The holiday season is fast approaching. But a major retailer, Toys R Us, is struggling. Why?
It has been a tough road for this company. They have been in a vicious financial cycle since they were acquired by investors twelve years ago for $6.6 billion. The purchase was a leveraged buyout, meaning the investors took on a lot of debt. That debt has been hanging over them ever since. Almost all the company’s profits go toward servicing that debt. Because of this, Toys R Us has not been able to reinvest this money to improve their ability to compete with Amazon and brick-and-mortar generalists like Wal-Mart and Target, and their profits dropped. Now we are seeing the results of this cycle.
How do they turn things around?
That is the million-dollar question. They must find a way to compete and offer something unique. Last week, they rolled out their first attempt, announcing an initiative called Today We Play. The rebrand, according to the company, was a “call to action for people to get up and do something.”
The focus of this new initiative seems to be aimed at improving customer experience. After all, the company is a toy store, and bringing consumers to the store to interact with toys is very important for consumers and the company alike. The main advantage physical stores have over online retailers right now is customer experience, so it may work. But the hole they are trying to escape is deep.
Who will be most affected by this bankruptcy?
Several stakeholders are going to feel this bankruptcy. First, even as we see a seasonal uptick in hiring, the company will probably lay off some employees once the holiday sales season is over. The company’s suppliers are also likely to take it on the chin. Many toymakers rely heavily on Toys R Us as one of their key partners. They are likely to see fewer orders and declining sales.
On top of this, many have outstanding invoices with the company for past orders may not get paid the full amount they are owed. Some of their suppliers are already preparing for financial pain in their future. According to The Washington Post, Lego is concerned and “deeply engaged in ongoing dialogue” with Toys R Us.
Others companies are said to be consulting bankruptcy lawyers and financial advisers to sort out shipments — and payments — related to holiday inventory. Most suppliers expect sales to the company to decline, not only because of the company’s current challenges, but also because they are nervous about getting paid. Some retailers have said they have already severed ties with the world’s largest toy store chain. It is clear their suppliers are going to feel some pain.
What does this mean for the chain’s customers in the coming holiday season?
Consumers could see some benefits from this bankruptcy. Even though the company is undergoing chapter 11, it will still try to come out the other end of bankruptcy, and to do this, it must continue to compete for consumers. Because customers sometimes avoid companies going through the bankruptcy process, Toys R Us may try to lure consumers back – and keep their rivals at bay – by cutting prices at their stores, benefiting shoppers.
On the other hand, this bankruptcy does mean you must exercise some caution when shopping at the store at this point. First, now is probably not the time to use the layaway service at Toys R Us. Layaway is often an option many turn to during the holiday season, and it is a better one than a high interest credit card. However, it is unlikely to be a something you want to do at Toys R Us this holiday season, because some stores could end up closing, and others may have issues getting or keeping the necessary inventory.
It is simply not worth the risk. Another thing that you want to keep an eye on is warranties. If you purchase items that have warranties through the store, you could be in for a rude awakening if the company disappears or stops honoring them. Basically, if you are not prepared for your purchase to be outright, and final, it is probably good to steer clear of Toys R Us right now.
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