The closing down of Toys ‘R’ Us and Babies ‘R’ Us franchises in the United States and Europe due to billions of dollars in corporate debt will not affect the more than 40 stores in southern Africa. This is because the southern African stores do not belong to the same group and are in fact owned by a privately-owned South African enterprise that merely pays royalty to utilise the Toys ‘R’ Us and Babies ‘R’ Us brand names. The popular outlets are owned by the Amic Trading Group in South Africa.
“The international liquidation will not affect us because we are a separate franchise. If this was to affect us our directors would have informed us months ago,” said Nancy Lebereki, Manager of Toys ‘R’ Us at Grove Mall in Windhoek. The Windhoek store employs eight full-time staff and eight part-time staff members.
The Amic Trading Group issued a recent statement noting that despite the challenges faced internationally by Toys ‘R’ Us United States and United Kingdom, Toys ‘R’ Us southern Africa (including Zambia and Namibia) remains unaffected.
“Although these challenges will have ramifications on the global toy landscape, it must be clear that Toys ‘R’ Us and Babies ‘R’ Us South Africa is a privately-owned South African enterprise, which merely pays a royalty to utilise the Toys ‘R’ Us & Babies ‘R’ Us brand names and operates completely independently from its global counterparts, which includes and is not limited to operations such as products, customers services and staffing,” read the statement.
According to Nicole Annells, Marketing Manager Toys ‘R’ Us and Babies ‘R’ Us South Africa, the South African franchise has experienced phenomenal growth, having opened seven new stores in 2017.
“We have maintained our momentum. Our revenue growth is solid, and Toys ‘R’ Us and Babies ‘R’ Us continues in a clear path of strengthening our brand footprint throughout South Africa,” said Annells. She added that the brand is eagerly awaiting the upcoming launch of its refurbished flagship store in Canal Walk, Western Cape next month.
Toys ‘R’ Us International recently announced that it will be closing all its US and UK stores. While many observers would claim that Toys ‘R’ Us was made uncompetitive by e-commerce and online retailers such as Amazon, the primary cause of the company’s collapse should be traced back to its billions of dollars in corporate debt.
In 2005, Toys ‘R’ Us was purchased by a consortium of private equity companies in a leveraged buyout (LBO). In a leveraged buyout, a financier – in this case private equity companies – purchases a company using borrowed funds, or leverage, rather than the financier’s own assets. The LBO left Toys ‘R’ Us with US$5.3 billion of debt, secured through the company’s assets.
This brought the company’s total debt up to US$6.2 billion when accounting for the US$1 billion debt the company had previously accumulated. The interest rate of the LBO was around 7.25 percent, leaving Toys ‘R’ Us with annual interest payments of US$450 million, nearly double its annual net profit.
That debt, as has been the case with so many other retailers, is what kept Toys ‘R’ Us from being able to compete with the likes of Amazon. Instead of investing in opportunities to diverge from the traditional brick-and-mortar business model, Toys ‘R’ Us had to pay millions of dollars each year to service its debt.
In a recent interview Toys ‘R’ Us International’s CEO, David Brandon, stated that debt service obligations kept the business from reinvesting in itself. Toys ‘R’ Us had plans to unveil a subscription-based delivery service and cheaper expedited shipping options, however, both were unfeasible because of the massive cash outflow to pay off debt.