hello everyone welcome back to key
studies with the biz doc this week it’s
Toys R Us one of my favorite case
studies that I’ve researched in a while
it’s a story about a brick-and-mortar
company nor its old-school physical
company that didn’t adapt to the future
and consequently just this week filed
the bankruptcy they’re probably going to
live through it at least for a little
while but times are not good so let’s go
take a look that the history of it and
some things that we can learn about
strategy and adaptation in a changing
world Toys R Us was founded in
Washington DC way back in 1923 there was
some name changes and they really took
off in 1948 that was right when the baby
boom happened everybody came home from
World War two families were established
Barbie Mattel a lot of things going on
in that baby boom and from 48 to 64 you
had 20 years of baby boom there but from
48 to 98 when the fun really started at
Toys R Us and things were changing this
they were a category killer let me tell
you what a category killer is category
killer is somebody who generally has
more than 50% market share and when it
came to the retail toy store to go buy
stuff for your kids and in games and
things like that they were the category
killer they had over 50% of the retail
market share by certain reports and they
were everything you’re gonna go you went
to Toys R Us and they were this big and
there were small toys stores like FAO
Schwarz which figures into this story
and KB Toys and hobby shops things but
Toys R Us was the category killer all
paths went to Toys R Us when companies
like Mattel were inventing and bringing
out new games and toys and that 50 years
was really the Golden Age of Toys R Us
and it all changed in 1998 in 1998 you
know you there’s a lot of things that
are going on around that time Amazon was
founded in 94 would go public in 97 the
Netscape IPO and if you remember the
Netscape IPO is a very big deal because
it was a browser that could be adapted
and used
there’s a lot of things that change when
the browser came to the internet and you
just didn’t enter direct addresses
suddenly you were in a process where the
browser and things could do things for
you offer security offer commerce a lot
of things were happening and that was
here in 1999 they an attempt to ship
things and get things done Toys R Us had
the Christmas from hell it was a
disaster as a public relations disaster
it was a customer disaster they failed
to deliver a ton of toys in time for the
holidays the systems the processes it
was a fumble of just gargantuan
proportions so what did they do
mmm they have a new CEO in the year 2000
and they enter his name was John Ayler
and he had come from fao schwarz well
you know what no offense but in a
changing marketplace I think that was a
strategic error they said let’s hire a
new CEO hey here’s one at a toy store
they should have been thinking about
commerce maybe even a little bit of
e-commerce we can’t be real negative on
Toys R Us at that time for not thinking
too much about e-commerce because
e-commerce was still a baby we were
still going to the malls malls were
still booming but there was still some
things that were changing and new skills
need to be brought in the automobile
industry had learned that painful lesson
during the Japan shift after the oil
crisis of 1976 hey Americans want better
cars with higher quality they get better
gas mileage and so they brought in
talent that wasn’t there before and
nurtured their own new talent to adapt
and go forward this was an opportunity
lost they brought somebody in that was
in a toy industry retail mindset they
didn’t bring new thought to the table
nonetheless John Tyler shows up in year
2000 from FAO Schwartz and here we go
they in an effort to find a remedy to
this they look to Amazon and committed
what now in retrospect was an
unthinkable sin a 10-year deal to be the
exclusive provider of toys to Amazon in
other words Amazon won’t go to Mattel
Amazon
go to other areas Amazon has the
exclusive online source would be Toys R
Us to Amazon so Amazon is in this
ten-year deal well this thing lasted
about three and a half four years and
Amazon came back and said look you don’t
have the biggest selection you don’t
have some popular things and it’s
annoying to me I want to sell that too
and what was happening is think about it
from an internet standpoint Amazon shelf
space is infinite from Toys R Us it’s
only as much as you can get into a store
even if it’s a very very big store
nonetheless this thing got sour and they
ended up in court I’m gonna jump forward
a little bit
in 2006 Toys R Us would actually win the
court case that they sued Amazon for
reneging on this exclusive deal in
Amazon was letting other small vendors
and independent vendors sell toys online
well now Toys R Us wins that suit no.6
but they didn’t get paid 209 and they
