Toys R Us: Following in the Footsteps of its Bankruptcy Predecessors

By: Jillian McMillan

 

In 1948, Toys R Us was founded by Charles Lazarus as a furniture store for babies. As years passed, Lazarus shifted his company to the toy business.[1]  Because there were no brick and mortar stores or online stores that could compete, Toys R Us thrived until 1998.[2]  In 1998, Toys R Us lost its position as the number one toy retailer to Wal-Mart.[3]  From this point forward, Toys R Us struggled to keep up with shoppers of the 21st century who preferred easy access to toys by online retail and big box stores.[4]  In 2017, Toy R Us found themselves in 5 billion dollars of debt.[5]  By September of 2017, Toy R Us had filed for Chapter 11 under the Bankruptcy code.[6]

Chapter 11 refers to the debtor, in this case Toys R Us, asking the court to grant them a reconsolidation of the company, as opposed to a Chapter 7 filing which results in liquidation.[7] In order for the court to grant a debtor’s wishes of a Chapter 11 filing, the debtor must prove that they have a solid plan to get the company back to a profitable range, and avoid going back into bankruptcy.[8]  If a company is approved for a Chapter 11 reconsolidation the court will order them to pay off a certain amount of debt, but will allow them to keep assets in order to restart the company.[9]  Although an approval of Chapter 11 is often seen as a benefit for the economy, Toys R Us’ reconsolidation will more than likely fail in the years to come due to the ever-growing e-commerce companies.[10]

A large reason for Toys R Us’ failure is based on their inability to keep up with the online convenience factor that so many 21st century parents are interested in.[11] The 21st century is shifting from in store shopping to online shopping or Bog Box store shopping.  Big box stores like Wal-Mart and Target, who sell not only toys but groceries, are found to be much more realistic to shop at.[12]  Why would anyone want to go to two separate places when they can get everything at one?  Toys R Us strictly sells toys and games, and since the late 1990’s they have struggled to keep up with the box stores.[13]  Amazon.com is a huge factor in Toys R Us’ bankruptcy.[14]  Amazon offers its customers a prime membership for $99 dollars which allows them to receive free, two-day shipping on just about any order.  Amazon has just introduced a same day delivery program on certain items as well.[15]  If Amazon could expand this same-day shipping to a majority of items they sell, then Toys R Us will fail. In order for Toys R Us to succeed following this reconstruction of their company, they must be able to keep up with the most successful businesses and mirror how these other companies attract customers.  Toys R Us has not made large attempts to compete with Amazon, Wal-Mart, and Target’s prices and convenience in the past, and it seems unlikely they will even stand a chance to last much longer as these companies continue to improve their convenience beyond Toys R Us’ capabilities.

A Chapter 11 reconsolidation for Toys R Us is a huge mistake.  Toys R Us will inevitably fail, causing it to go into further debt; barring its creditors from receiving the money they could have before this filing.  The liquidation of extremely successful companies at one point in time, such as Blockbuster and Borders Books, should be a clear indicator to the Bankruptcy courts that Toys R Us will follow in their path.[16]  The Toys R Us situation is extremely analogous to both of the situations of Blockbuster and Borders Books in that all of the companies filed for a Chapter 11 bankruptcy reconstruction and all of the companies were approved.  It wasn’t even a year after Blockbuster’s reconstruction that it was liquidated and ceased to exist.[17]  Borders Books only lasted five months following its approval to reconstruct.[18] Borders Books ended around July 2011 while Blockbuster was completely liquidated around May 2010.[19]

Both Borders Books and Blockbuster went under because of e-commerce expansion in the 21st century.[20]  Borders Books could not keep up with Amazon, who happens to be Toys R Us’ biggest competition.[21]  Blockbuster lost its business to Netflix who was an online based business as well.[22]  If Borders could not keep up with Amazon almost eight years ago before Amazon prime was brought about, Toys R Us will not even stand a chance.  Blockbuster spent a year trying to shift to a more e-commerce business and still ended up liquidating.[23]  It is clear that Toys R Us is following in the same path as both of these companies.  It is unclear as to how the Bankruptcy court differentiates Toys R Us from the other two companies who were approved Chapter 11 and failed within a year. Even more so, the bankruptcy judge in Toys R Us approved the company to give over 14 million in bonus incentives to its executives in order to motivate the executives during the holidays.[24]  The company is already in extreme debt, and to give executives of the company who drove Toys R Us into the ground more money is heinous. The 14 million dollars could be used to help the company stay afloat following Chapter 11, but instead the company is irresponsibly distributing its money, which caused its bankruptcy in the first place. From this action alone, it seems Toys R Us’ old habits die hard.

