Toys ‘R’ Us Didn’t Have to Die
bloomberg.com
bloomberg.com
https://www.bloomberg.com/news/articles/2018-04-17/retail-st...
Couple of years ago, one of my friends bought a store at a strip mall. The store was making a loss. And the previously owners were an elderly couple. So my friends thesis was that they weren't exactly tuned into the digital presence business and it was still entirely possible to run a store in US.
Two years later footfall in the mall has decreased a lot. And in spite of the digital strategy etc my friend's store hasn't worked well. Now he is not only in debt but he is also trying to sell the store. But there are no buyers.
Disrupted? Try to fit a king foam mattress back in the box to meet return obligations when you don’t like it, before we touch on the counterfeit product issue from Amazon.
I’ve had great experiences with buying mattresses online. The secret is to have friends with a variety of mattresses so that their homes become your showroom.
https://en.wikipedia.org/wiki/Sweepstakes_parlor
and
https://www.usatoday.com/story/news/nation/2014/03/24/statel...
this is a big thing in north carolina areas.
It's basically nothing to do with internet cafes that you'd find (or have found) in Europe. These are just sweepstakes/gambling places that have the words "internet cafe" on the door.
Anecdotally, a guy at the gym I frequent is a commercial real estate broker of some sort, and according to him shopping plazas with CVS/Walgreens as headliners are selling at a discount to comparables, as the market figured out that if Amazon didn’t enter the pharmaceutical retail sector this year, they will next year.
> By one measure of consumerist plentitude—shopping center “gross leasable area”—the U.S. has 40 percent more shopping space per capita than Canada, five times more the the U.K., and 10 times more than Germany.
https://www.theatlantic.com/business/archive/2017/04/retail-...
Of my local situation, probably the explanation is because on a 30km radius there are not really any other shopping malls ( space being filled with cows on green pastures :) ).
(Context: Rewe is a German supermarket chain. There are about 5 nation-wide supermarket chains and 5 nation-wide discounter chains.)
Is it really worth the property owners keeping them empty?
Dropping the rents would prompt their remaining tenants to renegotiate their contracts.
As a buyer you need to watch for new tenants at attractive rates as well. Sometimes the seller signs a 5 or 10 year lease with a connected company to drive up the cap rate, then a few months after selling the tenant defaults. As the landlord your recourse is limited, slow and expensive.
Or are the "lenders" in this case actually retail investors who are buying into dodgy REITs and suchlike?
There's dozens of buildings like these either recently built or under construction in or near RTP.
Yes. It's a tax dodge. [1] [2]
The owners "...hold out for higher rents to increase the worth of their properties because value is based on future income stream...They can afford to forego current rental income, waiting for higher-paying tenants because they claim big business losses. Landlords get a tax loss from negative rental income when no rent comes in, which cushions their lack of cash flow."
There are also perverse incentives structured by the debt instruments securing these properties. [3]
There's some more miscellaneous reasons, like not wanting to hassle with renegotiations from existing tenants who hear about a lower psf/psm rent of a new tenant, not wanting to attract the "wrong" class of tenant, etc., but by and large, the money reasons talk loudest.
High real estate costs preventing affordable, energy-dense and hyper-efficient living and working for most of the world's population are imposing quite significant externalities around the world. Not really discussed much though, as it gores too many oxen. Saliently changing this status quo would require fundamental changes in how real estate and credit interact, and that's not going to happen without some real not metaphorical blood spilling.
[1] http://www.nydailynews.com/opinion/change-math-keeping-nyc-s...
[2] https://gizmodo.com/full-bank-accounts-empty-storefronts-the...
[3] https://commercialobserver.com/2016/09/soaring-retail-rents-...
Nothing guarantees the higher rent will come eventually
Also
"According to Plasky, landlords who wait for their ideal tenant are generally approached by small businesses but reject them because they want a national chain—like TD Bank, CVS or Starbucks—and a corporate guarantor... But this leads to a vicious cycle, into which the entire retail corridor is sucked.
When a retail corridor deteriorates because of its empty spaces, the first tenants to leave because of low foot traffic (and consequently fewer customers) are the mom-and-pop businesses. "
It seems this is another bubble that will burst.
