Economic Fallout Of Toys R Us Liquidation Goes Beyond Brand (2024)

A recurring theme in business and economic news these days is the story of what some see as the death of traditional brick and mortar retail. One high profile case was the recent announcement that 61-year-old brand Toys R Us would be closing shop for good, reports about which were in part fueled by understandable nostalgia.

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And while competition from relative newcomers and online-based disruptors of course were a factor in Toys R Us' demise, some media observers want to portray online competition as a villain rather than as mere competitive victor. Such is the case of Amazon's role in Toys R Us' downfall, where many cast knee-jerk blame on its private equity partners (while barely mentioning its creditors).

But this simplistic analysis masks true understanding about what the impact of the Toys R Us fall will be on a broader range of people and institutions, including small businesses, manufacturers, workers, and underserved communities.

Impact Isn't Just Financial

Slowly some analysts are providing interesting and important insights into and information about how and why America's most recognizable toy seller is no more — and what it means for the future of retail and the businesses and workers that make up and depend upon this important business sector.

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A recent Wall Street Journal piece, for example, shines some badly needed light on the Toys R Us liquidation, where a small group of hedge funds chose not to sell or save Toys R Us even before it finalized its reorganization plan.

Interestingly, Bloomberg notes that some private equity firms that invested huge sums of money into trying to salvage the iconic brand are "taking unprecedented steps toward supporting the company's former workers," while "the lenders that financed its bankruptcy — and ultimate liquidation — are making no such promises."

Misleading Suppliers

Retail Dive's exploration of Toys R Us' demise points to its distressed-debt creditors — who had a so-called "debtor-in-possession" agreement with Toys 'R' Us that effectively gave them control of the company — and the possibility that Toys R Us misled their suppliers. Prior to and during its bankruptcy, Toys R Us "kept ordering product that it knew, or certainly should have known, it might not fully pay for," because "by continuing to order product from suppliers," the company "increased the collateral available to pay secured claims and certain administrative claims."

Even after filing for bankruptcy, the company didn't just place orders, it "actively applied pressure and persuasion on suppliers."

Retail Dive quotes a bankruptcy law firm representative as saying such "overt requests to suppliers to bring in more product" would be "a breach of their fiduciary duty," and that the "next question you have to ask" is "are the lenders directing the debtor to make those purchase requests for the specific intent to bring that product in" and increase their value to said creditors in liquidation?

Toys R Us' suppliers would very much like to know.

Toys R Us 'Downstream Effects'

The repercussions will have a downstream effect, and will disproportionately impact underserved communities. For example, according to the Bureau of Labor Statistics, more than 17.1% of the total employed U.S. population is both Hispanic and works in retail, and nearly 16% of all manufacturing workers are Hispanic.

These effects may not stop with Toys R Us. In the near future, small businesses, manufacturers, and suppliers may end up highly skeptical of extending the kind of trade credit — supplying goods prior to payment — to distressed retailers that may need to reorganize while still operating to get back on their feet financially.

If more businesses in tough situations move right to liquidation, certainly that is negative for retail businesses, workers, and the overall economy. Absent the flexibility and safety provided by bankruptcy, more companies will go under and fewer entrepreneurs will take risks — and the retail and manufacturing sectors will face unneeded headwinds, and both create fewer and shed more jobs.

The death of Toys R Us was more than a passing emotional blow. The business world may feel the repercussions of its demise for a long time.

  • Lopez is president of the Hispanic Leadership Fund, an advocacy organization aimed at promoting liberty, opportunity and prosperity for all Americans.

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Economic Fallout Of Toys R Us Liquidation Goes Beyond Brand (2024)

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