about their time at Toys R Us. They loved working with kids and families, and each other, and they wanted to see the company survive.
But the liquidation has also left a bitter taste for many.
"When these big companies buy out retailers, walk away with what they're walking away with — I built this company. I helped build it," Williams said. "My severance was to work for the liquidator for the next 60 days. I'm still walking away with nothing."
Editor's note: To hear about how diminishing employee investment contributed to the decline of Toys R Us, you can listen to Reporter Ben Unglesbee break this down on Retail Dive's Conversational Commerce podcast.
Follow Ben Unglesbee on Twitter