People in real estate are pretty satisfied with the current global monetary configuration that guarantees asset appreciation of most real estate over long enough (decades) time spans, over positions spread geographically wide enough (tens of millions of square feet/meters). At large enough capitalization scales, real estate starts to behave like passive indexing when set within our current monetary and legislative backdrop.
The way credit and tax are structured around real estate is deeply entwined with how our civilization generally conceptualizes money and the act of exchanging. And the big realty interests (trusts, big brokers, etc.) are using the small players as human shields, what I call the "Grandma Shield" political strategy. Any move to configure the gears of globalization to also crush real estate pricing with competition like it has with supply chains puts up a storm of "think of G'ma's rental income receipts!!!111!!!". This gives them the emotional charge to gin up a lot of political support, and structure "way of life being threatened" political battles.
Globalization has shed blood. The grand hope of globalization was deeply intertwined national economies propel with enmeshed economic pressures an evolution to Western liberal progressive postures and increased global harmony. There are today gaps in that narrative; it remains to be seen if they are patchable or structural. Globalization is the overarching thematic fundament that lends legitimacy to sovereign interference in Syria, Iraq, Afghanistan, South China Sea, Crimea, Falkland Islands, etc., predicated on the current mainstream foreign policy conjecture that turned into the modern globalization effort starting around the WW1 era that non-interference and neutrality leads to even worse outcomes.
Deep structural changes in real estate (and finance more generally) would have to take place in some similar context as globalization, and historically conflict arising to the level of blood shed accompanies changes on such scales because the architects of such changes do not model conflicts into their projections. Like programmers that don't model debugging time into their project plans.
I personally think globalization is patchable, but only starts to make real progress again (we've done a lot so far, possibly stretching beyond our reach by now) by the time we start getting much better modeling of societies that makes today's Summit-based modeling look like a Tinker Toy. There's also the problem that we simply don't know how to model societies at a fine enough granularity to tell with a high degree of confidence (>99%) and consistency (>99%) how broad swathes of people will vote. Lenin thought central planning projection was possible, but it took until today's computer-driven supply chain management to even begin to realistically approach just a pale shade of semblance of his vision of how to perform economic projection, and only at the short-term, reactive micro-economic level at that.
[1] http://fortune.com/2016/01/26/rea-estate-global-economy/
That's just the apparently-not-so-well-known First Law of Tax: It is always better to have more money than less money.
For little people like you and me, taking rent is a simple income and forgoing it would be a simple loss. As you say, it wouldn't make any difference for our net taxes.
When you own thousands of square meters of [what will be] prime brownfield development space, leaving it unoccupied just hastens the local government to offer incentives for redevelopment. Tax, rates, planning, VAT. Even if they don't subscribe to broken window theory, an unoccupied building pays them no business rates or council tax (UK) so doing anything else is preferable to doing nothing. They'll bend over backwards to make that happen.
A job-seeker may pass on an offer that he considers too low (because he's confident he will find something better later), no one would say he's doing so to avoid paying income taxes.
The overall portfolio cash flows profit, and capitalization is sufficient to ride out 10-20 year cycle minima on the minority of the portfolio sitting vacant until asset appreciation works in their favor again. These holdings are so large they overwhelm lay people's sense of what is feasible. This model only breaks down in "perfect storm" secular changes set within a dysfunctional government context like Detroit, and only then do you see true abandonment and not just vacancy.
To these holders, how these vacancies work is a feature, not a bug.
https://thetyee.ca/Solutions/2018/06/04/Tax-To-Solve-Housing...
This doesn't mean I want to toss out all economics, but some discerning skepticism about the descriptive (not to speak of predictive or prescriptive) modeling power of economics is in order, certainly at macro scales.
What to do about all this? I think a start was expressed by Iain A Banks in his The Culture storytelling universe, where he said "Money is a sign of poverty." My take on that is all capitalists should be striving to achieve a world where money is a historical artifact, because money is only used as a tool to advance science sufficiently to unlock post-scarcity material and cognitive abundance. In other words, capitalists should be working to progressively put themselves out of a job as capitalists, driving down the cost of every material good to the point it is cheaper to subsume it as a general utility everyone pays for than to leave it outside the Cosean boundary.
