Who Bankrupted Toys 'R' Us? Blame Private Equity and Millennial Parents

Toys “R” Us announced on Wednesday that it will close about 180 stores in the U.S., or about one-fifth of its domestic locations, as the company emerges from bankruptcy proceedings to restructure $5 billion in debt.

On one level, this is just the latest chapter in the never-ending saga of brick-and-mortar calamity as the retail industry focuses more on online sales. The first half of 2017 was among the worst periods for retail stores on record, and the pain isn’t nearly over. In the last four months, Sears and Kmart have announced 63 imminent store closings (after shuttering 350 locations in 2017), Gap announced plans to close 200 locations in the next three years, and Walmart announced that it would close 63 Sam’s Club stores and lay off thousands of workers.

But while Toys “R” Us has suffered from some predictable brick-and-mortar burdens, its story is a complicated one that touches on family economics, modern leisure, and private-equity mismanagement. There are the three main culprits of the sad demise of America’s erstwhile titan of toys.

1. It’s the e-retailers.

This story begins—as all modern retail stories must—with Amazon. The “everything store” sells toys now—billions of dollars of toys, in fact. Between 2015 and 2017, Amazon toy sales grew 24 percent, to $4 billion. Toys “R” Us, whose revenue declined in those years by a similar sum, simply doesn’t have the same facility with digital shoppers. Last June, the company’s CEO criticized the store’s own website, including its kludgy baby-gift registry tool, acknowledging that the store had simply fallen behind contemporary shopping habits.

Failing to build an online presence is bad for any retailer, but it’s particularly deleterious for one whose core demographic includes parents short on time and cash. As my colleague Rebecca Rosen wrote last year, most households don’t have a stay-at-home parent anymore, which makes shopping excursions a luxury many families cannot afford. So more moms and dads are skipping the car trips and buying toys from a website they can trust.

2. It’s the debt, too.

It’s a mistake to consider Toys “R” Us nothing more than Sears, but for kids. Yes, the store was clearly hurt by the rise of Amazon and other large retailers; Walmart actually overtook it as the nation’s largest toy retailer all the way back in 1998.

But its collapse has been especially acute, due to terrible mismanagement by private-equity firms. After Toys “R” Us was taken private by KKR, Bain, and Vornado in 2005, it took on a lot of debt, leaving the company with repayments that have crippled it in a period of declining sales. Toys “R” Us has spent more than $250 million annually to pay back $5 billion in long-term debt. These repayments became unsustainable once revenue started to decline consistently, as it has each year since 2012. That left one option: for the company to declare bankruptcy and renegotiate the terms of its debt.

3. Blame the kids and their screens.

It would be satisfying to exclusively blame private-equity sharks and retail conglomerates for the fall of Toys “R” Us. But there’s another group that deserves consideration as a culprit: Kids.

Today’s teenagers and children have been shaped by smartphones, social-media apps, and living-room bingeing, as the psychologist Jean Twenge wrote in The Atlantic last year. This has coincided with a sharp rise in teen depression and suicide. Less gravely, it’s also depleted the marketplace for hardware toys. In the last year, Lego, Mattel, and Hasbro have all reported declining sales for key brands (like American Girl or Star Wars merchandise). Maybe tactile trinkets have simply lost their luster among kids.

Or maybe kids don’t even know which toys are out there. Last year, The Wall Street Journal reported that with Millennials watching far less cable television than they used to, young parents and their children simply aren’t seeing the commercials that toy makers rely on to market new products. As a result, much of Toys “R” Us’s merchandise is doubly cursed—kids can’t play with it on their screens, and parents won’t find out about it on their screens.

While bankruptcy might seem like corporate death, the truth is that Toys “R” Us is far from defunct. With $11.5 billion in 2017 sales, its toy business is still more than twice as big as Amazon’s. But in the last decade, it has faced a brutal set of economic and technological forces that has left it heavy in debt and light in new customers. Along with every other struggling brick-and-mortar company today, the scariest question is this: If Toys “R” Us can’t cut it with 4 percent unemployment nine years into a recovery, what happens when the recession comes?