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Monday, March 12 2018 23:45

The Future of Toys "R" Us: What News Will Thursday Hold?

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A week ago, despite all the rumors of doom and gloom surrounding the fate of Toys "R" Us, my wife and I took our girls to our local store on a Friday night. Our visit was multi-fold - the main interest being that we needed a very specific birthday gift for our nephew (my wife = "the cool aunt"), and our girls wanted to pick out a little something with their own money. They receive a modest amount that caps at $5 per week based on performance at school as tracked by the Class Dojo app, and at five and eight they've reached the point of really enjoying the opportunity to pick something out and pay for it themselves. For our youngest, it was one of MGA Entertainment's L.O.L. Surprise Lil' Sisters, and for our oldest a small case of eye shadow from the Claire's Boutique store-within-a-store. What I was impressed with was that the attitude at the store was not gloomy at all - the employees were friendly, the store bright and clean, and it was still well-stocked with new items. Along the way, we received a demo of a Mattel classic - the Hot Wheels Criss Cross Crash (the girls love their Hot Wheels, just like daddy), and checked out the full assortment of Hasbro's new toys from Avengers: Infinity War. There were quite a few customers, and if you didn't know the backstory, you'd think all was well at Geoffrey's house. We got what we came for - an Imaginarium Ride-On Train that was priced at $149.99 in-store, but $104.99 on the TRU website. A quick mention at the check-out and it was price-matched and we were out the door. Less than a week later, rumors began swirling again that the folks pulling the strings on Toys "R" Us were considering a full-scale liquidation, and one that could come as soon as today - Monday. I drove by the Toys "R" Us in Gurnee, Illinois again on Saturday, and the parking lot was so packed, it could've been Christmas Eve. As of this writing, no news came through from TRU, but now all signs are pointing to something happening on Thursday, March 15, 2018.

According to court documents, a planned hearing for March 12 was adjourned until 2pm Eastern Time on March 15. Should Toys "R" Us move into a liquidation scenario for their U.S. operations, it will be a disaster that could've been prevented, and one that's been exceptionally painful to view as an outsider. I don't believe that I've ever felt so invested in the well-being of a company that I have no formal attachment to, but when the Honorable Keith L. Phillips enters the courtroom as Judge of the U.S. Bankruptcy Court in the Eastern District of Virginia, I sincerely hope that if a motion is filed to liquidate, he doesn't allow it. But, he did allow the company, which filed Chapter 11 last September, to award bonuses to 17 top executives this past December - bonuses that were said to range from $16M-$32M, and this was on top of an earlier round of "retention bonuses" that topped $8M to keep execs from jumping ship. Those executives include CEO David Brandon, who Crain's Detroit Business recently profiled as "being on a losing streak."

trulolI'll go a step further with Dave, noting that he's a long-time crony of Bain Capital Ventures, known for failure (not counting Domino's) and placed into his role directly by the folks at Bain, who strapped Toys "R" Us with massive debt as part of a leveraged buyout in 2005. In fact, he told the Wall Street Journal back in 2015 that Bain, KKR and Vornado Realty Trust were seeking to exit the Toys "R" Us business, so it would appear that they may indeed be getting their wish... and they installed the man who made it happen. After countless broken promises from a man who knew nothing about the type of business that he was tasked to run, Brandon and his crew were allowed to claim millions of dollars in bonuses all while the ship was sinking. Individuals like this should be recognized for their bad form and remembered as examples of how scum can rise to the top. Reward should be a fruit of success, not something that comes as a "participation trophy" for immense failure, especially when that failure is the destruction of someone else's legacy and the livelihoods of thousands. Sadly, men like David are a dime a dozen - "leaders" without vision who value their own wealth and worth more than that of their team. It's another reminder that just because you can do something, that doesn't mean that you should.

But this is the Bain Capital way of things.

