
Toys ‘R’ Us Didn’t Have to Die - petethomas
https://www.bloomberg.com/news/features/2018-06-06/toys-r-us-the-world-s-biggest-toy-store-didn-t-have-to-die
======
thisisit
Retailing seems to be dying in US irrespective of the company:

[https://www.bloomberg.com/news/articles/2018-04-17/retail-
st...](https://www.bloomberg.com/news/articles/2018-04-17/retail-store-
closures-in-u-s-set-for-record)

Couple of years ago, one of my friends bought a store at a strip mall. The
store was making a loss. And the previously owners were an elderly couple. So
my friends thesis was that they weren't exactly tuned into the digital
presence business and it was still entirely possible to run a store in US.

Two years later footfall in the mall has decreased a lot. And in spite of the
digital strategy etc my friend's store hasn't worked well. Now he is not only
in debt but he is also trying to sell the store. But there are no buyers.

~~~
duxup
What I don't get is there are a lot of empty storefronts and places moving
that I see... and retailers say the rents are still sky high for those
storefronts.

Is it really worth the property owners keeping them empty?

~~~
yourapostasy
> Is it really worth the property owners keeping them empty?

Yes. It's a tax dodge. [1] [2]

The owners "...hold out for higher rents to increase the worth of their
properties because value is based on future income stream...They can afford to
forego current rental income, waiting for higher-paying tenants because they
claim big business losses. Landlords get a tax loss from negative rental
income when no rent comes in, which cushions their lack of cash flow."

There are also perverse incentives structured by the debt instruments securing
these properties. [3]

There's some more miscellaneous reasons, like not wanting to hassle with
renegotiations from existing tenants who hear about a lower psf/psm rent of a
new tenant, not wanting to attract the "wrong" class of tenant, _etc._ , but
by and large, the money reasons talk loudest.

High real estate costs preventing affordable, energy-dense and hyper-efficient
living and working for most of the world's population are imposing quite
significant externalities around the world. Not really discussed much though,
as it gores too many oxen. Saliently changing this _status quo_ would require
fundamental changes in how real estate and credit interact, and that's not
going to happen without some real not metaphorical blood spilling.

[1] [http://www.nydailynews.com/opinion/change-math-keeping-
nyc-s...](http://www.nydailynews.com/opinion/change-math-keeping-nyc-
storefronts-vacant-article-1.3932715)

[2] [https://gizmodo.com/full-bank-accounts-empty-storefronts-
the...](https://gizmodo.com/full-bank-accounts-empty-storefronts-the-
economics-of-1706993230)

[3] [https://commercialobserver.com/2016/09/soaring-retail-
rents-...](https://commercialobserver.com/2016/09/soaring-retail-rents-keep-
vacancies-high-so-prices-should-come-down-right-maybe-not/)

~~~
kgwgk
It's easy to avoid taxes by not making money, but as someone states in the
third article you link to: "A wise colleague told me that until effective
income tax rates reach 100 percent, a dollar of income is worth more than a
dollar of deduction".

That's just the apparently-not-so-well-known First Law of Tax: It is always
better to have more money than less money.

~~~
isostatic
In the UK some people are taxed at >100% on income, but that aside

If you have 100 shops, and rent 11 at $10k a month, and the rest are empty,
you get $110k a month

If you have 100 shops, and rent 60 at $2k a month, and 40 are empty, you get
$120k a month

Now lets assume a 50% tax

In the first example you keep $55k In the second example you keep $60k

Great, go for the second.

But now if you make the empty shops a tax writeoff, you instead

first example, $110k income, $850k loss. No tax to pay, total income $110k
with no tax (and a £750k loss to offset other income) second example, $120k
income, $80k loss. Tax to pay on $40k which is $20k, so total net income $100k

This is assume that you can claim that unrealised rent as a loss. I believe
there are ways of doing that (charity shops for example)

~~~
kgwgk
That wouldn’t fly, at least in the US: [http://www.habifproperties.com/can-
landlords-take-a-tax-dedu...](http://www.habifproperties.com/can-landlords-
take-a-tax-deduction-for-the-donation-of-leased-space/)

~~~
isostatic
If the landlord donated $50k to a charity, is that a writeoff? If that charity
rents $45k of space from the donor does that count?