Convenience seems to be a high priority of shoppers in this day and age.  If Toys R Us cannot keep up with its competitors, similar to Borders Books and Blockbuster, it will liquidate almost as soon as it reconstructs under Chapter 11 of the Bankruptcy Code.  A Chapter 11 reconstruction should only be granted when it is likely the company will be able to improve its sales, get out debt, and grow a successful company.  By allowing huge corporations to reconstruct their companies simply because they dominated the retail market in the past, creates creditors who would have been paid prior to the filing out of their loans and overall a waste of time and resources.

 


[1] Michael S. Rosenwald, Toys R Us: The Birth – And Bust – Of a Retail Empire, Washington Post (Sep. 19, 2017), https://www.washingtonpost.com/news/retropolis/wp/2017/09/19/toys-r-us-the-birth-and-bust-of-a-retail-empire/?utm_term=.bd88a248827e.

[2] Id.

[3] Joan Verdon, Toys R Us’ Bankruptcy Filing Was Long In the Making, USA Today (Sep. 11, 2017, 6:20 PM), https://www.usatoday.com/story/money/nation-now/2017/09/11/toys-r-us-once-ahead-retail-game-now-playing-catch-up/655734001/.

[4] Id.

[5] Michael Corkery, Toys R Us Files For Bankruptcy, Crippled By Competition and Debt, N.Y. Times, (Sep. 19. 2017) https://www.nytimes.com/2017/09/19/business/dealbook/toys-r-us-bankruptcy.html.

[6] Aimee Picchi, Toys “R” Bankruptcy: Why it Went Bust, CBS News (Sep. 19, 2017), https://www.cbsnews.com/news/toys-r-us-bankruptcy-why-it-went-bust/.

[7] See generally 11 USCA Ch. 7; See generally 11 USCA Ch. 11

[8] See id.

[9] See generally 11 U.S.C. §§ 1101-1174 (2005) (referring to Chapter 11 of the Bankruptcy code addressing reorganization).

[10]  Tanya Garcia, Amazon Isn’t the Only Reason Toys R Us Filed for Bankruptcy, Bulletin (Sep. 20, 2017 (9:45 a.m.) https://www.marketwatch.com/story/private-equity-apple-apps-and-amazon-share-blame-for-toys-r-us-bankruptcy-2017-09-19.

[11] Picchi, supra note 6.

[12] Picchi, supra note 6.

[13] Picchi, supra note 6.

[14] Picchi, supra note 6.

[15] Annie D’Innocenzio, Toys R Us Joins Bankruptcy List as Amazon Exerts Influence, Seattle Post (Sep. 18, 2017, 11:52 PM), https://www.seattletimes.com/business/toys-r-us-files-for-chapter-11-reorganization/.

[16] Hooper, Will & Mary Katherine Rawls, Borders Group, Inc.’s Final Chapter: How A Bookstore Giant Failed In The Digital Age, xxChapter 11 Bankruptcy Case Studies 24-25 (U. of Tennessee, Knoxville Trace, 2014) http://trace.tennessee.edu/utk_studlawbankruptcy/38; Christopher Harress, The Sad End of Blockbuster Video: The Onetime 5 Billion Dollar Company is Being Liquidated as Competition from Online Giants Netflix and Hulu Prove All Too Much for the Iconic Brand, IB Times (Dec. 5, 2013, 11:45 AM), http://www.ibtimes.com/sad-end-blockbuster-video-onetime-5-billion-company-being-liquidated-competition-1496962.

[17] De la Merced, supra note 14.

[18] Nathan Bomey, Borders Plans to Liquidate, Ending 40-Year-Old Bookstore Chain, Ann Arbor News (July 18, 2011, 4:40 PM), http://www.annarbor.com/business-review/borders-liquidation-chapter-11-ann-arbor-bookstore-chain-borders-group-e-books/.

[19] de la Merced, supra note 14; Bomey, supra note 16.

[20] de la Merced, supra note 14; Bomey, supra note 16.

[21] Bomey, supra note 16.

[22] de la Merced, supra note 14.

[23] de la Merced, supra note 14.

[24] Amy Held, Struggling Toys R Us Plans to Pay Executives Millions in Bonuses, WUWM (Dec. 7, 2017) http://wuwm.com/post/struggling-toys-r-us-plans-pay-executives-millions-bonuses#stream/0.