Rudy Panucci On Pop Culture

The Underwhelming Return Of Toys R Us

The PopCulteer
August 2, 2019

This story broke a couple of weeks ago when your PopCulteer was enjoying a brief visit to Chicago, but the real reason I haven’t addressed it here is that it’s sort of sad.

TRU Kids, the company spearheading the revival of the legendary toy retailer, Toys R Us, announced that they will be returning to retail in time for Christmas this year with a grand total of TWO WHOLE STORES…one in Texas and one in New Jersey.

This is not exactly the sort of revival that folks were hoping for.

A little history for those who came in late: Back in 2017, Toys R Us, which was in debt to the tune of over ten billion dollars (with a “B”), needed to borrow even more money in order to survive through the holiday season.

The only way they could get the necessary loan to keep operating through Christmas was to put up their intellectual property as collateral. Some of the financial institutions issuing this loan were the same entities that had loaned them money previously, but this was a seperate transaction, secured by the store’s name, trademarks and website addresses that belonged to the company.

The 2017 Christmas season was a bit of a disaster and the company could not borrow any more money to stay afloat, so in 2018 they had to liquidate (which I covered extensively in PopCult at the time). However, when it came time to sell off all the assets, that liquidation did not include the name of the company and all the related IP. Those were already foreclosed upon by the lenders in the final loan transaction.

It was announced that all the intellectual property would be auctioned off late in the summer of 2018. That never happened. Eventually it was revealed that the folks who had foreclosed on the name and trademarks decided that there was more value in them reviving the company (now that it was out from under that insane debt load) than there would be in selling the name to someone else.

A new company called Tru Kids formed, headed by Richard Berry, one of the former CEOs of TRU (from back when they were making money), and they were hired to manage the intellectual property and get the revival off the ground. Last year for the holiday season, just to keep the brand visible before they formally established Tru Kids, the IP owners sold some of their private-label toys in Kroger, as “Geoffrey’s Toy Box.”

When they started meeting with toy companies about buying inventory for their proposed stores and website, I started hearing from my industry contacts that they were going to try to do this on the cheap. They actually went to toy companies with the proposal that they sell their products on consignment, rather than actually buying it upfront to sell themselves.

This is not a foreign concept to American retailers, but it’s one that rarely works. A year or two ago Target went to the major record labels and told them that they would no longer buy their product outright, but would sell it on consignment. That’s why you don’t find CDs in Target any more.

This type of arrangment shifts all the risk to the manufacturers and allows the retailer to spend their money on other costs of doing business. Since the cost of inventory is the number one business expense for retailers, this would be a pretty sweet deal if you could talk anybody into falling for it.

Now, in the case of Tru Kids, they were going to members of an industry that had just suffered a dismal financial year due to the liquidation of Toys R Us. Toy Manufacturers lost tens of millions of dollars in the bankruptcy, and then had to compete in the marketplace against their own liquidated product that they hadn’t been paid for due to TRU shutting down.

I can only imagine how Tru Kids was received when they pitched the idea of not paying for any product upfront from companies that just lost tons of money thanks to the failure of Toys R Us.

Originally there was talk of Tru Kids opening as many as 200 Toys R Us stores nationwide in time for Christmas, 2019. I’m guessing that the reality of the costs of doing business must have hit them in the face for them to have scaled that down to two stores. That the stores aren’t exactly in the biggest markets is even more puzzling. New Jersey is close enough to New York to be considered a good move, but why they would pick Texas over Los Angeles, Las Vegas, Chicago or Orlando is beyond me.

The new Toys “R” Us stores will be open before the holiday shopping season later this year at The Galleria in Houston and in Westfield Garden State Plaza in Paramus, New Jersey. My guess is that they will probably have about the same amount of inventory as a Go! Calendars and Toy store (like the one in the Huntington Mall). Below you can see the concept image of what they expect the stores to look like. Pretty disappointing, if you asked me.

It’s pretty evident to me that Tru Kids is under-capitalized. That’s never a good way to start a business. While the financial institutions who own the TRU Intellectual Properties were not willing to part with it for what had been offered, they also seem unwilling to invest much more into building a new retail chain. Now they say they plan to open eight more stores in 2020.

