Toys R Us filed for bankruptcy towards the end of September. Yes, arguably the most popular toy store in the world, Toys R Us which has over 35 stores in Australia and 750 international stores (outside of America) and more than 245 licensed stores in 37 countries has recently filed for Chapter 11 Bankruptcy.
It has often been said that Toys R Us, established more than 60 years ago set the standard when it came to toys. There is no question that if the popular TV game show ‘Family Feud’ had to go out and survey 100 people asking them to name a toy store, that Toys R Us would come up as the number 1 answer every time.
So what happened? Where did it all go wrong?
The obvious response is ‘another retailer slaughtered by Amazon and on-line retailing.’ But this conclusion comes short of describing why the Toys R Us leadership did not do the obvious things to keep Toys R Us relevant.
In the events leading up to the bankruptcy of Toys R Us, it was more a case of the wrong assumptions leading to bad outcomes!
In 2005 KKR and Bain Capital bought Toys R Us for about $6.6 billion, plus assuming just under $1 billion of debt, for a total valuation of $7.5 billion. But the private equity guys didn’t buy the company with equity. They only put in $1.3 billion, and used the company’s assets to raise $5.3 billion in additional debt, making the total debt a whopping $6.2 billion. What did this debt mean for the company? In short it created a cash outflow of $450 million per year just to pay interest on the loans.
Although risky, leveraged buyouts as described above are not unusual, the problems were in the assumptions used to analyse the risks.
The biggest assumption behind a debt-financed takeover is that the company can cut costs to improve cash flow and thus pay the interest. But behind that assumption is an even bigger assumption. That the marketplace won’t change dramatically.
Their plans were to lower operating costs, close some stores that were under performing, license some offshore stores, and sell some assets (real estate) to raise cash and repay the debt.
But what did they miss?
1. The accelerated growth and popularity of online stores such as Amazon.
2. That growth of on-line retailing would stall traditional retail stores, thus creating a major loss of value for retail real estate
3. The changing landscape of games. Let’s face it with the advent of technology and the advancement of video games kids today are not spending much of their time paying with traditional toys.
Toys R Us choose to focused on the war with WalMart and Target who had decided to launched a full scale price war to dominate holiday toy sales. A war these giant retailers were winning not only because of price but because of convenience. Parents could now do their toy shopping while they were doing their general weekly shop.
Simply put because of their debt Toys R Us did not have the resources to fight the traditional discount and dollar brick-and-mortar retailers and build a major on-line presence plus keep up with the changing landscape of traditional toys and keep paying their debt. They wanted to, let us not forget Toys R Us actually had a very strong online presence launching toysrus.com over 20 years ago and further strengthening their online presence in 2007 when they bought etoys.com and toys.com which all happened after the LBO.
In layman terms, it is like being forced to take a pay cut but still having the same mortgage repayments. Their lack of financial resource meant they were always behind the ‘8 ball’.
Because of poor assumptions, poor decisions were taken resulting in lower earnings and profits putting Toys R Us in a position where they simply could not afford to service their debt.
So what does this have to do with real estate?
The real estate market is more dynamic and harder to predict than ever before. Yet, agents are still listing properties using a pricing strategy. To price a property, you have to make far too many assumptions and often these assumptions result in properties remaining on the market for 90 days or longer (current average days on market is 72) and selling well below market value.
Auction Services 5 Stage Selling Strategy strips price from the equation and allows the market conditions to control the sales process. Throughout the 5 stage selling strategy you have up to 5 opportunities to create a competitive environments resulting in properties selling in less time (on average 28 days) and for the highest the market is prepared to pay!
To find out more about the 5 stage selling strategy contact Auction Services Australia
(Article Note: The Toys R Us chapter 11 filing did not include operations in Europe and Australia, licensed stores and joint venture partnership in Asia, which are separate entities)