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

Crippling debt, retail changes, and failure to adapt caused Toys R Us to close. The toy retail giant once dominated with 739 U.S. stores and over 750 international locations. A $7.5 billion buyout in 2005 crushed the company under massive debt. The financial strain forced them to pay $400 million yearly while they struggled to improve their business.

Toys R Us became a classic example of retail failure. The company drowned in $5 billion of debt by 2017, showing a negative 47.37% Return on Equity. The retailer's problems started in the late 1990s as Walmart and Kmart began taking their market share. 

Their costly Amazon partnership, at $50 million per year, damaged their chances to build their own online presence. The retail giant that held 12.5% of the U.S. toy market in 1983 shut down all global stores by 2021. This marked the end of a remarkable era in toy retail history.

The Real Reason Toys R Us Closed

Toys R Us didn't close because of a single reason. Many people think Amazon caused its downfall, but the truth involves a mix of crushing debt, poor management decisions, and a digital world that changed too fast for the company to keep up.

It wasn't just Amazon

E-commerce competition played a part in the company's struggles, but the problems started much earlier. Yes, it is worth noting that Toys R Us's debt had already dropped to junk bond status by January 2005, when Amazon's sales were just 4% of what they are now.

Walmart and Target posed a serious threat by offering cheaper toys and convenient one-stop shopping. These stores had started eating into Toys R Us's market share since the late 1990s.

The company made a crucial mistake in 2000 by partnering with Amazon. They agreed to pay Amazon $50 million every year plus a cut of sales to be the only toy seller on the platform. This deal stopped them from building their own online store during a crucial time in e-commerce growth. Amazon learned everything they could from this partnership and started selling toys with other companies, which hurt Toys R Us even more.

The role of internal missteps

The biggest problem came from the massive debt they took on. After Bain Capital, KKR, and Vornado Realty Trust bought the company for $6.6 billion in 2005, Toys R Us ended up with about $5 billion in debt. They had to pay around $400 million in interest each year, which left them with little money to make needed improvements.

The stores started falling apart:

• Floors and rafters got dusty because cleaning services were cut

• Buildings didn't get repairs and looked run-down

• Staff numbers dropped so low that some 40,000-square-foot stores ran with just 2-3 employees

• The team manipulated important customer satisfaction numbers

The company didn't adapt to what customers wanted. Kids started playing more video games and digital entertainment, but Toys R Us kept their old product mix. They could have changed their stores to offer more hands-on experiences, but they moved too slowly. Mark Cohen, Columbia University's retail studies director, said the chain showed "serial mismanagement".

What year did Toys R Us close?

The end came quickly. Toys R Us filed for Chapter 11 bankruptcy protection on September 18, 2017. They hoped to stay open, but poor sales during the 2017 holiday season crushed those plans.

The company announced plans to close 182 stores in January 2018. Things got worse fast. On March 14, 2018, employees learned the company would sell or close all its roughly 800 U.S. stores.

Stores kept closing through spring 2018, with the last U.S. location shutting down on June 29, 2018. This left 33,000 employees without jobs across the country. The brand tried to stay alive online, but their physical stores disappeared until a brief comeback attempt. The final two U.S. Toys R Us stores in Texas and New Jersey closed in January 2021 during the COVID-19 pandemic.

The Debt That Crushed the Business

Toys R Us's financial collapse shows how too much debt can destroy even a market leader with big sales. The company made $11.5 billion in sales in 2016, but its huge debt made it impossible to stay competitive or adapt to market changes.

The 2005 leveraged buyout

The company's money problems started when private equity firms Bain Capital, KKR, and real estate investment trust Vornado Realty Trust bought it in 2005. They paid about $6.6 billion but only put up $1.3 billion of their own money—just 20% of the price. They borrowed the other 80% and passed this debt to Toys R Us.

This move shot up the company's debt from $2.3 billion to $7.6 billion. Interest rates stood at 7.25%, which meant the company had to pay around $450 million every year just on debt.

Toys R Us had $2.2 billion in healthy reserves before the buyout. These reserves dropped to just $301 million by 2017. The company's debt-to-EBITDA ratio hit seven times earnings in 2005—a number that even private equity experts later said couldn't last.

How debt limited reinvestment

The company struggled to grow because it had to pay $400-500 million in yearly interest. An MIT finance professor said it best: "A huge debt burden made the firm very sensitive to a moderate decline in sales and profitability".

The heavy debt caused:

• No money to improve stores or go digital

• Less staff and poor maintenance

• Job cuts that pushed more work onto remaining staff

• Workers paying more for fewer benefits

The company could have been profitable without these interest payments. Money was coming in—just not enough to cover both daily costs and massive debt payments. One expert pointed out: "If Toys R Us had half of the debt they had, the firm would have been profitable and totally fine now".