In practical, actionable terms today, I suspect this means forming inter-generational and intra-generational cooperatives as a defensive measure by the under-capitalized against predations (sometimes not even conscious or intentional) by the well-capitalized. That's a tough problem to solve.
I can definitely see a situation where the owner prefers to have some storefronts vacant rather than lowering the rents because they aren't sure lowering the rents would actually fill the storefronts and it might cause the other tenants to demand lower rents. Plus it might attract the wrong sort of business.
I've met people who sincerely believed making enough to enter another tax bracket would mean all their income would be taxed at that rate, not just income inside the range.
If you have 100 shops, and rent 11 at $10k a month, and the rest are empty, you get $110k a month
If you have 100 shops, and rent 60 at $2k a month, and 40 are empty, you get $120k a month
Now lets assume a 50% tax
In the first example you keep $55k In the second example you keep $60k
Great, go for the second.
But now if you make the empty shops a tax writeoff, you instead
first example, $110k income, $850k loss. No tax to pay, total income $110k with no tax (and a £750k loss to offset other income) second example, $120k income, $80k loss. Tax to pay on $40k which is $20k, so total net income $100k
This is assume that you can claim that unrealised rent as a loss. I believe there are ways of doing that (charity shops for example)
Do you have any examples please?
If they earn an extra £1, the marriage allowance vanishes, and they pay £11,449.54 in income tax and national insurance
That's a 23,822% tax rate on that pound.
You've also got the state where you have 7 kids (say you had 4 from a previous marriage and your partner had 3), and earn in the £50k-£60k range, where you attract a "High Income Child Benefit Tax Charge" which, combined with income and NI, works out to be 102% marginal rate, over a range of £10k.
As the OP said: "A wise colleague told me that until effective income tax rates reach 100 percent, a dollar of income is worth more than a dollar of deduction"
There are cases in the UK where that's demonstratably false. A dollar of income is actually worse than nothing. At the marriage threshold a pound of income is worth £-230. A pound of deduction is worth 33p.
A similar loophole was being used in the UK a few years back: https://www.bbc.co.uk/news/business-16692556
Edit: reading your link it seems unrelated to deductions on taxable income. It's about council taxes on businesses, which are lower for charities than for regular businesses or unoccupied stores. So it makes sense for the owner to let a charity use the space rent-free and pay their 20% of the tax instead of paying 100% of the tax for the empty property.
[1] Actually I may end up paying less taxes if my costs raise, because I will be making a lower profit. But that would result in lower after-tax profits, which is probably not the objective of the scheme.
I sold my company (had a legal battle with my partners which destroyed me emotionally and now I find it hard to trust others, naturally i am risk reverse now), and deployed excess capital in these vacant kept properties. I simply have no desire to earn extra income on them. I hope I'll make some amount on appraisal.
Secondly, not everyone is in the market for maximizing their gains. It would cost more of my time if I ran into a bad tenant who sued me (if partners i known for years couldn't resist, what makes a random one any different? No amount of rational explanation is going to change my belief. Once you are burned, you even start hating candles). I optimize for less risk and if it comes at zero return or slight loss, all good.
It’s clearly not worth renovating, but maybe the seasonal business brings in enough that it doesn’t need a tenant the rest of the year. But also, the store is huge and its layout is unwieldy for most types of retail.
What I don’t understand as well is how many empty storefronts around here still have Radio Shack signs above the doors, even in what should be prime locations. I’ve started wondering if having been a Radio Shack is a curse of some sort.
I suspect it's a combination of factors that leads to this:
* Retail was heavily overbuilt leading up to the 2008 market crash, so even a decade later there's oversupply of retail real estate compared to demand for it
* The economics of brick-and-mortar retail haven't gotten much better, which further depresses demand
* There are probably uses for those properties as tools for tax arbitrage which are best served by keeping them empty (and in California, the fear of Proposition 13 reassessment being triggered by redeveloping the property)
So leaving it empty most of the year, with the seasonal rental, may be the best option for the owner of the property.
