Toys “R” Us is one of the largest retailers in the world and probably the most popular toy store in the United States, but this Monday they filed for chapter 11 bankruptcy protection.
The news comes as a shock to everyone but they aren’t necessarily that surprising if you have been paying attention for the past few months and understand the immense pressure Amazon and Walmart are putting on brick and mortar shops.
It is important to keep in mind that is not just the giant’s fault alone and that some businesses are accountable for their own downfall due to poor leadership and unwise business moves that have made it easier for online retailers to brush them off aside. However, it is true that Amazon’s expansion could be described as truly terrifying and that when Jeff Bezos company decides to enter a particular section of the market, is best for everyone to brace for impact since the consequences will be noticeable almost immediately.
The thing about Amazon is that it has truly changed the way people shop, period. The thought of buying books online came as a novel idea back in 1995 and it stuck with us. It was easy; it was fast and the savings made it worth waiting for a couple of days instead of driving to the bookstore and picking up a copy physically. Even with the advent of e-readers, it has been possible for some retailers like Barnes and Nobles to stay afloat by adapting and finding ways to compete and stay relevant, but to say that they have not suffered as well would be a lie since some of their stores have closed and their sales have plummeted.
The fact is that Toys “R” Us has a debt just short of $5 billion with about $400 million on payments due for next year. This situation has forced the retailer to file for bankruptcy and secure loans from a few banks including JPMorgan Chase, for a total of $3.1 billion. This money is going to help Toys “R” Us prepare for the upcoming holiday season so their stock can meet the demand of customers and so they can cover the operating costs for those busy couple of months. But what is going to happen after that?
Toys “R” Us currently has around 1,600 stores globally, so it is inevitable that some of those stores will have to close in order to reorganize the business with a new strategy in mind. Stores that are underperforming must be shut down so resources aren’t used unnecessarily and at the same time, a new strategy for capturing more online sales and actually competing against online retailers must be set in place. Store closings will probably bring about some sort of negotiation with the current landlords that hold the leases with the existing stores. It is possible that the company will try to negotiate and save some money by utilizing locales that will be willing to take significant cuts in their leasing contracts over locations that will not reduce their rent.
Something else to consider is the interest of toy manufacturers worldwide. Mattel and Hasbro for example, understand the importance of maintaining the last remaining toy store open since they are the primary carriers of the products. The problem with Amazon and Walmart is that they only give a section of their business to toys. In those mega-stores, they are just one category amongst many, while Toys “R” Us is the only toy store left in which their products are the main attraction and where they can showcase their entire line of toys, not just their best sellers. The importance of Toys “R” Us for these companies cannot be overstated and a large part of their business relies on the ability these toy stores have to remain open.
Toy manufacturers helping Toys “R” Us stay in business is not something new, as they have been coming up with strategies for a while to help give the toy chain relevance. Some of these strategies include giving them exclusive products during the holidays and when launching new items and also helping by funding some of their most significant promotions.
When a chapter 11 bankruptcy is filed, the business is expected to stay open and continue operating until they are able to get back to normal, pay some of their debt back and become somewhat profitable again. In the case of Toys “R” Us, the company denies planning on closing any of their stores, as a matter of fact, some of the lease agreements specifically state that the stores may not close down.
This is a crucial moment not only for Toys “R” Us but for the physical retail industry as a whole. It is important to reorganize and come up with strategies that are long-lasting and that can cater to the many needs and demands of the market.
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* Featured Image courtesy of Pixabay at Pexels.com