Toys R Us bankruptcies and financial strain

The company ran out of options faster by 2017, with $400 million in debt due in 2018. They brought in financial advisors to look at restructuring and needed $200 million just to make it to January.

Toys R Us filed for Chapter 11 bankruptcy protection on September 18, 2017. They needed help with their $5 billion long-term debt. The company filed without a plan or agreement from creditors, showing how desperate things had become.

Some hope appeared when JPMorgan Chase and other lenders offered $3 billion to help keep the business running during bankruptcy. The court later let them borrow over $2 billion to pay suppliers and stock up for holidays in late 2017.

The complex debt structure made it hard to negotiate new terms. Different stakeholders owned various parts of the debt with different priority levels, which made everyone agreeing nearly impossible. The financial pressure from the 2005 buyout created a hole that Toys R Us couldn't climb out of, and they ended up closing all stores in 2018.

A Missed Opportunity in eCommerce

Toys R Us sealed its digital fate with one decision back in 2000, long before filing for bankruptcy. The toy retail giant's spectacular failure in ecommerce stands as one of retail history's biggest missed opportunities. This story shows how market leaders can lose their advantage through poor choices.

The Amazon partnership mistake

Toys R Us thought they made a smart move by partnering with Amazon in 2000. The company agreed to pay Amazon $50 million yearly plus a percentage of sales to become its exclusive toy seller. ToysRUs.com redirected all traffic to Amazon's website, which meant giving up its online presence completely.

The partnership turned into a disaster. Amazon started selling toys from other retailers by 2003, breaking the exclusivity agreement. Toys R Us sued for $74 million in damages in 2004 and won. The victory didn't matter much because Amazon had already learned everything about selling toys. One expert said "Amazon got to watch firsthand what was selling, when it was selling and what wasn't selling".

Delayed digital transformation

Toys R Us launched its own website in 2006 after breaking free from Amazon. This late entry into ecommerce proved disastrous. Retail expert Bill Davis explained that "underestimating both ecommerce and what Amazon was focusing on—retail domination—started Toys R Us down the path they are on".

The company's problems went beyond just having a website. Praful Saklani, CEO of Pramata, pointed out that "Toys R Us failed because it didn't have a coherent digital strategy to pair with a unique high-touch experience". Other retailers gathered customer data to create customized marketing, but Toys R Us stayed "stuck doing commerce the old fashioned way".

Why Toys R Us went bankrupt

Digital failures contributed by a lot to the company's bankruptcy. The company struggled with $5 billion in debt while losing online market share. Analysts noted that "the website and general e-commerce proposition are still below par" even in 2017.

The company faced these overwhelming ecommerce challenges:

• They couldn't compete with Amazon's pricing model, which wasn't "concerned with making a profit at this juncture"

• They had to discount popular toys by 54% on average compared to Amazon

• They kept expensive physical stores while spending too little on digital capabilities

• They failed to give customers compelling reasons to shop online or in stores

Toys R Us announced plans to revamp its website in May 2017, but this last effort came too late. An industry expert noted that the company had been "carefully constructing its own coffin for a long, long time".

Changing Consumer Behavior and Competition

Toys R Us closed its doors because of debt, digital mistakes, tough competition, and changing shopping habits.

Rise of Walmart, Target, and Amazon

The 2017 holiday season proved devastating when Walmart, Target, and Amazon created what Toys R Us called a "perfect storm" by cutting toy prices as "loss-leaders". These competitors slashed prices deeply. Toys R Us couldn't keep up since it relied "exclusively on toys for profit". The company missed its profit target by $250 million that season.

Market dominance had become too much to handle. Walmart led with 29.4% of toy market share, Amazon grabbed 16.3%, while Toys R Us lagged at 13.6%. The giants only grew stronger after Toys R Us disappeared. Walmart became "America's Best Toy Shop" with 23.1% of the retail toy market, and Amazon followed closely at 19.6%.

Change to digital play and video games

Kids started playing differently. A retail expert pointed out that "Kids spend way more time playing online video games. You don't have to go to a Toys R Us store for those". The numbers backed this up. Hasbro's digital gaming revenue jumped 20% in Q2 2024, while traditional toys dropped by 20%.

The customer base changed too. Adults (13 and older) now generate over 60% of Hasbro's revenue. This shows a demographic change away from traditional toy stores. The "kidult" market has become vital as birth rates drop.

Declining toy sales overall

The toy industry faced broader challenges. Global toy sales fell 7% in 2023 compared to 2022. U.S. toy sales dropped 8% in 2023, a $2.4 billion decrease. Both sales volume and average prices went down.

High inflation made toys—"the ultimate discretionary items"—easy targets for budget cuts. Growing household debt and shrinking savings meant people spent less on non-essentials. An industry analyst summed it up: "Consumers across many regions had to make difficult trade-offs and reduced their spending on toys and games".