were paid 51 million dollars wait a
minute you’ve got a multi-billion dollar
business here your online retail partner
you know you do a 10-year deal with and
then the thing falls out of love you end
up in court and you only collect 51
million dollars on it I’ll tell you
there’s one word for that it’s damn you
blew it
you also let the Fox in the henhouse and
you taught Amazon the toy industry and
they also are building e-commerce better
and better so in O five also about the
time they win the suit they buy FAO ox
leaves o six excuse me o six they buy
fao schwarz so the toy guy on the
retailer trying to meet growth targets
and do things like that says I’ve got an
idea
let’s buy FAO Schwarz well at the same
time in there about this is going on and
there are disputes in the story of whose
idea it was but nonetheless in oh five
when Eiler left this idea was apparently
on the table what also happened there is
a LBO
an LBO is a leveraged buyout and it just
means that you bought somebody using
leverage or debt lots of it 6.6 billion
a collection of LBO companies such as
KKR Bain legendary LBO specialists they
buy Toys R Us for six point six billion
dollars $26 and seventy four cents a
share that stands for all time high
stocks at an all-time high so they’re
buying at the peak and they paid six
point six but they only their down
payment 1.3 billion means they went out
and got five point three billion dollars
in debt and apparently they felt that
despite the lawsuit with Amazon which
they certainly knew about despite what
was all the frenzy that was going on
that they felt that there was really a
profitable company under here that they
can make a lot of money on because
leveraged buyout firms usually take
companies from the stock market pail out
of money for them and then generate the
profit out of them every year that’s
what an LBO strategy is hey you know
what that company could be run like an
ATM put good management in it I’ll buy
it and then it’ll keep kicking out
profits to me ding-ding-ding coming out
of an ATM that’s the theory behind
leveraged buyout and the profit I make
is this much the interest I pay on the
debt is this much so guess what I’m
making money even though I got all this
debt and I got to be paying off LBO well
here they go and they buy fao schwarz
and by the way there’s something else
right before all this happened
Toys R Us actually tried to build this
thing called kids R Us launched it in 83
it with twenty years and it dies very
quietly in oh three but it was an
indication underneath they saw
themselves as pure retail pure retail
and a brick-and-mortar and they were
adapting very slowly so they get bought
here and we move forward 2009 they
announced that they had six hundred
million dollars in online sales that’s
pretty good but
it’s nothing compared to what was
happening in e-commerce then a year
later it was 782 finally in 2011 they
actually crossed a billion dollars in
online sales a year later it was 1.1
billion which is only 10% more now I’m
sitting there looking at this saying
they were still opening stores and they
were still trying to grow online guess
what they were trying to live in two
worlds and neither was very successful
and there’s something that I
I look at very very carefully here that
I had experience with when I was at a
previous company that was a video it was
one of the first companies to bring
video to apps on mobile phones one of
the companies I called on was
blockbuster in Dallas Texas and I talked
the blockbuster about putting their
stuff on a mobile device and stream
through I said what kind of rights do
you have with the studio’s what kind of
ability you have to legally do that or
does the studio only want you to sell
physical media and they kind of push
back on me and say you don’t understand
data on a phone is so expensive the
carrier’s won’t do that and I said wait
a minute wait a minute I come from the
wireless carriers I understand this
transition and about that same time
there is a very funny quote from the CEO
of blockbuster Jim Keyes doing an
interview with The Motley Fool and he
said neither Redbox
or Netflix are even on the radar screen
in terms of competition it’s more
Walmart and Apple in other words people
competing for my sale of a DVD or rental
of a DVD and so they completely miss the
digital transition so my point here is
Toys R Us isn’t exactly alone here and
they go out after struggling they tried
a variety of techniques online is only
going so-so and in 2013 they announced
our toy stores will be open 24 hours on
this day in this day and some stores
were open 87 hours straight or something
like that
like over 2 and a half days straight and
to it I thought of
at that time I might wait a minute the
Internet is open 24 hours a day 365 days
a year and now you got to hire all these
people and do all this stuff and who’s
gonna get out of bed to go at 3:00 a.m.
