TITLE: The Amazon Effect Did Not Put Toys "R" Us Out of Business. Here's Why
You are now tuned in to leonard innovation, where the focus is on entrerepreneurs who don’t come from wealth but have the potential to be great. The following is question I recently answered on a website called quora. And the question was... What caused Toys R Us to go out of business? Was it because Amazon offered discounts to its customers, or was there another reason for this?
One of the responses pointed to a lawsuit that took place around 2004 between the toymaker and Amazon. By the way, Toys R Us won that lawsuit. And while it may have been a contributing factor, it’s difficult to pinpoint a single reason. So, in this short episode, I am going to list several potential reasons for the company’s downfall. What can current or future small business owners learn from big business failures? A lot. I’m going to quickly show you how to look at these situations in a more sophisticated manner. And you will see how each point I make can be used to protect your business long term.
It should also be noted that Toys R Us, through its new owner, has recently made a comeback. But an important part of business is a state of constant or stable economic conditions. But here are seven factors to consider for the company’s sudden demise several years ago:
If consumers change their behavior over time, a business can suffer. In this case, there was a change in consumer behavior due to technology. For example, shopping at brick and mortar stores less often due to things like increased access to cell phones, better internet accessibility, affordability of mobile devices, and streamlined billing practices. So, around the time that Toys R Us started hemorrhaging, the internet, as it pertained to accessibility via mobile devices, kinda sucked. If you recall, you had to pay ambiguous roaming charges and they were limited to so many minutes, which meant your cell phone bill was never consistent. Establishments like restaurants offered access to their internet credentials if you patronized their business. So once this process was streamlined and less confusing, it was naturally going to change consumer behavior in a way because now you had more cell phone users, who were able to shop at work while they are bored… and companies that were better positioned for mobile shopping would have had an edge. Another example would be reading online reviews to influence purchase decisions versus going into a physical store to touch and test the product.
Any inability to pivot or adapt to changes in the market can wipe out a business.
The IRS technically doesn’t allow businesses to hoard cash. Excess profits are taxed annually. If businesses were allowed to do things like hoard cash or keep 100% of their tips, for example, the business survival rates would shoot up.
New market entrants or competition from stores that previously didn’t focus on toys.
Commercial leases. It’s easy to expand a business when things are good. But when things go south, sometimes you need a way to cancel your lease. But often, you are contractually obligated to fulfill the terms of the lease. If you can’t pay, it could mark the end of an era. Very difficult to significantly downsize a business.
Outdated marketing strategy. If they made toys like Tickle Me Elmo and certain video games exclusively available at Toys R Us stores, for maybe the first 2 to 4 weeks, it would have given them an edge over everyone competing in the toy space.
Inability to capitalize on inconsistent sales tax regulations for online purchases. Amazon benefited from unclear and ambiguous sales tax laws in several states.
Businesses need homeostasis. Any disruption can wreak havoc, leaving the business nowhere to go but down.