Too Little, Too Late: Failed Turnaround Attempts

Toys R Us made desperate attempts to save their business as bankruptcy approached, but their turnaround strategies proved inadequate to rescue the retail giant.

Late store closures and poor upkeep

The retail chain waited nowhere near long enough to reduce its store count. The company ran 1,697 stores when it filed for bankruptcy—the highest number in its history. Their January 2018 announcement to shut down 182 US locations barely made a dent in their massive retail presence.

The company's aggressive cost-cutting left their stores looking shabby. A veteran employee shared his experience: "They even cut back on our floor care. They used to buff stores once a week, then went to every two weeks, then once a month".

The stores showed clear signs of neglect:

• Floor polishing and parking lot cleaning dropped significantly

• Dust built up on floors and rafters because of reduced cleaning services

• High dusting (cleaning tops of fans, girders, lights) stopped happening regularly

CEO David Brandon later admitted these shortcomings, saying the company lagged behind competitors "on various fronts, including with regard to general upkeep and the condition of our stores".

Unrealized plans for experiential retail

The company realized late that shopping needed to become an experience. After filing bankruptcy, they planned to spend $65 million on store renovations. Their vision included playrooms for kids to test toys and dedicated birthday party spaces. They also set aside $72 million to boost starting wages and keep their best employees.

These plans never became reality. Retail expert Mark Cohen pointed out, "Toys R Us never made a concerted effort to bring that experiential opportunity into the stores". Their locations stayed outdated while other retailers created fun, engaging spaces that customers loved.

Babies R Us and missed potential

Babies R Us stood out as the company's most promising division. This segment generated about 75% of Toys R Us's total operating income while only making up 15% of sales. The management's decision to merge many Babies R Us locations into combined stores backfired when they cut baby product space by half.

A $54 million investment plan (2018-2021) aimed to upgrade Babies R Us with several improvements. These included a new registry app, better website features, loyalty program, and digital concierge service. Like their other rescue attempts, these changes came too late to save the struggling retail giant.

Conclusion

Toys R Us didn't survive a perfect storm of financial mismanagement, competitive pressure, and strategic failures. Many people pointed fingers at Amazon for the retailer's collapse, but the bankruptcy stemmed from several interconnected factors that sealed the company's fate.

The crushing debt from the 2005 leveraged buyout turned out to be impossible to overcome. The company had to pay $400-500 million in annual interest, which left Toys R Us with no money to invest in store improvements or digital upgrades. Other retailers modernized their operations while Toys R Us stores just kept getting worse.

The company's catastrophic Amazon partnership decision in 2000 dealt another major blow. This deal cost $50 million every year and stopped Toys R Us from building its own online presence at a crucial time. The company's website launch in 2006 came too late - they were already way behind in the digital retail race.

The retail world brought challenges that Toys R Us couldn't handle. Walmart and Target sold toys at a loss during holidays, offering prices that Toys R Us just couldn't match since toys were their only source of profit. Kids started spending more time with digital games, which changed how people bought traditional toys.

The company tried to turn things around, but their efforts came nowhere near soon enough. They had plans for interactive stores, better Babies R Us operations, and renovations. These ideas only came after filing for bankruptcy when they had no money left to make changes. The once-mighty toy retailer with 739 U.S. stores ended up closing its final locations in January 2021.

Toys R Us teaches us about the dangers of too much debt, waiting too long to go digital, and not adapting to customers' changing priorities. Even with its impressive 12.5% market share, this retail giant couldn't survive the radical alterations that continue to reshape the industry today.

FAQs

Q1. What was the main reason for Toys R Us closing?

Toys R Us closed primarily due to a combination of crippling debt from a 2005 leveraged buyout, fierce competition from big box stores and online retailers, and failure to adapt to changing consumer preferences and the digital retail landscape.

Q2. When did Toys R Us officially go out of business?

Toys R Us filed for bankruptcy in September 2017 and began liquidating its U.S. stores in March 2018. The final U.S. stores closed on June 29, 2018, with the last two remaining locations shuttering in January 2021.

Q3. How did Amazon impact Toys R Us's downfall?

While Amazon contributed to Toys R Us's struggles, the retailer's problems began earlier. A costly partnership with Amazon in 2000 prevented Toys R Us from developing its own e-commerce capabilities during a critical period, leaving it far behind in the digital retail space.

Q4. Could Toys R Us have survived if it had made different decisions?

Potentially. If Toys R Us had reduced its debt burden, invested in store improvements and digital transformation earlier, and created more experiential retail environments, it might have been able to compete more effectively in the changing toy market.

Q5. Is Toys R Us making a comeback?

Yes, Toys R Us is planning a comeback in 2024 with a fresh approach to toy shopping. However, the new iteration will likely be very different from the large-scale retail operation of its past, given the significant changes in the toy retail landscape.