the Toys R Us to buy the next Barbie for
their daughter
ok so keeping stores open that long
isn’t gonna work and then they hire
David Brandon as CEO he was the athletic
director at the time at the University
of Michigan and he had previously taken
Domino’s Pizza public so he had
experience going public so it looked
like that the LBO guys the bank’s Bain &
KKR are now thinking gosh maybe we need
to take this back public again on the
stock market because we’ll use all that
billions on the stock market to pay
ourselves back and to get a return on
our money so there was speculation they
were gonna do that but at the same time
there were news that they were losing
you know a hundred million dollars a
quarter or more and it’s like wait a
minute
you know Toys R Us is getting its butt
kicked by Amazon and you’re going out
here and you hire you know a guy whose
experience appears to be consumer retail
like Domino’s is food retail and he was
the athletic director at University of
Michigan and he announces which cracked
me up 2016 we’re not afraid of Amazon
you know they’re a formidable player and
they can change prices 88 times a day we
don’t live in fear of these guys we know
who we are and we’re good at it that’s
what he’s saying in 2016 in 2017 he
makes an announcement that hey we got to
make our big big investment in our
systems and revamping things and we are
gonna invest a hundred million dollars
to fix our e-commerce system wait a
minute a hundred million dollars to fix
an e-commerce system fix fix
Amazon’s had a ten year head start on
you from books to multi-product to
e-commerce and you’re just gonna put a
hundred million in Amazon spent in 2017
if I got this right five billion dollars
on Rd now there’s the echo the dot the
Kindle the fire fire TV a lot of things
in there but five billion dollars you
got to believe that a huge percent of
that is on their e-commerce system that
they continue to make better and better
and better and these guys are talking
about being 10 years behind and they’re
gonna invest a hundred million dollars
to fix it
man that’s worth another damn but I just
can’t bring the energy to do it because
I’m so stunned at the news they also sit
there back and announce you know FAO
Schwartz is closed so they bought that
company and within ten years of buying
it they closed it there’s a beautiful
premier store in New York FAO Schwartz
been there years and years don’t know
how you know apples got an apple store
down the street don’t know why you are
not able to keep that thing open in such
a prime location nonetheless they do
that and then he does another interview
and says this you know the web sites the
front door of our brand you know in its
60% of our customers visit our web site
before going to a store and in a year to
two years you know we have about that
much time to catch up on ten years of
innovation and that’s no small feat oh
my gosh
so here’s all this admission that the
stuff is is not going well and then you
come out now and they filed bankruptcy
so let’s step aside for a moment on that
you got the University of Michigan
athletic director who did have a
business background and took things
public is now saying a hundred million
dollars to fix e-commerce heck for a
hundred million dollars I don’t know
that you could recruit a University of
Michigan football team but if you want
to find out let’s get adidas on the
phone okay enough of that let’s get back
you’ve got just a tremendous amount of
of denial all coming to the searches so
the strategic issues that happened here
came home to roost here and now they
file bankruptcy and they’re asking the
court to help them break and restructure
all that debt and oh by the way they
need two billion more debt now there’s
probably a bank out there for the right
interest rate that’s willing to give
them the two billion in structure the
other where there’s money there’s always
a deal to be made
but it may be expensive money and right
now when we step back and look at this
what you have is a brick-and-mortar
company that went through the Golden Age
of retail and toys and they were the
category killer and what happened over
time is they unwittingly educated who
would be their biggest online competitor
they missed cues to bring additional
knowledge into the company and although
they got to a billion dollars in online
they weren’t continuing to invest
apparently and got to a point where they
felt that they were now 10 years behind
everybody despite a billion dollars in
online to wrap this is a case study
about strategy and adapting strategy is
not executing today it’s the plans on
how to best execute tomorrow adapting is
adapting responding to a changing
marketplace and you have to invest to
adapt and you have to bring in new
brains and the blood to adapt if you
don’t have visionary people on site
working for you on your team right now
they can do it and toys-r-us missed it
so from one side of history where they
were beloved and known and tremendous to
now you know a bankrupt multi-billion
dollars in debt getting crushed by