Housing demand in cities is much higher than the normal available space on the boundaries. Carving a big box into 300 apartments more than justifies a couple of years of doing nothing with the place.
It'd also ideally need a ton of parking though which brings a hard compromise between making a nice walkable pleasant park area and having enough parking that your reinvigorated area doesn't become too congested. On top of that most malls are way too large even for that, it'd be hard to build out enough shops to make the mall not feel super empty.
The developers tore down the existing structures and built from scratch. They didn't build around an existing mall (although there is an another mall across the street).
was it built during the rush thereby incurring high land and building costs?
do they have good clients? good are grocery stores, popular chain restaurants, and such. bad are "I want to run my own coffee, cupcake, and such, stores.
So if they ended up with the less than favorable clients in order to get storefronts it does tend to lead to vacancies. that is always compounded by not having the big draw, I love grocery.
There are 2-3 abandoned moderate sized retail buildings in a suburb I pass on my way into work that have sat vacant for the better part of a decade with a big "for sale" sign out front.
On the odd times I look up the listing price, they want high hundred thousands to low million. Keep in mind this is for buildings and land that have not been maintained for years now.
Without a massive surge in pricing, they are already vacant maintained spaces that will capture most interest before that vacant tear-down gets bought.
Even when the value of something has fallen (as measured by market comparables, ability to generate incomes like rent, etc) people become anchored to a valuation and think they'll get the price they want if they just hold out a little longer. There's something psychologically difficult about accepting that you aren't going to get the price you want for something; it requires an act of "letting go" that can be hard.
You see this all over the subprime crisis, banks had tons of toxic debt but didn't want to "book" their losses by selling at whatever the fair-market price was that day.
I'm reminded of that old saying from finance, "The market can stay irrational longer than you can stay solvent."
I'm talking about rationally assessing that the value of an asset has fallen, vs. sunk cost's "we've come this far..." - even if you're rational, it can be hard to sell and psychologically tolerate taking such a huge loss.
https://www.statista.com/chart/9454/retail-space-per-1000-pe...
https://qz.com/1032723/theres-much-more-empty-retail-space-i...
https://www.theatlantic.com/business/archive/2017/04/retail-...
If there's a retail store within a mile of our house, I'll happily walk to it and do my shopping there. Especially when it's a pleasant day outside, that's an enjoyable way to get out of the house and get a little light exercise.
If the only kind of store left that sells what I need is one of the big box stores, so that going there means having to get in the car and deal with traffic and haul myself halfway across town and, seriously, ugh, that is enough of a chore that I'm already feeling vaguely annoyed just thinking about it. No thanks; I'll happily order online.
And I would rather starve in the woods than drive all the way out to the nearest shopping mall.
None of these are stores I'd want to browse.
The alternative is the mall, which is all brand stores. Basically one big ad space. Shopping there is like running IE with 100 toolbars!
Same issue with some of the big box stores now. All are restructuring to be brand specific. Best Buy? Separated by Brand now. Want to buy a headset? Get ready to go to 6 different places and only see the the brands that paid to be there (just like with Facebook, we're the product, not the customer).
Toys'R'Us did the same thing before its death. It separated by brand. Which wasn't as bad in a toy store. I can see going shopping for Lego or Barbie more likely than going shopping for Corsair or Logitech. But it still feels based on who paid to get the space rather than making it easier for the customer.
I'm in NY, Long Island specifically and they all get converted to Senior or Luxury apartments that cost way more than the average person can afford. But that's getting a bit off topic.
But it would be interesting to have some of those big places converted into cheap apartments. It's like you'd be getting a discount for having ads on your place of residence.
Today, to put it bluntly, the stores skew heavily toward women-oriented products (clothing, accessories, underwear). Which is fine, and probably inevitable (clothing and whatnot are the kinds of things people prefer not to buy online). But there isn't of as much interest or utility for anyone else.
Did your friends have extensive experience running such a business?
Makes sense?