In the press releases, the folks in charge have said that the new Toys R Us stores will not be warehouses full of toys, but will instead focus on providing “experiences” and play value. Tru Kids described them as a “highly engaging retail experience designed for kids, families and to better fit within today’s retail environment.” The plan is to lease out space to the toy companies so they can set up their own displays. Tru Kids has partnered with the bright, shiny retail concept company B8ta to create a store concept that’s more like an Apple Store than a big box retailer.

That tells me that they don’t understand the Toys R Us concept at all. If you really want to pinpoint the moment when Toys R Us started their decline–one that included multiple bankruptcies and a leveraged buyout that eventually doomed the company–you have to look at 1994, the year the chain’s founder retired, and new management decided that they were carrying too much product. They put into place a plan that would remodel the stores, and drastically reduce the amount of different products they offered from over 100,000 to about 40,000.

That is when Toys R Us began to suck. Sales plummetted and the downward spiral began. Up until then TRU sold almost every toy that was offered on the market. If you wanted a toy you knew that you could find it at Toys R Us. After the change, that was no longer true.

I have no idea what kind of beancounter voodoo was used to conclude that slashing your offerings by 60% would make sales go up, but it must be powerful stuff to get management to go along with such a counterintuitive concept. That was 25 years ago, before the rise of Amazon, and the face of retail has changed dramatically in that time. I am of the opinion that, had Toys R Us stayed true to their original concept of carrying almost every toy on the market, they would still be a thriving retail powerhouse today. They weren’t beaten, they surrendered.

In order to recreate the original Toys R Us magic a huge capital outlay would be needed. Hundreds of millions of dollars would have to be spent on real estate and construction, and tens of millions on inventory. It doesn’t seem like the lenders who foreclosed on the Toys R Us name are willing to invest that kind of money. This seems more like a “stop the bleeding” move, designed to keep the name alive in the hopes that another company (Please, God, not another private equity firm) will come along and buy up the name and IP…and pay at least enough for it for them to recoup what they loaned Toys R Us in 2017.

That might happen. Tru Kids and B8ta might survive long enough to open more stores in key markets next year. It will never be the same, though. I don’t think anybody in a position of power has any faith in mass market retail as a viable concept any longer. It still hasn’t occurred to the folks competing with Amazon that the reason Amazon does so well is that they offer so much product…just like the big box stores used to.

You have to excuse me if I’m a bit skeptical of this new retail plan. Maybe it’s because I’m an old, out-of-touch white guy, but the more I read about the store concept created by B8ta, the more I imagine a store manager, with a man-bun, named “Clem Fandango,” who has no idea how to process a return, and only knows the toys offered in the new stores…if that. The days of a person working in retail because they really love what they sell are long gone. The B8ta concept is all about surveillance and metrics and algorithms and providing “experiences.” Somehow that’s supposed to work better than “Oh, you don’t like that toy? Here choose from thousands of other toys.”

Meanwhile, the attempted revival of KB Toys has run into a major snag: Strategic Marks, the folks who snapped up the trademarks when they expired, can’t find any financial backing or willing partners to open any stores. Hell, it’s not like they’re going to spend their own money on the idea. Last year’s plan to open pop-up stores never materialized. Two of their potential partners, Go Calendars and Party City, opened their own pop up toy stores without KB, and while the folks at Strategic Marks have also talked about opening a couple hundred stores in time for this year’s holiday season, they admit that it won’t happen without additional investors.

My prediction is that Amazon will expand their toy offerings even more, and simply replace the in-person toy store experience. They seem to be the only retailer of any kind that understands the simple notion that, if you offer more products, you sell more products.

That’s this week’s PopCulteer. Check back for our regular features.

1 Comment

  1. Thomas Wheeler

    This is a shame, really, but one of the sentences in this article is rather telling: Toys R Us stores will not be warehouses full of toys, but will instead focus on providing “experiences” and play value. Tru Kids described them as a “highly engaging retail experience designed for kids, families and to better fit within today’s retail environment.”

    This seems to be, at least according to some sort of market research, I guess, what people (i.e. millennials) seem to want in malls these days, which is where these two stores are locating. They don’t want “shopping” — they want an “experience”. The mall closest to my home, which is virtually a ghost town, is planning a major renovation which will add more “experience” themed places. I’ve heard a bowling alley is likely to be part of it. The only facility in this mall to recently spend money on a major overhaul? The movie theater.

    So Tru Kids’ attitude doesn’t surprise me. Whether it WORKS is anybody’s guess.

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