Amazon it’s just it’s sad to see that
but you know what we’ve seen it before
and we’ll see it again as the industries
change and things change stuff comes and
goes one thing that didn’t change a
couple weeks ago is the pillow pillow X
please subscribe to value tainment the
best channel on the internet for
entrepreneurial content and until next
time I’m Thomas Wirth and I hope I left
you better than I found you
you [Music]
studies with the biz doc this week it’s
Toys R Us one of my favorite case
studies that I’ve researched in a while
it’s a story about a brick-and-mortar
company nor its old-school physical
company that didn’t adapt to the future
and consequently just this week filed
the bankruptcy they’re probably going to
live through it at least for a little
while but times are not good so let’s go
take a look that the history of it and
some things that we can learn about
strategy and adaptation in a changing
world Toys R Us was founded in
Washington DC way back in 1923 there was
some name changes and they really took
off in 1948 that was right when the baby
boom happened everybody came home from
World War two families were established
Barbie Mattel a lot of things going on
in that baby boom and from 48 to 64 you
had 20 years of baby boom there but from
48 to 98 when the fun really started at
Toys R Us and things were changing this
they were a category killer let me tell
you what a category killer is category
killer is somebody who generally has
more than 50% market share and when it
came to the retail toy store to go buy
stuff for your kids and in games and
things like that they were the category
killer they had over 50% of the retail
market share by certain reports and they
were everything you’re gonna go you went
to Toys R Us and they were this big and
there were small toys stores like FAO
Schwarz which figures into this story
and KB Toys and hobby shops things but
Toys R Us was the category killer all
paths went to Toys R Us when companies
like Mattel were inventing and bringing
out new games and toys and that 50 years
was really the Golden Age of Toys R Us
and it all changed in 1998 in 1998 you
know you there’s a lot of things that
are going on around that time Amazon was
founded in 94 would go public in 97 the
Netscape IPO and if you remember the
Netscape IPO is a very big deal because
it was a browser that could be adapted
and used
there’s a lot of things that change when
the browser came to the internet and you
just didn’t enter direct addresses
suddenly you were in a process where the
browser and things could do things for
you offer security offer commerce a lot
of things were happening and that was
here in 1999 they an attempt to ship
things and get things done Toys R Us had
the Christmas from hell it was a
disaster as a public relations disaster
it was a customer disaster they failed
to deliver a ton of toys in time for the
holidays the systems the processes it
was a fumble of just gargantuan
proportions so what did they do
mmm they have a new CEO in the year 2000
and they enter his name was John Ayler
and he had come from fao schwarz well
you know what no offense but in a
changing marketplace I think that was a
strategic error they said let’s hire a
new CEO hey here’s one at a toy store
they should have been thinking about
commerce maybe even a little bit of
e-commerce we can’t be real negative on
Toys R Us at that time for not thinking
too much about e-commerce because
e-commerce was still a baby we were
still going to the malls malls were
still booming but there was still some
things that were changing and new skills
need to be brought in the automobile
industry had learned that painful lesson
during the Japan shift after the oil
crisis of 1976 hey Americans want better
cars with higher quality they get better
gas mileage and so they brought in
talent that wasn’t there before and
nurtured their own new talent to adapt
and go forward this was an opportunity
lost they brought somebody in that was
in a toy industry retail mindset they
didn’t bring new thought to the table
nonetheless John Tyler shows up in year
2000 from FAO Schwartz and here we go
they in an effort to find a remedy to
this they look to Amazon and committed
what now in retrospect was an
unthinkable sin a 10-year deal to be the
exclusive provider of toys to Amazon in
other words Amazon won’t go to Mattel
Amazon
go to other areas Amazon has the
exclusive online source would be Toys R
Us to Amazon so Amazon is in this
ten-year deal well this thing lasted
about three and a half four years and
Amazon came back and said look you don’t
have the biggest selection you don’t
have some popular things and it’s
annoying to me I want to sell that too
and what was happening is think about it
from an internet standpoint Amazon shelf
space is infinite from Toys R Us it’s
only as much as you can get into a store
even if it’s a very very big store
nonetheless this thing got sour and they
ended up in court I’m gonna jump forward
a little bit
in 2006 Toys R Us would actually win the
court case that they sued Amazon for
