Pity the Poor Giraffe

Once-powerful Toys “R” Us drowned in debt, taking Geoffrey with it. In the retail world, LBO rarely means “lots better off”
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Posted April 11, 2018

It was a haunting confluence of events.

A little over a week after Toys “R” Us announced it would shut it all down, its founder, Charles Lazarus, passed away.

Lazarus was 94. He died, reportedly, of respiratory failure.

Toys “R” Us was 70. It died of – what? “Respiratory failure” is probably not such a wrong diagnosis, either.

The common wisdom is that the chain rose and fell because of abrupt changes in the retailing geology. In a sense, it seems, it was a Darwinian extinction: An asteroid hits the earth. Boom! No more dinosaurs.

“Boom” is exactly right. In 1948, Lazarus had correctly foreseen a growing demand for toys as the baby boomers began taking their first steps. Eventually, a proliferation of boomer kids would lead to greater demand and more choice, leading to bigger stores. Bigger stores would feed the insatiable maw with selection, all the popular new releases and bargain prices, in tens of thousands of square feet. It made eminent sense.

In the new age of the category-killer superstore, which peaked in the 1980s and ’90s, Toys “R” Us rolled over all the department stores, drug stores, corner toy stores, neighborhood candy stores and novelty stores, and anyone who sold kids’ toys.

However, the 21st century saw a different age emerge – the rise of digital shopping. It was an attractive alternative to Toys “R” Us shoppers who got tired of fighting the crowds, finding parking, wheeling big carts through cluttered aisles, trying to manage the big cartons they had to pull down from shelves, reining in their kids, being disappointed by out-of-stocks, standing in long lines to check out, loading everything into their trunks, unloading everything out of their trunks, collapsing in their living rooms.

Fun? Hardly. But whoever said shopping should be fun? (The answer: Nearly every good merchant.)

The boomers became parents of grown children, a new generation of tech-savvy consumers finding they could not only get more efficiency online but also pay less.

Many old-line retail brands began to die. The clues were right there: The culprit was the Internet, in the parlor, with an iPhone.

But there was another culprit worming its way into the industry, even before e-tailing took hold.

The term on the business pages was “private equity investment.” The shorthand word for it was “debt.” LBOs – leveraged buy outs. “Leveraged” is a fancy term for borrowing.

The concept is as old as money itself: buy low, sell high. Private equity firms raised capital to acquire retail organizations that needed money – some were in trouble (Toys “R” Us, Payless ShoeSource), others were looking for growth (Neiman Marcus, J.Crew).

Forget Nordstrom, Saks, Starbucks, Publix. The new retail glamor names became Golden Gate Capital, TPG Capital, Bain Capital, Versa Capital Management, Blum Capital Partners. (There’s a hint: “Capital” does not mean “merchant.”)

The retailers suddenly had an infusion of cash. Though it was mostly leveraged, that debt obligation wouldn’t come due until somewhere off in the future. In the meantime, the cash would fuel growth, which would improve profitability, which would cover the debt, and everyone would emerge happily ever after.

It’s amazing how few happily-ever-afters there actually were. Or maybe not amazing, at all. If the retailer was not producing the hoped-for growth, the new owner would rearrange the C-suite, fire employees, close stores and cut back on merchandise. Revenues, of course, promptly dwindled as stores were closed. Outraged landlords demanded their lease payments. Shoppers shrugged and went somewhere else. Not a recipe for retail growth.

Toys “R” Us’ debt just kept growing. While it flirted with bankruptcy, always with a plan to revive its fortunes, those fortunes never emerged. In the end, Toys “R” Us owed $5 billion! That’s roughly the national debt of Brazil.

So don’t entirely blame Amazon.

I’ve read that giraffes are in danger of extinction – everything from hunting, to poaching, to repurposing of their grazing lands, to human consumption. (Some Tanzanians apparently believe that giraffe brains and bone marrow can cure HIV-AIDS.) The giraffe population is half of what it was 15 years ago.

In retrospect, Toys “R” Us might have chosen a better symbol.

As a journalist, writer, editor and commentator, Steve Kaufman has been watching the store design industry for 20-plus years. He has seen the business cycle through retailtainment, minimalism, category killers, big boxes, pop-ups, custom stores, global roll-outs, international sourcing, interactive kiosks, the emergence of China, the various definitions of “branding” and Amazon.com. He has reported on the rise of brand concept shops, the demise of brand concept shops and the resurgence of brand concept shops. He has been an eyewitness to the reality that nothing stays the same, except the retailer-shopper relationship.