The US's struggling retailers can count a new casualty: Toys 'R' Us, the iconic toy supermarket that has prompted generations of children to nag their parents for a visit, filed for bankruptcy late Monday after more than a decade of struggling to lift itself out of the red.
The company, based in Wayne, New Jersey, was bought out by private equity companies more than a decade ago and is now $4.8 billion in debt and unable to pay its suppliers. Despite its popularity with children, parents, and holiday shoppers, Toys 'R' Us has struggled to stay afloat, given increasing price competition from Walmart, Target, and, more recently, Amazon.
Not to panic: The Chapter 11 filing should buy the company some time to get its house in order, and most of its stores are expected to remain open during the upcoming holiday season, still stocked with all the season's hot toys.
The company's net sales have been on the decline to $11.5 billion in January from $13.5 billion in 2013, according to its annual report. By contrast, the overall industry has seen a 5% rise in toy sales, including Amazon which reported a 24% increase in toy sales last year, according to One Click Retail.
"Much of the merchandise we sell is also available from various retailers at competitive prices," the company said in its 2016 annual report. "Discount and mass merchandisers use aggressive pricing policies and enlarged toy-selling areas during the holiday season to increase sales and build traffic for other store departments."
The company also cites competitors’ subscription models to buy diapers, formula, and other consumables that "adversely affected our sales and profitability" both online and at their brick-and-mortar stores.
Symbolically, Toys 'R' Us closed its flagship store in New York's Times Square two years ago, shuttering a major tourist destination that was known for its 60-foot indoor ferris wheel and an animatronic T-Rex that roared regularly, terrifying legions of toddlers.
News of the impending bankruptcy sent shares for Mattel and Hasbro tumbling to some of their lowest prices this year. Toys 'R' Us is one of Mattel's three largest customers, along with Target and Walmart, and makes up $600 million in its worldwide net sales, according to Mattel's 2016 annual report. Hasbro makes 9% of its net revenues at Toys 'R' Us, which it also lists as one of its top three customers.
Mattel, which makes Barbie and Hot Wheels, saw their shares fall to $14.82 Monday and Hasbro, which makes My Little Pony and Play-Doh, fell to $93.24.
The toy company's bankruptcy is the latest strike against traditional retail in its war with online commerce. Toys 'R' Us, which became a public company in 1978 until its buyout in 2005, used to be a thriving digital property in the late 1990s and early 2000s.
Its online sales were so successful that Amazon.com, then a new startup, went into 10-year partnership with Toys 'R' Us to be the exclusive retail outlet for toys, games and baby products. But Amazon's business model shifted over time toward its current model, which pits sellers against one another in a price war to give customers the best deal. Toys 'R' Us sued Amazon in 2004 claiming that the online company broke its contract. A New Jersey court judge sided with Toys R Us in 2006 and, in 2009, Amazon paid the toy company $51 million to settle the allegations.
But while Toys 'R' Us leaned on Amazon for its online sales, other companies were speeding ahead in building their own digital properties.
It wasn't until 2016 that Toys 'R' Us revamped its website to make browsing and checkout simpler and smoother for shoppers.
“The website really represents the front door of our brand,’’ said Lance Wills, Toys 'R' Us’ first global chief technology officer, to USA Today. “In a year to two years, we have to catch up on 10 years of innovation and that’s no small feat.’’