reneging on this exclusive deal in
Amazon was letting other small vendors
and independent vendors sell toys online
well now Toys R Us wins that suit no.6
but they didn’t get paid 209 and they
were paid 51 million dollars wait a
minute you’ve got a multi-billion dollar
business here your online retail partner
you know you do a 10-year deal with and
then the thing falls out of love you end
up in court and you only collect 51
million dollars on it I’ll tell you
there’s one word for that it’s damn you
blew it
you also let the Fox in the henhouse and
you taught Amazon the toy industry and
they also are building e-commerce better
and better so in O five also about the
time they win the suit they buy FAO ox
leaves o six excuse me o six they buy
fao schwarz so the toy guy on the
retailer trying to meet growth targets
and do things like that says I’ve got an
idea
let’s buy FAO Schwarz well at the same
time in there about this is going on and
there are disputes in the story of whose
idea it was but nonetheless in oh five
when Eiler left this idea was apparently
on the table what also happened there is
a LBO
an LBO is a leveraged buyout and it just
means that you bought somebody using
leverage or debt lots of it 6.6 billion
a collection of LBO companies such as
KKR Bain legendary LBO specialists they
buy Toys R Us for six point six billion
dollars $26 and seventy four cents a
share that stands for all time high
stocks at an all-time high so they’re
buying at the peak and they paid six
point six but they only their down
payment 1.3 billion means they went out
and got five point three billion dollars
in debt and apparently they felt that
despite the lawsuit with Amazon which
they certainly knew about despite what
was all the frenzy that was going on
that they felt that there was really a
profitable company under here that they
can make a lot of money on because
leveraged buyout firms usually take
companies from the stock market pail out
of money for them and then generate the
profit out of them every year that’s
what an LBO strategy is hey you know
what that company could be run like an
ATM put good management in it I’ll buy
it and then it’ll keep kicking out
profits to me ding-ding-ding coming out
of an ATM that’s the theory behind
leveraged buyout and the profit I make
is this much the interest I pay on the
debt is this much so guess what I’m
making money even though I got all this
debt and I got to be paying off LBO well
here they go and they buy fao schwarz
and by the way there’s something else
right before all this happened
Toys R Us actually tried to build this
thing called kids R Us launched it in 83
it with twenty years and it dies very
quietly in oh three but it was an
indication underneath they saw
themselves as pure retail pure retail
and a brick-and-mortar and they were
adapting very slowly so they get bought
here and we move forward 2009 they
announced that they had six hundred
million dollars in online sales that’s
pretty good but
it’s nothing compared to what was
happening in e-commerce then a year
later it was 782 finally in 2011 they
actually crossed a billion dollars in
online sales a year later it was 1.1
billion which is only 10% more now I’m
sitting there looking at this saying
they were still opening stores and they
were still trying to grow online guess
what they were trying to live in two
worlds and neither was very successful
and there’s something that I
I look at very very carefully here that
I had experience with when I was at a
previous company that was a video it was
one of the first companies to bring
video to apps on mobile phones one of
the companies I called on was
blockbuster in Dallas Texas and I talked
the blockbuster about putting their
stuff on a mobile device and stream
through I said what kind of rights do
you have with the studio’s what kind of
ability you have to legally do that or
does the studio only want you to sell
physical media and they kind of push
back on me and say you don’t understand
data on a phone is so expensive the
carrier’s won’t do that and I said wait
a minute wait a minute I come from the
wireless carriers I understand this
transition and about that same time
there is a very funny quote from the CEO
of blockbuster Jim Keyes doing an
interview with The Motley Fool and he
said neither Redbox
or Netflix are even on the radar screen
in terms of competition it’s more
Walmart and Apple in other words people
competing for my sale of a DVD or rental
of a DVD and so they completely miss the
digital transition so my point here is
Toys R Us isn’t exactly alone here and
they go out after struggling they tried
a variety of techniques online is only
going so-so and in 2013 they announced
our toy stores will be open 24 hours on
this day in this day and some stores
were open 87 hours straight or something
like that
like over 2 and a half days straight and
to it I thought of
at that time I might wait a minute the
Internet is open 24 hours a day 365 days
a year and now you got to hire all these
people and do all this stuff and who’s
gonna get out of bed to go at 3:00 a.m.