A similar loophole was being used in the UK a few years back:
[https://www.bbc.co.uk/news/business-16692556](https://www.bbc.co.uk/news/business-16692556)

~~~
kgwgk
I'm not sure if you read the link I sent. If I give $100k to a charity and
they use the money to rent something from me for $100k I won't be paying any
less taxes that if I had not done the whole "tax dodging" scheme... [1] Maybe
it was possible to deduct "virtual" donations in the UK, but it's not hard to
disallow if people abuse the system. I could also donate a stone to a charity
saying that it's worth $1bn to get a deduction. Would that count?

Edit: reading your link it seems unrelated to deductions on taxable income.
It's about council taxes on businesses, which are lower for charities than for
regular businesses or unoccupied stores. So it makes sense for the owner to
let a charity use the space rent-free and pay their 20% of the tax instead of
paying 100% of the tax for the empty property.

[1] Actually I may end up paying less taxes if my costs raise, because I will
be making a lower profit. But that would result in lower after-tax profits,
which is probably not the objective of the scheme.

------
wgerard
What a trip.

I used to go to the Times Square location with people who came in from out of
town, as an attraction for when they inevitably wanted to check out Times
Square. The article doesn't really do justice to what a spectacle it was
(which is saying something, since the article calls it out repeatedly). The
person-sized Lego Hulk they built for that store is _still_ my phone
background.

Made this even more shocking to read, since it was always packed:

> In late 2001, Eyler oversaw the opening of a flagship store in New York’s
> Times Square, with a 60-foot Ferris wheel, a life-size Tyrannosaurus rex,
> and a Barbie dollhouse bigger than many Manhattan apartments. Eyler promised
> that 20 million people a year would visit, and maybe they did, but the store
> never made money.

Of course, thinking back on it, I went several times but rarely bought
anything from the store.

Maybe that's the (21st century) story of Toys "R" Us, summarized into a
sentence.

~~~
0xcafecafe
Yes, visiting the times square location always used to be the highlight of my
NYC visit. It reminded me of the toy store showed in home alone 2 (which I
watched a lot growing up). Another one which I will miss is the FAO Schwarz
store in NYC (which was also owned by Toys R Us).

I feel sad thinking that my son will never experience that joy of going to
these huge Toy stores. At best, his experience will be limited to the kids
section at Target/Walmart (if they are still around by the time he is old
enough to visit them).

~~~
autarch
The toy store in Home Alone 2 was based on FAO Schwarz. I remember going to it
as a kid a few times. It was very cool and a big NYC attraction for families.
But I don't remember if we ever bought anything there.

------
gkoberger
I read the whole article, and I didn't really see a convincing argument that
it didn't have to die. Sure, it could have eked out a few more years... but it
was living on borrowed time.

Not only do most people shop online now, most toys are also online. I imagine
most parents put money into TV shows, video games, iPhone apps, etc.

~~~
jaysonelliot
There's nothing about the brick & mortar toy space that's inherently living on
borrowed time. It was Toys 'R' Us' own mismanagement that doomed it.

Toy stores can be a destination. Provide a compelling experience for parents
and kids alike. It's easy to imagine a space where kids get to play with toys
hands-on, and parents get to judge for themselves whether they think they're
appropriate in terms of fun and quality—something you can't do online.

Make the adult experience a mixture of café and Apple store, and give the kids
a safe "penned in" experience like IKEA does in their kids' section. Parents
will enjoy the respite, and kids will beg to go. And of course, once they get
there, they'll cajole their parents to spend more money. Never underestimate
the power of a child in a store.

IKEA has nailed the brick & mortar experience, even though most of their
products could easily be purchased online. Toys 'R' Us merely had to abandon
their hubris and old thinking, and they could have killed it.

Instead, they languished with a chain of dirty, disorganized, depressing
stores, ill-treated and unmotivated employees, and no vision.

They didn't have to die, but their leadership and strategy did.

~~~
gkoberger
It's easy to rattle off a list of things on HN, but a lot harder to build.

If people were invited to come play with toys, they'd just do it for free,
enjoy the day, and buy it online after. Your other ideas just seem like...
free babysitting? It's not like parents are going to shop for toys while their
kids are babysat for free.

I agree the stores aren't great now... but they were working with insane debt
and a dying business model.

I don't think it's impossible to sell toys (see: Disney), but it's really hard
to do it when you're trying to pivot something like Toys 'R Us with no money
to spend and nowhere to really go.

