With the liquidation bankruptcy filing of Toys “R” Us, the era of the category killer store may be said to be over. Toys “R” Us was the original category killer chain that overwhelmed small specialty and large general merchandise stores by offering a supermarket-style presentation of wide and deep assortments of sharply priced category specific merchandise.
To be sure, a few category killers remain—Best Buy, Dick’s Sporting Goods, Bed Bath & Beyond, and even the struggling Barnes & Noble, to name several. But the graveyard list of category killers is much larger. An incomplete list would include Child World, Lionel Leisure, KB Toys, Circuit City, Crazy Eddie, Sports Authority, Oshman’s Sporting Goods, Linens ’n Things.
When Toys “R” Us began in 1948, if you wanted toys, or an appliance or housewares item—virtually anything—you would go downtown to a department store. There were no suburban department stores back then. There were no suburban shopping centers.
Charles Lazarus used $4,000 to transform his father’s Washington, DC, bicycle shop into a juvenile furniture store. After customers kept asking for toys, Lazarus quickly evolved his merchandise mix to focus on toys.
He believed staunchly in regimental uniformity. All business decisions–which products to carry, merchandising and store layout–emanated from headquarters. “I should be able to close my eyes and walk 130 feet and put my hand down and touch the very same stack of items in each store. If not, there’s something wrong,” he used to say.
Lazarus was an early believer in the power of point of sale data. He partnered with suppliers, accepting early inventory deliveries and sharing sales data in return for discounts and assurances that Toys “R” Us would be kept in stock on the most wanted toys. The chain’s wide and deep inventory position became a strategic advantage when desperate parents and grandparents scavenged for the most wanted present during the holiday season. In stock leadership, not price, cemented the company’s position as the go-to retailer for toys.
This advantage started to dissipate in the late 1980s as Walmart and Target refined their POS data systems. They concentrated on the hottest toys, selling them at discounted prices. They had more stores than Toys “R” Us. Shoppers visited them more often. They siphoned off sales in buckets, not drips and drabs.
If you needed a specific toy, the place to go no longer was Toys “R” Us. In the age of the Internet, you searched on line, Amazon most likely.
With the advent of electronic games, computers and hand-held devices, traditional toys began losing their cache among children. Toys “R” Us added video games to its assortment, but one didn’t need to visit a store to upload apps to a hand-held device.
The real dagger to the heart of Toys “R” Us and other retailers, however, has been the greedy tentacles of private equity fund managers. They swooped in to ostensibly rescue retailers, offering cash secured against a retailer’s real estate. Some merchants had lagged because they could not compete against more streamlined, better financed competitors. Some were unable to cope with changing market conditions. Some just had inadequate management. It mattered not to the equity funds. They reaped their profits upfront from the leveraged buyout transaction, from interest payments on the debt it provided and, hopefully, from taking a retailer public if its profitability improved.
Ever since Charles Lazarus retired from his creation in 1994, Toys “R” Us has lacked an energetic, bold merchant at the helm. Profits lagged. The equity funds offered money. But at a highly leveraged price. Executives with no proprietary interest in a company, other than to maximize their personal returns, usually succumb to the siren song of a deep-pocketed equity fund. Bain Capital and Kohlberg Kravis Roberts, along with Vornado Realty Trust, loaded Toys “R” Us with $5 billion in debt in a 2005 leveraged buyout.
The downward sales spiral kept Toys “R” Us from paying off the debt and, ominously, from upgrading its stores and systems. All that’s left now is to sell off its real estate.
Charles Lazarus is now 94. The last time I saw him was about 15 years ago as I was leaving work. He was window shopping a store located on the ground floor level of the Park Avenue office building housing Chain Store Age. We exchanged pleasantries but even then, a decade removed from active Toys “R” Us management, he resisted talking about the company he founded.
He always was a reluctant interview (see http://nosocksneededanymore.blogspot.com/2017/09/toys-r-us-bankruptcy-brings-back.html). I cannot imagine what must now be gripping his emotions.
His proudest moment, he used to say, was paying off the creditor debt Toys “R” Us assumed when its then-parent company, Interstate Stores, dragged it into Chapter 11 bankruptcy reorganization in 1974. Other Chapter 11 filings have occurred, none under his watch.
On Thursday, management filed for Chapter 7 liquidation. The same market forces that will silence Lazarus’ once ubiquitous airwaves jingle—“I don’t wanna grow up, I’m a Toys “R” Us kid …,”—are sure to wreak havoc among remaining category killer stores. For some, if not all, it is just a matter of time before they share a similar fate.