the Toys R Us to buy the next Barbie for
their daughter
ok so keeping stores open that long
isn’t gonna work and then they hire
David Brandon as CEO he was the athletic
director at the time at the University
of Michigan and he had previously taken
Domino’s Pizza public so he had
experience going public so it looked
like that the LBO guys the bank’s Bain &
KKR are now thinking gosh maybe we need
to take this back public again on the
stock market because we’ll use all that
billions on the stock market to pay
ourselves back and to get a return on
our money so there was speculation they
were gonna do that but at the same time
there were news that they were losing
you know a hundred million dollars a
quarter or more and it’s like wait a
minute
you know Toys R Us is getting its butt
kicked by Amazon and you’re going out
here and you hire you know a guy whose
experience appears to be consumer retail
like Domino’s is food retail and he was
the athletic director at University of
Michigan and he announces which cracked
me up 2016 we’re not afraid of Amazon
you know they’re a formidable player and
they can change prices 88 times a day we
don’t live in fear of these guys we know
who we are and we’re good at it that’s
what he’s saying in 2016 in 2017 he
makes an announcement that hey we got to
make our big big investment in our
systems and revamping things and we are
gonna invest a hundred million dollars
to fix our e-commerce system wait a
minute a hundred million dollars to fix
an e-commerce system fix fix
Amazon’s had a ten year head start on
you from books to multi-product to
e-commerce and you’re just gonna put a
hundred million in Amazon spent in 2017
if I got this right five billion dollars
on Rd now there’s the echo the dot the
Kindle the fire fire TV a lot of things
in there but five billion dollars you
got to believe that a huge percent of
that is on their e-commerce system that
they continue to make better and better
and better and these guys are talking
about being 10 years behind and they’re
gonna invest a hundred million dollars
to fix it
man that’s worth another damn but I just
can’t bring the energy to do it because
I’m so stunned at the news they also sit
there back and announce you know FAO
Schwartz is closed so they bought that
company and within ten years of buying
it they closed it there’s a beautiful
premier store in New York FAO Schwartz
been there years and years don’t know
how you know apples got an apple store
down the street don’t know why you are
not able to keep that thing open in such
a prime location nonetheless they do
that and then he does another interview
and says this you know the web sites the
front door of our brand you know in its
60% of our customers visit our web site
before going to a store and in a year to
two years you know we have about that
much time to catch up on ten years of
innovation and that’s no small feat oh
my gosh
so here’s all this admission that the
stuff is is not going well and then you
come out now and they filed bankruptcy
so let’s step aside for a moment on that
you got the University of Michigan
athletic director who did have a
business background and took things
public is now saying a hundred million
dollars to fix e-commerce heck for a
hundred million dollars I don’t know
that you could recruit a University of
Michigan football team but if you want
to find out let’s get adidas on the
phone okay enough of that let’s get back
you’ve got just a tremendous amount of
of denial all coming to the searches so
the strategic issues that happened here
came home to roost here and now they
file bankruptcy and they’re asking the
court to help them break and restructure
all that debt and oh by the way they
need two billion more debt now there’s
probably a bank out there for the right
interest rate that’s willing to give
them the two billion in structure the
other where there’s money there’s always
a deal to be made
but it may be expensive money and right
now when we step back and look at this
what you have is a brick-and-mortar
company that went through the Golden Age
of retail and toys and they were the
category killer and what happened over
time is they unwittingly educated who
would be their biggest online competitor
they missed cues to bring additional
knowledge into the company and although
they got to a billion dollars in online
they weren’t continuing to invest
apparently and got to a point where they
felt that they were now 10 years behind
everybody despite a billion dollars in
online to wrap this is a case study
about strategy and adapting strategy is
not executing today it’s the plans on
how to best execute tomorrow adapting is
adapting responding to a changing
marketplace and you have to invest to
adapt and you have to bring in new
brains and the blood to adapt if you
don’t have visionary people on site
working for you on your team right now
they can do it and toys-r-us missed it
so from one side of history where they
were beloved and known and tremendous to
now you know a bankrupt multi-billion
dollars in debt getting crushed by
Amazon it’s just it’s sad to see that
but you know what we’ve seen it before
and we’ll see it again as the industries
change and things change stuff comes and
goes one thing that didn’t change a
couple weeks ago is the pillow pillow X
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you [Music]
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