~~~
emodendroket
I'd argue that a toy store, more than any other kind of retailer, is insulated
from that, because the store has an little advocate for spending ten dollars
extra to buy the product right now with most shoppers. And going to the toy
store itself is kind of an activity that I don't think you can replace with
online shopping.

~~~
sasaf5
Anecdote time: I took my cousin (12) to a toy store once. First it was
difficult to get him out of his iPad and get out of home. Second he was
completely indifferent to anything in the store. We ended up buying some card
games and credit for mobile games.

\+ There aren't many kids anymore.

~~~
jacobush
Kids. They don't make'm like they used to.

~~~
sasaf5
And they don't make them in the same quantities. I think what killed Toys R Us
was demographics more than consumer trends.

------
voidmain
Despite the title and the focus on the form of financing, none of the facts in
the article even suggested to me that the company would be in any better shape
if it had used equity financing rather than debt. It sounds, rather, like an
unprofitable business that no one in their right mind would give any more
money.

If someone thinks they can figure out how to make a workable business out of
big box toy stores, it sounds like the name is for sale.

~~~
jwlato
You're missing the key piece: Toys R Us didn't go into debt for any good
business reason, it was bought by a private equity firm and loaded with debt
it didn't need. This is how private equity works:

1\. A PE firm uses a combination of other people's money (limited partners
a.k.a investors) and debt to buy a company.

2\. The PE transfers the debt to the company's books. This way, if the company
goes bankrupt the PE fund isn't liable for that debt.

3\. The PE firm charges millions of dollars in fees for providing management
services. This way the PE firm makes money regardless what happens to the
business.

Toys R Us was profitable before it was bought and saddled with debt that was
essentially used to purchase it's own business.

~~~
amelius
Why is this legal?

~~~
orwin
Free market and all this stuff.

Also a similar "technique" (LBO to be exact) was used to break down a giant
company into smaller companies, effectively shutting down monopolies at the
expense of a small number of workers, often making big gain for investors.
With the failure of RBR Nabisco LBO, investors think twice about this kind of
venture nowaday. If Toys'R US failure could cost the investors a bulk of
money, maybe this won't happen anymore with big business like this.

Anyway, if you take part of venture like this, you better be the law firm or
the executives, especially if your target is a big company.

~~~
amelius
> Free market and all this stuff.

But in a truly free market, I think there should be no protection against
bankruptcy. I mean, the government is protecting the PE firm from creditors.

------
randomdata
Has it died? The sale of the Canada arm was finalized only a few days ago[1].
There is no indication that they plan to shut down any time soon.

[1] [https://www.thestar.com/business/2018/06/01/fairfax-
complete...](https://www.thestar.com/business/2018/06/01/fairfax-completes-
purchase-of-toys-r-us-in-canada.html)

~~~
dingo_bat
The original US business is dead. The article is about that. It says that
operations in Asia are also fine.

~~~
a_bonobo
The ones here in Australia aren't independent and are currently in voluntary
administration. For example they stopped accepting their customer loyalty
cards, the one next to me seems to have stopped restocking as well. There are
however some bidders to take over the entire Asian arm so it could be fine.

------
PhasmaFelis
The thing that's really lacking to me in online toy stores is, I guess,
discoverability. Amazon can give you a list of all the Transformers, or all
the Legos, in an instant, and with a bit of prodding it does an acceptable job
of showing you the current top-selling toys, but it's impossible to walk down
an aisle at Amazon and see something awesome that you've never heard of.

~~~
krallja
I went to our neighborhood Toys-R-Us to be a vulture, and discovered quite a
few toys I wouldn’t have considered purchasing otherwise. Of course, the
40-70% discounts helped a lot.

~~~
amyjess
Same here. I went there to soak in childhood nostalgia one last time before it
closed, and I was surprised by a) all the things I saw there that I would have
never heard of otherwise and B) all the random things I have vague memories
from when I was a kid that are still around.

And it made me feel profoundly sad that that experience will be gone forever
soon. Soon, it'll just be the top brand names that anyone will have ever heard
of and the random weird stuff will all be gone. I'm talking about the toys
that you had growing up that you never knew what they were called but you had
because your parents passed by it at random and went "ooh, that looks
interesting, I bet [kid's name] will like this".

------
nikanj
One of the more interesting theories I've heard is the link between the
housing crisis and the retail crisis. When you live in a tiny shoebox, the
last thing you need is more stuff. Back in the days people had comparatively
huge houses all to themselves, and could buy crap to their heart's content.

