The Toys R Us bankruptcy, along with the bankruptcy of its sister store Babies R Us and parallel bankruptcy proceeding in Canada for its Canadian subsidiary, shocked the market. Not so much because a store with a strong brick and mortar presence filed for bankruptcy, but because its sheer sales numbers were not enough to offset its debt obligation. The initial filing occurred in November. Since then, Toys R Us has been operating under the auspices of a Bankruptcy Judge while trying to reorganize. A few weeks ago, Toys R Us announced that it is liquidating and will be closing all 1600 stores worldwide. This will mean that 33,000 people will be out of a job.

Most likely, a new toy company will take its place that has more of an emphasis on online sales while keeping brick and mortar stores in the repertoire. Regarding the Toys R Us employees, being out of a job might signal a rash of bankruptcies.

Toys R Us

According to media reports, Toys R Us had $4.9 billion in debt at the time it filed its bankruptcy petition. It has many locations inside American shopping malls. Once iconic, particularly in the 70s, 80s, and 90s, American shopping malls are falling on hard times. Foot traffic at malls has decreased. Even for those who still go to the malls, they are comparing prices on their smart phones and are not as quick to buy as they were in years past. While the mall experience is still important, it does not bring in the dollars that it used to. Toys R Us suffered because of this reality.

Similarly, Black Friday, once a huge money maker for retailers, lost its luster. Consumers are able to find great deals online on Black Friday and consumers are used to staying home to shop. Toys R Us had significant business on Black Friday.

Toys R Us Employees

It is difficult to forecast bankruptcies in general and difficult to forecast how Toys R Us will factor into consumer bankruptcies. Some may argue that many Toys R Us employees are low-wage employees and will find work at similar, retail-based jobs. In large part, this is probably true. However, the Toys R Us bankruptcy represents a model that applies to many retailers: Brick and mortar needs to be curtailed.

Online sales generally require less manpower and less “customer service” that has been a hallmark of retailers over the past number of years. Retailers would hire sales associates and the like so customers would have minimal wait time and an overall better shopping experience. With the advent of online sales, it is understood that orders are not processed right away. Moreover, because much of online sales are automated, there is no reason to hire someone and pay that person a salary.

The industry reflects this. Gymboree, Sears, Sun Pacific, and Bon-Ton, to name a few, also filed for bankruptcy in 2017. The notion that other retailers will hire those who worked in retail may not be true. Employees of those retailers are or will be looking for jobs, as well.

Even retailers with strong brick and mortar bases, like Target and Walmart, have recently invested large sums of money into expanding their online shopping experience. Seemingly, those retailers are not seeking to expand their brick and mortar employee base.

In the meantime, those employees who lost or will be losing their jobs in the Toys R Us liquidation may want to get training for new skills, perhaps to work with an online retailer. Until they acquire those skills, what will they do?

Great Recession

The Great Recession of 2008-9 saw an explosion of corporate bankruptcies followed by an explosion of consumer bankruptcies. The current economic climate may track this, though for different reasons. The corporate bankruptcies of 10 years ago were due to an economic downturn triggered by bank failures, notably Bear Stearns and Lehman Brothers. It later led to auto bankruptcies and a rash of other corporate bankruptcies. The current economic climate, in contrast, is not experiencing a downturn; in fact, all economic indicators show strong economic activity. Instead, technology and related factors are driving the economy, leading traditional business models to extinction.

Despite the contrast, the similarities are strong in reference to the climate of large corporate bankruptcies. While these bankruptcies are not in the financial sector, they are applicable to large corporations. With the explosion of retailers restructuring, the question is whether the consumer will be the next wave of bankruptcies.

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