Why Did Toys R Us Fail After Filing Chapter 11 Bankruptcy?
In the corporate world, bankruptcies are handled under either Chapter 7 or Chapter 11 of Title 11 of the United States bankruptcy code. When a business is failing, Chapter 11 provides an opportunity for them to file bankruptcy, but maintain control over business operations. However, the business is subject to oversight and jurisdiction of the court.
In 2017, Toys R Us filed for Chapter 11 bankruptcy in an effort to save their failing corporation. It didn’t work. What was once the nation’s leading toy retailer has now crumbled, with all of its 800 US stores being closed. 33,000 employees have lost their jobs due to this failure. Other businesses have resuscitated themselves after filing for Chapter 11 bankruptcy, so why did Toys R Us fail?
The Company Fell Into Unmanageable Debt
Bankruptcy filings almost always involve unmanageable debt, but the Toys R Us situation was different.
In 2005, Bain Capital and other investment firms took control of Toys R Us and made the company private. When this happened, the company acquired massive debt. In 2017, when the company was approaching bankruptcy, they were still saddled with roughly $5 billion in liabilities.
These massive debt payments made for an uphill battle for the toy retailer and ultimately prevented them from righting the ship.
They Filed For Bankruptcy Shortly Before The Holiday Season
The bankruptcy announcement also came at one of the worst possible times – in September, before the holiday season. The company would have had a higher likelihood of success if they had been able to wait until after holiday shopping to make this announcement. Unfortunately, rumors of bankruptcy led to strained relationships with vendors, forcing the company to make the announcement earlier than ideal.
Many American consumers may have gotten skittish about shopping at Toys R Us during this time, as a sudden closure could make gift cards worthless and mean no more returns of unwanted gifts.
Competitors Offered Big Sales In Wake Of Bankruptcy
Competitors like Amazon, Walmart, and Target all saw the bankruptcy announcement as an opportunity to take out the competition. These companies all offered big toy discounts during the holiday shopping season, effectively kicking Toys R Us while they were down and eventually contributing to the retailer’s demise. With their entire future riding on holiday season sales, Toys R Us was simply unable to compete and eventually failed due to ruthless competition and other factors.
Vendors Were Afraid The Company Could Not Pay
When news begins to circulate that a major corporation is failing, those doing business with the corporation get understandably uncomfortable. Vendors worried that the company would not be able to make payments it had promised, and this led to some vendors severing their business ties with the company.
Lower Overall Toy Sales During 2017 Holidays
During the 2017 holiday shopping season, overall toy sales were lower than average for all retailers. Toys R Us had a strategy that relied on their deep inventory, as they would have many popular toys after their competitors had sold out. However, that did not pan out this year. Because overall sales dropped, their competitors maintained inventory through the end of the holiday season. With retailers like Amazon offering same-day and two-day deliveries, Toys R Us simply could not compete.