~~~
rashomon
Any source on that theory? I think you have something solid there. George
Carlin put it quite eloquently:
[https://www.youtube.com/watch?v=MvgN5gCuLac](https://www.youtube.com/watch?v=MvgN5gCuLac)

We're definitely seeing a resurgence to simplicity after advertisers had
performed scorched-earth on frontal cortex lobes.

------
amriksohata
If you are a parent you will feel it did need to die. I went in there years
after being a kid and nothings changed, that old warehousey look,the same
toys, nothings changed since I was a kid. Worse, is they are all overpriced
compared to even other stores let alone internet stores.

~~~
WhiteSource1
That's the key. It's not just online or competition lost to Amazon. The same
toys were available at Target for a lot less money.

~~~
dragonwriter
> The same toys were available at Target for a lot less money.

True for a relative handful of the most popular toys, but Target doesn't have
the floorspace dedicated to toys to cover any but a small fraction of what a
Toys R Us would carry. Last time I was in a Toys R Us, the section dedicated
to play houses was, no kidding, the size of an entire Target toy section.
Target _might_ stock one item in that category in store (though I don't think
I've ever seen one in a Target).

It's Amazon and friends, not brick and mortar stores with smaller but
discounted toy sections that killed the advantage of having floor space and
variety in stock to browse, since people would use the store for discovery and
then order from a discount online channel that didn't have the overhead of
brick and mortar showrooms.

------
dirktheman
Bloomberg made a really nice 80-esque adventure game where you're the manager
of a mall: [https://www.bloomberg.com/features/american-mall-
game/](https://www.bloomberg.com/features/american-mall-game/)

------
zer0faith
I worked for a home improvement retailer for a long time, around 2008 they
stopped building 120k sq ft stores and moved down to 80k sq ft, Then staff was
cut (2010), a few years later (2012) more staff was cut, now they are talking
about replacing some staff members with self help robots that have video
conferencing to help customers(2014). These traditional retailers are trying
hard to stay in the game but i just don't think they can compete and Toys 'R'
Us is just another name on the long list of the dead.

~~~
mkirklions
Things that make me go to a store

>Instant

>Helpful employees

Prices didnt matter if I showed up to the store, but it should be cheaper than
shipping to your home. Employees should be knowledgeable and helpful.

Instead most stores have the exact products or fewer online, higher prices,
and an empty store.

~~~
zer0faith
I once tried to stock up on some generator connectors and like electrical
items in my department before Hurricane Sandy. My orders were denied because
last year sales and previous three week trends weren't enough to justify the
order. The shelves stayed empty for almost 2 months.

~~~
slfnflctd
Modern logistics algorithms have massively increased supply chain efficiency,
but there should always be a human override for cases like this. The models
cannot and will not ever be able to account for everything.

~~~
downrightmike
But then someone has to be thinking, and doing it before it is reactive. Good
luck.

------
triviatise
I dont know the economics of our local toy stores, but the ones that seem to
thrive allow you to actually play with the toys. If it was more like a theme
park or a playground you would get parents to bring their kids in just to
play.

For example, let kids drive power wheels around a track. Have playscapes that
they can play on and buy. And sample toys that kids can play with.

~~~
benjaminwootton
I remember reading 20 years ago how retail stores need to turn into experience
destinations. I think the perceived risk at the time was mail order rather
than the internet.

However, even with Apple and the Apple Store there for all to see, few
retailers still seem to get this. Without the hands on element, they are
really fighting a losing battle vs ecommerce.

~~~
suresk
Apple sells high-margin products that are typically priced the same (or
roughly so) everywhere - I don't know that there are interesting lessons for
all industries to learn here. Wasn't Ron Johnson's attempt to take some of
those lessons to JC Penney pretty disastrous?

Everyone always has the same ideas when retailer struggles come up, and a lot
of the ideas would undoubtedly make many stores more pleasant to visit. But
people still buy based on cost, and that makes it hard to compete with a
company who has a much lower cost model than a physical retail store and has
much larger scale.

I don't think retailers will stop the bleeding and start implementing some of
these ideas until they can figure out how to solve the showrooming problem.
They may never do so, and physical retail in most categories will be a distant
memory for most of us.

~~~
ghaff
I’m a bit surprised that we haven’t ended up with some formal manufacturers
showrooms fronting Amazon or whatever. But I guess as long as some big box
retailers hang on there isn’t the incentive

------
ggg9990
Toys R' Us was dead so many years ago. I went there once to buy a present for
a kid and it was just so depressing and not at all a fun or cheerful place.
When I had a kid of my own I never took her there. I regret it not being what
it was when I was a kid but I don't regret it going from its state ~10 years
ago to dead.

