How Could Toys "R" Us Have Avoided Bankruptcy?

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What could Toys R Us have done to avoid having to go bankrupt? originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Ian McCullough, Former LeapFrog team member + Several Toy Startups, on Quora:

With regards to the Toys “R” Us bankruptcy, everyone needs to keep in mind here that they are looking at going into Chapter 11 bankruptcy. They’re planning to reorganize rather than going into a Chapter 7 liquidation. Toys “R” Us won’t be disappearing.

For all of the fun that people have playing with toys, developing them and manufacturing them and bringing them to market is a brutal, hit-driven, highly-seasonal industry. When 70% of your revenue is likely to come in the back half of the calendar year with the bulk of that coming in Q4 — most specifically a 4–5 week window between Thanksgiving and Christmas, you’re going to have a hard time no matter who you are.

Toys “R” Us has been under financial strain for at least a decade. (If I recall correctly, they actually spun out the much more profitable Babies “R” Us into a separate legal entity some time back to try and have that do better for shareholders.) In the mid-aughts, as I recall, major toy companies wound up backstopping Toys “R” Us by cutting favorable terms on both retailer margins and payment terms. The reason that companies across industry made such moves is simple: they (we?) didn’t want annual success profitable stuck in price wars between Walmart and Target. Walmart, Target, and Toys “R” Us have long dominated U.S. toy sales — especially during the crucial winter holidays — and losing Toys “R” Us as a competing channel was too big of a business risk. Toys “R” Us have therefore been operating on borrowed time for a long time now.

In 2007, the iPhone was introduced. In 2009, the iPad was introduced. In 2011, the Kindle Fire was introduced. With kids devoting more time and parents therefore devoting more dollars to tablets and apps, TRU — a comparatively undiversified retailer — started seeing foot traffic decline. They’d had a solid toe-hold on video game consoles & games (which enough people saw as products for children that TRU could be a destination retailer), but mobile and tablets have been a different beast entirely. General toy industry challenges plus a weak foundation made a bankruptcy filing pretty much inevitable. We’ll see where they come out.

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