I used to go to the Times Square location with people who came in from out of town, as an attraction for when they inevitably wanted to check out Times Square. The article doesn't really do justice to what a spectacle it was (which is saying something, since the article calls it out repeatedly). The person-sized Lego Hulk they built for that store is still my phone background.
Made this even more shocking to read, since it was always packed:
> In late 2001, Eyler oversaw the opening of a flagship store in New York’s Times Square, with a 60-foot Ferris wheel, a life-size Tyrannosaurus rex, and a Barbie dollhouse bigger than many Manhattan apartments. Eyler promised that 20 million people a year would visit, and maybe they did, but the store never made money.
Of course, thinking back on it, I went several times but rarely bought anything from the store.
Maybe that's the (21st century) story of Toys "R" Us, summarized into a sentence.
I feel sad thinking that my son will never experience that joy of going to these huge Toy stores. At best, his experience will be limited to the kids section at Target/Walmart (if they are still around by the time he is old enough to visit them).
Not only do most people shop online now, most toys are also online. I imagine most parents put money into TV shows, video games, iPhone apps, etc.
Was it moving more effectively into online sales? Or alternate business lines altogether?
Normal intuition would say that maybe the company could enter bankruptcy, wipe out that debt, turn the bond holders into the new owners, have the owners issue stock for a debt free company and sell the stock to pay off a fraction of the money they owed. That would seem like a rational approach that would maximize utility for at least owners and employees.
The problem apparently was that bargaining and brinksmanship destroyed the company before such a result could be considered.
Toy stores can be a destination. Provide a compelling experience for parents and kids alike. It's easy to imagine a space where kids get to play with toys hands-on, and parents get to judge for themselves whether they think they're appropriate in terms of fun and quality—something you can't do online.
Make the adult experience a mixture of café and Apple store, and give the kids a safe "penned in" experience like IKEA does in their kids' section. Parents will enjoy the respite, and kids will beg to go. And of course, once they get there, they'll cajole their parents to spend more money. Never underestimate the power of a child in a store.
IKEA has nailed the brick & mortar experience, even though most of their products could easily be purchased online. Toys 'R' Us merely had to abandon their hubris and old thinking, and they could have killed it.
Instead, they languished with a chain of dirty, disorganized, depressing stores, ill-treated and unmotivated employees, and no vision.
They didn't have to die, but their leadership and strategy did.
If people were invited to come play with toys, they'd just do it for free, enjoy the day, and buy it online after. Your other ideas just seem like... free babysitting? It's not like parents are going to shop for toys while their kids are babysat for free.
I agree the stores aren't great now... but they were working with insane debt and a dying business model.
I don't think it's impossible to sell toys (see: Disney), but it's really hard to do it when you're trying to pivot something like Toys 'R Us with no money to spend and nowhere to really go.
+ There aren't many kids anymore.
My son, now 8, has been hot and cold with toys. I think he'd rather just run around with the neighborhood kids and engage in mock battles with makeshift swords and such. He liked my old Star Wars toys for awhile, and we even bought a few new ones to add to that stuff, but lately those things are sitting in a big bin in the basement. He was/is a Lego nut and has tons of Lego sets in his room and I am hoping he doesn't totally lose interest in building the sets and making up his own. If he loses interest I'll have about a zillion Lego sets to sell on CL.
It saddens me that kids aren't kids very long because I enjoy playing with him but my free time is so tight and I am often so harried that it is hard to just say "I'm going to dig through these bins and find parts so we can rebuild this set together." He'll be leaving for college one day and I'll have these huge regrets! My son's other big obsession is Nerf guns--those have been an enduring pastime for him, but one can only buy so many Nerf guns before saturation is reached as they are often huge and bulky items that don't store well. Still, much fun, especially in the dark winter months.
The only other toys that had any lasting impact for my kids were the expensive wooden Thomas trains when they were 3-4 years old. I guess my son liked Hot Wheels for awhile and we still have a large parking garage thing in our family room that probably is getting dusty right now. That thing comes out when the slightly younger neighbor kids come over.
