The World’s Biggest Toy Store Didn’t Have to Die
The early tale of Toys “R” Us brims with ambition, energy, and no small amount of ruthlessness, as creation stories often do. Charles Lazarus had gone from high school straight to the U.S. Army, where he served as a cryptographer during World War II, and as he cast about for a business venture upon his return, he identified a market that was largely unexploited: kids. “Everyone I talked to said they were going to go home, get married, have children, and live the American dream,” he often recounted of those days.
Lazarus may not have anticipated the full impact of the Baby Boom or the accompanying sprawl, malls, television, and advertising, but he took advantage of Americans’ desire to accumulate and the cultural imperative to conform. He opened the first big-box toy store, outside Washington, D.C., in 1957, then another and another, until by the mid-1980s there were more than 200 across the country. Toys “R” Us Inc. offered abundance on a scale that smaller competitors could never equal, much of it at prices they could never match. As its mascot, Geoffrey the Giraffe, became as recognizable as Tony the Tiger and its “I don’t want to grow up” jingle lodged itself in the brains of a generation of kids, Toys “R” Us became the first category killer. In 1985, Goldman Sachs called it “one of the outstanding companies in all of retailing,” and for much of the decade, Lazarus was among the highest-paid chief executive officers in the U.S.
His final opportune move was to step down just as Toys “R” Us peaked. That was in 1994. Four years and two CEOs later, Toys “R” Us was overtaken by Walmart as the biggest toy seller in the U.S. Two years after that, Toys “R” Us struck a disastrous deal to give up its troubled website and exclusively sell its wares online with Amazon.com Inc. By 2004 the company, which now relied on its Babies “R” Us stores for much of its profit, was looking to sell itself. Executives suggested it might have to get out of the toy business altogether.
Instead, the private equity firms Bain Capital LP and KKR & Co., along with Vornado Realty Trust, took over the company in a $7.5 billion leveraged buyout in 2005. For the next 13 years the owners would watch a succession of executives try to halt the steady slide of Toys “R” Us amid a recession and retail upheaval. As the last big toy store chain, Toys “R” Us had a captive audience. Kids could reasonably be counted on to badger, drag, or otherwise persuade adults to bring them to toy stores, especially if they were fun and hands-on. Those adults would more readily acquiesce if the stores were well organized and the toys competitively priced. There could have been an alternate ending for Toys “R” Us.
Complicating the executives’ efforts, though, was the central fact of the company’s existence: It was living on borrowed money. When Toys “R” Us filed for bankruptcy in September, one figure was particularly clarifying. The company had been paying interest of $400 million on about $5 billion of debt every year for a decade. In the good years, that was almost half its operating profit. Toys “R” Us had U.S. revenue of $7 billion and, even toward the end, a 14 percent share of the toy market, but there was no math that made $400 million look sustainable.
When it all came crashing down in March, Toys “R” Us had just about run out of cash, and it could find no one willing to replenish its accounts. It was a category killer killed by bigger and more powerful rivals, with the inevitable ending hastened by the cold logic of its private equity owners and bankers. But it goes deeper than that. As the company’s advisers liquidate its 735 U.S. stores, make deals for the operations around the world, and determine the value of its intellectual property, it’s become clear that Toys “R” Us didn’t only have an improvident amount of debt—it also had a debt structure as complex and precarious as a Jenga tower, which obscured the company’s tenuous finances. But gravity always wins in the end.
For all of its life after Lazarus, through six CEOs, Toys “R” Us tried both growing and shrinking to become more profitable. John Eyler, who became CEO No. 4 in 2000, had the luxury of trying Option A. Under his guidance the company invested hundreds of millions of dollars to make the U.S. stores look less like impersonal warehouses, to retrain an often indifferent sales staff, and to expand a private-label line of toys. It purchased a 192-acre corporate campus in Wayne, N.J., for $36 million and named it the Global Resource Center, the sort of move that often looks like corporate hubris in hindsight. 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.