Analyst Corner

Why Did Toys ‘R’ Us Fail?

Categories: Amazon, Retail, Uncategorized

(No official announcement made, but vendors not being paid and gift cards not being accepted)

One of the frustrations in pushing back against the false Retail Apocalypse narrative are situations like Toys ‘R’ Us that people will point to and say – what about them?  It’s pretty easy to find stories that fuel the narrative but looking just a bit under the hood you see the PRIMARY reason and it’s similar to what causes any individual to have to declare bankruptcy…they grew costs too high and took on too much debt.  Perhaps that is a bad comparison.  Individuals can face many reasons that are not self-inflicted such as medical debt, some natural catastrophe, or perhaps home values drop in their market.  But there is none of that here.  Toys’ is going under for one reason only:  KKR, Bain Capital and Vornado Realty Trust leveraged them with over $7B in debt for expansion even in spite of increased competition from Walmart, Amazon, Target and others.

Private equity in and of itself is not evil, but when it is used for only short-term views and short-term gains, without thinking about overall market dynamics, we end up with disaster impacting thousands of lives. That is what happened here.  That is what happened at Wet Seal, Limited, and several others.  Short term thinking from private equity owners.

It was not the market dynamics that took these companies under, it was the fact that their owners took on so much debt that it positioned them to only be successful if all the market dynamics went their way.  They decided to purchase a Formula One race car and forgot they have to dodge potholes on I-94 in Chicago to and from work. And when they fail the world wonders and laments the loss of these retailers and make it sound like this is an overall retail issue.  It’s not.

Here is the realityRetail Sales in the US were up over $232B in 2017.  To put that in perspective, we added the equivalent of the annual retail sales of South Korea, the 4th largest retail economy in Asia!  Or the entire GDP of Finland.  But when you are positioned to only succeed in conditions better than this, it’s not the market that is the issue.

While I’m on this soap box, let me also take a shot at lazy reporting that is feeding the false narrative.  Most of the reporters are very responsible in the industry. They are willing to look beneath the headlines, but for some reason (that boggles my mind), the headlines from the government and mainstream press seem to accentuate the negative.

Case in point – if you search the headlines for January Retail Sales, you will see the headline that retail sales declined .5% in January.  What is the truth?  Retail Sales dropped .5% from December’s retail sales.  Anyone surprised retail sales would be lighter in January than in December?

What’s the right comparison? Well I would think January 2017 to January 2018.  What was that change?  +5.4% growth over the year before.  A $5 Trillion market is growing at 5.4% year to year but we position this as bad news?

No question, retail is changing.  There are many aspects of those winning versus those that are not.  But the big retail failures out there are due to bad management and taking on too much debt, not a single competitor or bad market conditions.

Please retire the Retail Apocalypse narrative! Unless you like spreading false news and $232B in gains is a negative to you.

We talk about all of these issues in the free webinar and report called “Debunking the Retail Apocalypse”.

OK, off the soap box.  Please go back to your regular scheduled programming dodging blizzards and filling out brackets.