I felt like last Christmas was really expensive and yet we didn't really buy them much of anything really good and I told my wife I'm not doing that again just to have the appearance of a lot of gifts. If they aren't going to play with stuff, they aren't getting it because our house is too full of unused junk as it is. I'd rather take a trip to Disney or maybe skiing.
Thanks~
A lot of third party IKEA resellers on Amazon exist because of this (they basically run to the local IKEA to fulfill an order with better low volume shipping options).
They don't, at least in the UK. You pay a variable charge depending on what is shipping.
Shipping rates are approximate and calculated by weight/volume & retail value of the order.
https://www.ikea.com/us/en/store/homeshopping/shipping_calcu...
Maybe it's changed, or that info is wrong.
The main factor is that we live in city centre and don't own cars, so 40 euro (or whatever it is) for shipping compares favourably to getting a taxi or a short-term car hire like car2go, gocar, etc.
TBH I even like visiting Ikea sometimes but ordering online solves the whole "this is going to chew up a whole Sunday afternoon" problem too.
The underlying price of the real estate to the revenue brought in by a toys-based sales funnel simply makes these locations untenable to flog products that can be sourced online for cheaper. You need a hell of a lot of sales volume to keep up, and online took away enough volume to starve these models.
The parenting culture is also wise to the models that are built around "hook 'em young and get them to insist on instant gratification". Look inside parenting forums and you'll see a shift in shopping habits, where toy stores are deliberately and consciously avoided precisely because parents are annoyed at the effects.
Personally, I'd rather see more parents teaching children through involvement in daily activities than throwing more toys (including computer and video time) at their children. We're "over-toyed", over-retailed, and "under-practicum'd".
This. I have a few kids of my own and make a point to never go with them to toy stores - they go crazy from looking at all the possible options and end up being unhappy because no matter what we end up buying, there is a gazillion things we ended up not getting.
Much better to get ideas from wherever (window shopping, other kids, forums, etc) and buy online - free no hassle / screaming delivery.
Even if you end up getting not the "perfect" toy they would have picked, it's a superior shopping experience for the adult.
The kids now play with the boxes, turns out they didn't even need the toys.
I’m not sure to what degree you can focus on elaborate experiences for stores that are in every shopping mall.
It was the private equity investors who loaded it up with debt in order to cash out who doomed it.
You don't have a hope in hell of adjusting to market changes when your funds are tied up paying off the loans your owners made you take on in order to fund their takeover.
Toy aisles and toy stores are frequently populated by exhausted parents standing around while their children entertain themselves checking out the toys. The kids are happy enough. The parents are content just to have a few minutes to themselves. Toy retailers typically try and dissuade this behavior.
Meanwhile indoor playgrounds/play centers are a huge and growing business. They are happy for parents to unleash their children while they make their money from entry charges, selling cups of coffee to the parents and snacks for the kids.
Despite having a huge inventory of toys play centers never actually sell toys that I have seen. Tearful children have to leave their new favorite ride on racing car (or whatever) behind when they leave.
People are terrible calculating sunk cost, and I'm pretty sure that the pre-paid $15 admission credit makes a $29 toy look like a "steal", even if you could buy it on Amazon for $24. In fact, I'll bet most parents would be hard-pressed to leave the experience without buying something for every child.
There's a mom and pop place like this near me. They rented an old dead big box store (I remember shopping there when it was a Circuit City) and filled it with bounce houses and arcade games.
They charge $10/kid admission. Adults are not allowed in the bounce houses, and they've got an area set up with tables and free WiFi for the parents. They'll charge you $3.79 for a soda, so overpriced for sure but not quite movie theater or ballpark pricing.
My son begged to have his birthday party there this year. The parties have to be the big revenue driver, as it was $300 for twelve kids' worth of Domino's Pizza and use of a party room for an hour.
That business model appeared not to work in the 90s, because they all closed down, I wonder why. Unsustainable business model? Good business model but taking on too much debt? Kids get bored after a couple visits and don't come back? Rising rents? Admission prices too high?
Around me there was a Discovery Zone and there was two more independent ones that opened up around the same time as Discovery Zone and closed a little after too. From what I could gather, seems like the business model just didn't work, at least not at the time.
