From an existential threat to retailers worldwide in the 1990’s to possibly the biggest victim of America’s retail malaise so far in 2017 – that’s what lies ahead of fallen idol, Toys ‘R’ Us this week.
It has over $US5 billion in debt and 1,600 stores in the US and worldwide, and with 42 in Australia the crash – it could come in the next day or so – will be a big one in Australia where the chain has racked up hundreds of millions of dollars in losses.
It will be felt especially in NSW where it has 16 outlets, Victoria (11 stores) and Queensland where there 6 stores. Hundreds of jobs will be at risk as a time when local retailing isn’t buoyant – as we saw the worse than expected sales and profit performance from Myer. Target, another department store (owned by Wesfarmers) is feeling the pinch.
It’s fate is a timely warning to all those experts telling us that Amazon is going to destroy retailing as we known it in the US, Australia and around the world. But there is an added reason – like the failed Dick Smith chain in Australia, if Toys ‘R’ Us goes broke, it will be a victim of the dead hand of private equity. (Dick Smith was floated on the ASX by private equity and quickly went broke after being stuck with too much stock and poor management).
In the case of Toys ‘R’ Us US private equity buyout firms KKR & Co LP and Bain Capital LP, together with real estate investment trust Vornado Realty Trust, took it private for $US6.6 billion in 2005.
And earlier this year another big US retailer owned by private capital – Payless Shoes – collapsed with up to $10 billion in liabilities. It was bought in 2012 by two San Francisco private equity groups, Golden Gate Capital and Blum Capital Partners.
As usual, these private equity sharks deal saddle the companies with high debt levels, take out dividends for the investors, charge fees to manage them and limited their ability to revamp its stores and make online shopping easier to meet the challenge from the likes of Amazon, Walmart and Target. Media reports say that was especially so in Toys ‘R’ Us.
A one stage in its life, Toys ‘R’ Us was considered a so-called ‘category killer’ (that’s a pre-internet and Amazon) media descriptor for a company that was going to ruin the sector it was aiming at, driving competitors out of business and dominating.
It was hailed and feared – it was part of the evolution of single sector focusing retailers rthat grew up in the 80’s and 90’s in the US (and were attempted to replicate in Australia, the UK, Japan and elsewhere.
So scared were Australian retailers that when Toys ‘R’ Us arrived in Australia in 1993, the Solomon Lew-dominated Coles Myer, established a stand alone business, World 4 Kids to take the invader head on – That eventually played a small part in the convulsions at Coles Myer that saw massive boardroom and management changes in the mid 1990’s as Lew lost control of the retailer.
According to a media report in 2015, so successful was the invader that by 2014-15 it had accumulated losses in Australia of more than $A450 million (http://www.smh.com.au/business/retail/toys-r-us-australia-accumulates-450m-in-losses-20150325-1m77hg.html)
And now Toys ‘R’ Us could very well go into bankruptcy protection (Chapter 11) in the US this week, burdened down with more than $US5 billion in debt, falling sales, shrinking margins and a shadow of the monster that threatened all and sundry in the late 80’s and early 90’s.
It vigorously protected its name, especially the use of the word ‘R’ in titles, suing rivals the world over (a bit like the way Apple does).
According to Reorg, a US group which tracks the collapses, it will be Number 27 when it happens (https://twitter.com/ReorgFirstDay/status/907402835964448768) (Number 26 happened last Thursday when Aerosoles, the women’s shoe company, filed for bankruptcy with up to $US500 million in debt. It was the second shoe group to collapse in 2017. earlier this year Payless fell over with an estimated $US10 billion in debt.
Aerosoles’ collapse was two days after another company, Vitamin World filed for Chapter 11 relief, making it the 25th retail chain with over $US10 million in liabilities to do so in 2017 (its were estimated at $US50 million in total). Reorg estimates that the 26 chains to have gone bust already this year have had total liabilities approaching $US50 billion.