Before Toys "R" Us filed bankruptcy last year, I wrote a much-shared article - "Toy Killer: Is Bain Capital Positioning Toys "R" Us to be a Repeat of KB Toys?" In that piece, I cite a must-read 2012 Rolling Stone feature entitled "Greed and Debt: The True Story of Mitt Romney and Bain Capital"That story should be required reading for anyone interested in toys, retail or just business in general. It sheds light on the blueprint for how not to do things - the profile of a company that has been legally dismantling successful American businesses that have been built the old-fashioned way (with hard work) just to kill them, strip the corpses and cash-in on a "dividend." I call it "a legally-operating scam," because that's what a leveraged buyout is. It's a numbers game, and the target company usually ends up losing. It's just a matter of when.

They did it to KB Toys, they just put Gymboree through the wringer, and when they're done killing Toys "R" Us, their next target will be another legacy company: Guitar Center. 

The reality is, while Toys "R" Us has made some major mistakes over the years, most agree that there's little that couldn't be fixed with the right leadership in place. My opinion is that Bain/KKR/Vornado didn't want the ship to be righted, and they made sure that it wasn't by putting someone unfamiliar with toys (and even retail) at the helm. In order to be successful with toys, you have to have a passion for toys.

This left customers complaining about higher-prices and a poor shopping experience, particularly online, and that leads to another batch of weirdness in that Toys "R" Us essentially taught Amazon how to run a toy business - a fact many don't seem to remember. Once upon a time, the official Toys "R" Us website took you to a page on Amazon, and eventually those two came to blows (and lawsuits). Now Amazon is the go-to name in the blame for the demise of brick-and-mortar.

Although Toys "R" Us hasn't posted a profit since 2013, they have still been selling a lot of toys. In 2016, they sold over $11 billion dollars worth. The financial problem is that the interest on that buyout money (over $5B) amounts to over $400 million a year, and the next payment has been said to be in the $60 million range. Without that looming debt, they should've been able to turn a profit. You can blame "kids and their screens" for a lot of stuff (and I do), but when you're selling billions in toys, there's still a demand.

truhw

Now we wait until Thursday to hear what could be the fate of the company, and a crushing blow to their employees - people who stand to lose everything. And beyond the staff, the toy industry will lose a place that offered smaller companies a place to shine - a benefit of the shelf space that's unavailable in retailers like Walmart and Target that move a high volume of a smaller assortment. It's going to cause a global ripple through supply chains, the marketing world and even the industrial. For families, we'll lose a place that still holds magic - where parents and grandparents shop for gifts, and children can go hands-on in exploring a world of toys that they might never know exists if left to a digital realm. There is still a place for Toys "R" Us, and it's probably in a smaller form, but it needs to be there for now and forever. 

Are the powers that be listening? And do they care at all?

James Zahn

James Zahn is not a journalist, nor a blogger, though he may be credited as such by others, or even accept the title... depending on the circumstance.  Instead, he considers himself largely to be an "entertainment and lifestyle writer," bringing 25+ years of experience in the entertainment and publishing industries into the family realm as THE ROCK FATHER™.

As a media personality, commentator, adventurer and raconteur, James now finds himself raising a pair young girls - The Rock Daughters™ - along with his wife from their Illinois home.

He is a member of The Toy Insider Parent Advisory Board, has contributed to The Toy Book and regularly serves as a Brand Ambassador and spokesperson for several Globally-recognized pop culture and lifestyle brands in addition to consulting for a number of toy manufacturers. 

Creatively, James has directed/edited music videos, lyric videos, and album trailers for bands such as FEAR FACTORY, has appeared as an actor in feature films and commercials, written comic books, and performed in bands. He currently serves as an artist manager and video director for PRODUCT OF HATE, whose debut album was released by Napalm Records in 2016, distributed by ADA/Warner Music in the U.S. with Universal Music handling global.

James and/or his work have been featured in/on CNN, FOX Business, NBC, ABC, WGN, G4, The Chicago Tribune, BusinessWire, Babble, Fangoria, Starlog and more. He's appeared as a music expert on CNN's AC360 alongside Anderson Cooper, and has been interviewed by Larry King. In the past he served as a writer for the Netflix Stream Team,  Fandango Family and PBS KIDS, penned articles for Sprout and PopSugar, and was a contributor to Chicago Parent.

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