For those of you outside the US or too young to remember: https://youtu.be/33QpqR-fN0c
The DZ locations, at least where I lived, were in prime spots, and it was a time when they couldn't build strip malls fast enough to keep up with demand.
Now you've got an oversupply of dead big box stores and not enough ideas of what to do with them.
Like corporate bookstores, theater chains, music stores you got the same selection at all their million outlets in the country.
Perhaps it's just me that was tired of the same-ol' same ol' or maybe the public became tired of it as well.
The owners knew it and sold while it was still possible to sell. The buyers gambled that they could cut costs fast enough to compete, but they lost the bet.
If someone thinks they can figure out how to make a workable business out of big box toy stores, it sounds like the name is for sale.
I have no idea if that will translate into American urban culture; I can see cases made for Millennials and post-Millennials embracing this model and rejecting it. I don't see it happening in the suburbs, much less exurbs. For this business model to work at scale, it would have to be embraced ubiquitously, but I'm not convinced there is a lot of space left to scale into after Starbucks got there first in so many locations.
1. A PE firm uses a combination of other people's money (limited partners a.k.a investors) and debt to buy a company.
2. The PE transfers the debt to the company's books. This way, if the company goes bankrupt the PE fund isn't liable for that debt.
3. The PE firm charges millions of dollars in fees for providing management services. This way the PE firm makes money regardless what happens to the business.
Toys R Us was profitable before it was bought and saddled with debt that was essentially used to purchase it's own business.
“In 2004, after years of flat sales and falling profits, the Toys R Us board of directors put the company up for sale” [1]. Then, over “the next five years, sales at Amazon quadrupled to $34 billion”.
Toys ‘R’ Us was bought as meagre profits fell and right before Amazon went for them. Blaming this outcome on the debt load is inaccurate.
[1] https://www.google.com/amp/s/www.marketplace.org/amp/2018/03...
> To compete, Toys R Us would have had to invest significantly in its website and stores. But the retailer was using most of its available cash to pay back its debt.
Yes, profits were falling crazily, but the company was still profitable. Without the debt load, they could've spent some time losing money while they pivot to a new business strategy. The debt load really prevented them from trying anything except surviving as long as they could.
There is zero evidence, in the history of Toys 'R' Us or their failed competitors, that another strategy would have worked. More likely? It would have limped along until the next recession. In any case, I see no reason to blame capital structure when a simpler explanation abounds: Amazon taught people to buy toys online.
Also a similar "technique" (LBO to be exact) was used to break down a giant company into smaller companies, effectively shutting down monopolies at the expense of a small number of workers, often making big gain for investors. With the failure of RBR Nabisco LBO, investors think twice about this kind of venture nowaday. If Toys'R US failure could cost the investors a bulk of money, maybe this won't happen anymore with big business like this.
Anyway, if you take part of venture like this, you better be the law firm or the executives, especially if your target is a big company.
But in a truly free market, I think there should be no protection against bankruptcy. I mean, the government is protecting the PE firm from creditors.
here's one of many play by plays out there of what Bain capital has been doing for years: https://youtu.be/NS3s0xDL8A8
In general, if a business is clearly profitable it should continue no matter how thoroughly you screw up the capital structure: the worst case is a bankruptcy in which the shareholders get nothing, the debt holders get very little, and a new capital structure gets created. When this doesn't happen, it's because the business is worthless or nearly so.
I disagree that profitable businesses can continue no matter the capital structure. You're assuming that there's a liquid market for businesses, or parts of them. For a huge retailer that's almost certainly not true. Additionally, the current owners have to actually want the business to continue. I would believe there's more value to a short-term owner in liquidating assets than accruing profits over a relatively short timeframe.
[1] https://www.thestar.com/business/2018/06/01/fairfax-complete...
And it made me feel profoundly sad that that experience will be gone forever soon. Soon, it'll just be the top brand names that anyone will have ever heard of and the random weird stuff will all be gone. I'm talking about the toys that you had growing up that you never knew what they were called but you had because your parents passed by it at random and went "ooh, that looks interesting, I bet [kid's name] will like this".
