The Lessons You Can Learn from the Collapse of Toys R Us
Updated: Feb 13
The history of business has many stories of companies that succeeded enormously and then collapsed. From Toys R Us to Compaq, these are the business failures that you can learn from.
In 2018, an institution collapsed.
Toys R Us had to close its doors as it struggled to meet the expectations of a modern market. In the fact of online shopping and huge competition, the store that brought joy to so many was no more.
It’s a sad tale for those who have happy memories of wandering the aisles of their local Toys R Us.
But it’s also by no means a unique story. Toys R Us is one of many huge businesses that have collapsed. The cancer of complacency takes hold and causes them to rot from the inside. By the time such businesses realise they have a problem, it’s already too late.
You can’t allow your business to get to that point!
That’s why it’s so important to learn lessons from the companies that came before. In this article, we’ll look at the reasons behind the collapse of several major businesses and what you can learn from them.
Toys R Us
Toys R Us started life as a simple baby furniture store back in 1948. Like so many mom and pop operations, it grew in popularity over time. By the 1980s, the chain was a behemoth in the retail market. And it became the go-to place for many a young child to find the latest toys of the day.
Its collapse in 2018 seemed to come out of nowhere. However, Toys R Us struggled for a long time before it had to give in. Way back in 2005, the company had to rely on a $7.5 billion leveraged buyout. That purchase came with a whole heaping of debt. And it’s the inability to repay that debt due to falling sales that ultimately killed off Toys R Us.
The Lesson – Change to Suit Your Market
It’s no coincidence that Toys R Us began to run into problems just as the concept of online shopping began to take off.
With internet connections came a level of convenience that retail stores simply can’t offer. And Toys R Us was just one of many that failed to adapt. Columbia University’s Graduate School of Business’ Director of Retail Studies, Mark Cohen, explains:
“Retailers today, especially in any kind of fashion or trend segment, have to progress. They have to morph, they have to modify. They have to represent the changes in the marketplace and their customers’ behaviour. Toys R Us has never been able to wrap their arms around the changes necessary, and this is the inevitable outcome.”
The lesson here is that no market ever remains static.
As new technologies emerge, the needs of your market will change. Your business has to keep pace with these changes to survive. Ideally, it will predict these changes and position itself to benefit from them in the long run.
What you cannot do is stick with the same old strategy in the vain hope that the market will adapt to you. Doing so is a sign of arrogance and complacency that will come back to bite you.
The late-1990s was an exciting time in the business world. The emergence of commercial internet connections gave companies a new avenue to appeal to customers. This period saw the creation of what we’d later refer to as the “Dot-Com Bubble”.
Hundreds of virtual companies sprang up out of nowhere in such a short period of time. And among them, Pets.com was one of the most famous. The company offered valuable resources, products, and information via its website. And it rose to the top of the growing online pet store market for a simple reason…
It was the first company to offer these types of services online.
Unfortunately, being first is not a guarantee that your company will succeed in the long term. Complacency can take hold if you coast on your reputation and allow competitors to surpass you.
That’s what happened with Pets.com. As its niche became saturated, the company did little to set itself apart. And when its range of common products became more widely available online, the company struggled.
In November 2000, just two years after its founding, Pets.com closed down.
The Lesson – Create a Unique Positioning Strategy (And Adapt It Where Needed)
Pets.com coasted on the novelty of its approach. It was the first company to offer pet services online. However, it did nothing to make those services stand out from the crowd. Consumers could buy everything that Pets.com offered at physical retailers. And as more competitors entered the online space, the novelty of “being first” wore off.
This teaches us that every business needs to have something that makes it unique.
For Pets.com, that something was the novelty of buying online. But its mistake was that it didn’t find a way to set itself apart when other companies started offering the same thing.
You need to figure out what makes you different from everybody else in your niche. It could be anything, from the types of services you offer through to the quality of your customer service. Make that unique thing the centre-point of your value offering. And most importantly, revisit what makes you unique regularly.
After all, others may copy you or start to do what you do better than you.
In the 1980s and 1990s, Tower Records was the place to get new music. The CD boom that happened in the 1990s led to an explosion of growth for the company. It opened retail outlets throughout the United States and constant growth was its motto.
That desire for growth is what ultimately consumed the company.
Tower Records took on enormous amounts of debt as it absorbed smaller businesses. It became a monolith that seemed too big to fail. But the weight of that debt, coupled with the emergence of MP3 technology, brought the giant to its knees
In 2006, Tower Records declared bankruptcy.
The Lesson – You’re Never Too Big to Fail
The management behind Tower Records simply didn’t consider the possibility of failure. We can see this in a 1994 interview with the company’s founder, Russ Solomon. Talking about the possibility of having music that could beam directly into the home, he said:
“As for the whole concept of beaming something into one's home, that may come along someday, that's for sure. But it will come along over a long period of time, and we'll be able to deal with it.”
Russ Solomon believed that the concept behind what would become MP3s would take decades to develop. And it would take longer to become the go-to method of listening to music.
It took less than ten years for the technology to prove Solomon wrong.
The lesson here is that no company is too big to fail. For all of its growth, Tower Records failed to adapt to what consumers wanted. It stuck with CDs and other physical media even as digital media grew more popular.
That inability, or refusal, to change led to its downfall.
Once upon a time, Compaq was a computing giant that rivalled the likes of Dell and IBM. In fact, it overtook IBM as the leading computer company in the 1990s. And it experienced one of the most meteoric growths of any start-up in history.
But the end of the 1990s also signalled the end of Compaq’s glory years. In 1998, the company bought DEC for $9.6 billion. The idea was to leverage the company to enter the enterprise computer services niche, thus eating even more into IBM’s profits.
It didn’t work out that way.
DEC came with a ton of expensive baggage that slowed Compaq’s growth down. In 2001, Dell overtook Compaq as the world’s leading PC retailer. In 2002, Compaq’s stock price fell to a quarter of what it was in 1998.
And it was in 2002 that HP bought the company.
Today, Compaq is little more than a trademark that HP occasionally trots out.
The Lesson - Growth Holds Dangers (Especially When Done Without Forethought)
Much like Tower Records, Compaq was a company that valued growth at all costs. So determined was it to dominate every niche of its market that it ultimately spread itself too thin.
The lesson here is not that expanding outside of your initial niche is a bad thing.
It’s that you must do so sustainably.
Compaq made a huge acquisition in DEC that it didn’t think through. That’s why it missed all of the baggage that played a role in sinking the company.
Do not allow complacency that comes from success to affect how you plan for growth. Measure every step that you take and consider all possibilities before making decisions.
Complacency Kills Businesses
Every business listed here was, at one time, one of the largest in the world. And yet, each ended up collapsing under the weight of its own success.
There are many reasons for the failure of each.
However, these reasons all find their roots in complacency. These companies failed because they became too confident. Their management thought the companies would last forever. And that thinking didn't change even as competitors overtook them and market needs evolved.
You cannot allow this to happen to your business.
My name is Hassan Younes and I almost allowed complacency to kill my own business. Today, I speak to entrepreneurs about the hidden dangers that lurk inside their companies. Please get in touch if you’d like me to attend your event.