~~~
PhasmaFelis
I wonder if what you're actually describing is the change in your adult
perspective, not in the store. As a kid, and as an adult who likes toys,
shelves piled high with toys are "fun and cheerful" all by themselves. I'm not
sure what else you felt was lacking.

~~~
ggg9990
The kids in the store weren't happy or excited to be there, that's what was
different from when I was a kid.

------
brownbat
"Bain, KKR, and Vornado... will end up losing well over a billion dollars
combined."

A lot of retail debt will be renegotiated in 2019 as underlying interest rates
are increasing, so the pace of these might be set to increase dramatically as
delaying reckonings like TRU did becomes steadily more costly.[1]

The article points out that the collapse of this one big name was pretty
expensive to lenders, even if lawyers made some money during the unraveling.

I'm curious about the prospects for another financial crisis. How many billion
dollar losses happening all at the same time are we looking at? How many can
retail financing divisions endure without undermining the stability of larger
banks?

It's not my main area of expertise, so I genuinely don't know if there's a
serious contagion risk, but Google alerts for retail apocalypse have been a
fun ride.

[1] [https://www.bloomberg.com/graphics/2017-retail-
debt/](https://www.bloomberg.com/graphics/2017-retail-debt/)

------
toufique
Begs the question, what kinds of local businesses are structurally safe from
being disrupted by Amazon? Some that come to mind:

* Food - restaurants, fast food, pizza, takeout

* Social experiences - bars, cafes, arcades, comedy clubs

* Things that can't be shipped - gas stations, perishables

* Things you want right away - milk, delis, convenience stores

* Things that can't be commoditized - Copying keys

* Services - Barber shops, mechanics

Other ideas?

~~~
arkitaip
Every single one of those industries can be disrupted by Amazon given the
right setup with partners.

~~~
stevehawk
And any of them thinking they can't be all be the first ones to fall.

------
timwaagh
and the morale of the story is, dont let your business get taken over by a
bunch of vultures fueled by a lot of debt. unless you like seeing it die a
slow death, that is.

------
scarface74
What types of toys are kids buying these days? I’ve never been a parent of a
really young child, my experience with parenting are with my stepsons - the
youngest was 9 in 2010. Besides a bike, the only toys he was interested in
were video games, he collected action figures for awhile, and water guns.

All of which could be served better by Amazon or for video games by GameStop -
a store with a much smaller footprint.

Even when I was growing up in the 80s by nine, I remember most kids being
interested in video games, bikes and sports equipment. All of which were
available at Walmart either at the same price or cheaper.

With video game downloads becoming more popular, I don’t see how GameStop is
going to survive after this round of the console generation.

------
trumped
Even with 20% off coupons, Toysrus was often more expensive then Walmart and
Amazon...

------
DoubleGlazing
The article mentioned the Irish chain Smyths. This is a company that has grown
from one store in a small Irish city to expanding in to and dominating the UK
market in just over 30 years. Having shopped in both I can see the difference.

Toys 'R' Us felt like it wanted to be part of the toy experience with their
whimsical logo, mascot, jingle and colourful in-store decoration.

Smyths on the other hand is just a toy warehouse. They forego the mascot,
jingle and colorful stores instead focusing on making sure they always have
what the children want. In other words Smyths knows that the toy is the
experience, not the store.

~~~
CalRobert
Smyths also:

* Tends to be reasonably priced (I've gotten things there the same or cheaper than Argos)

* Is a quick walk from my flat in city centre

Though so far I've only bought baby things there (pram, etc.) not actual toys.

Neither of which applied to any ToysRUs in cities I've lived in.

------
proee
Do anyone know how FAO Schwarz is doing? This is also a huge destination-
location in New York that sells toys.

~~~
proee
Some research suggesting that it's coming back to NYC in 2018

[https://www.cntraveler.com/story/fao-schwarz-is-finally-
comi...](https://www.cntraveler.com/story/fao-schwarz-is-finally-coming-back-
to-new-york-city)

------
Areading314
[https://www.bloomberg.com/features/american-mall-
game/](https://www.bloomberg.com/features/american-mall-game/)

------
stealthmodeclan
My kids love video games, I thought toys don't give them enough kick.

~~~
crummy
Toy's R Us sold a lot of video games.

------
srathi
They would have survived if they hadn't filled all their aisles with stupid
star wars and disney princess stuff. There was a severe lack of creative toys.