Another thing is knowing the quality of stuff you are getting. Of course, plenty of cheap crap gets sold at Toys-R-Us and elsewhere, but some of the stuff on Amazon is in a league of its own in terms of poor quality and I suspect it will continue to get worse.
We're definitely seeing a resurgence to simplicity after advertisers had performed scorched-earth on frontal cortex lobes.
True for a relative handful of the most popular toys, but Target doesn't have the floorspace dedicated to toys to cover any but a small fraction of what a Toys R Us would carry. Last time I was in a Toys R Us, the section dedicated to play houses was, no kidding, the size of an entire Target toy section. Target might stock one item in that category in store (though I don't think I've ever seen one in a Target).
It's Amazon and friends, not brick and mortar stores with smaller but discounted toy sections that killed the advantage of having floor space and variety in stock to browse, since people would use the store for discovery and then order from a discount online channel that didn't have the overhead of brick and mortar showrooms.
>Instant
>Helpful employees
Prices didnt matter if I showed up to the store, but it should be cheaper than shipping to your home. Employees should be knowledgeable and helpful.
Instead most stores have the exact products or fewer online, higher prices, and an empty store.
For example, let kids drive power wheels around a track. Have playscapes that they can play on and buy. And sample toys that kids can play with.
However, even with Apple and the Apple Store there for all to see, few retailers still seem to get this. Without the hands on element, they are really fighting a losing battle vs ecommerce.
Everyone always has the same ideas when retailer struggles come up, and a lot of the ideas would undoubtedly make many stores more pleasant to visit. But people still buy based on cost, and that makes it hard to compete with a company who has a much lower cost model than a physical retail store and has much larger scale.
I don't think retailers will stop the bleeding and start implementing some of these ideas until they can figure out how to solve the showrooming problem. They may never do so, and physical retail in most categories will be a distant memory for most of us.
A lot of retail debt will be renegotiated in 2019 as underlying interest rates are increasing, so the pace of these might be set to increase dramatically as delaying reckonings like TRU did becomes steadily more costly.[1]
The article points out that the collapse of this one big name was pretty expensive to lenders, even if lawyers made some money during the unraveling.
I'm curious about the prospects for another financial crisis. How many billion dollar losses happening all at the same time are we looking at? How many can retail financing divisions endure without undermining the stability of larger banks?
It's not my main area of expertise, so I genuinely don't know if there's a serious contagion risk, but Google alerts for retail apocalypse have been a fun ride.
* Food - restaurants, fast food, pizza, takeout
* Social experiences - bars, cafes, arcades, comedy clubs
* Things that can't be shipped - gas stations, perishables
* Things you want right away - milk, delis, convenience stores
* Things that can't be commoditized - Copying keys
* Services - Barber shops, mechanics
Other ideas?
things you want right away - Prime Now, 2 hr delivery in select markets
services - Amazon has an entire section of services, from auto detailing to household cleaning
https://www.trybooster.com/ https://filld.com/ http://www.startyoshi.com/ https://www.gasrevolution.net/ http://www.fuelmeapp.com/
All of which could be served better by Amazon or for video games by GameStop - a store with a much smaller footprint.
Even when I was growing up in the 80s by nine, I remember most kids being interested in video games, bikes and sports equipment. All of which were available at Walmart either at the same price or cheaper.
With video game downloads becoming more popular, I don’t see how GameStop is going to survive after this round of the console generation.
Toys 'R' Us felt like it wanted to be part of the toy experience with their whimsical logo, mascot, jingle and colourful in-store decoration.
Smyths on the other hand is just a toy warehouse. They forego the mascot, jingle and colorful stores instead focusing on making sure they always have what the children want. In other words Smyths knows that the toy is the experience, not the store.
* Tends to be reasonably priced (I've gotten things there the same or cheaper than Argos)
* Is a quick walk from my flat in city centre
Though so far I've only bought baby things there (pram, etc.) not actual toys.
Neither of which applied to any ToysRUs in cities I've lived in.
https://www.cntraveler.com/story/fao-schwarz-is-finally-comi...