Toys 'R' Us is uncomfortably close to the incinerator like Woody and his Toy Story 3 pals. Can it find a rescuer?

The chain's US stores have had to seek Chapter 11 bankruptcy protection with debt doing as much as competition from the internet to batter the business

(Getty)

At it height, Toys ‘R’ Us was held up as the archetypal 'category killer'; a chain that had become so big and so powerful competitors didn’t stand a chance.

Both smaller toy shops, and larger multi product retailers, were all but forced out of the trade by the big dog. With an unbeatable range, and ads that swamped America’s Saturday morning TV schedules, it stood almost peerless, and took its model global.

Now the internet has killed off the category killer. At least that’s how the story has been playing out with the reeling company’s US stores filing for Chapter 11 bankruptcy.

The reality is a little more complex. It is true that the internet has made life tough for the business, like it has for virtually every bricks and mortar retailer.

But there's more to this grim Toy Story than simply shoppers' migration online.

Warehouse style retailers like Wal-Mart, with their aggressive pricing, have also hit the chain hard. But in fact, Toys ‘R’ Us lost its top spot to the former nearly two decades ago.

More recently it has become clear that modern kids prefer tablets to traditional toys (often to their parents’ dismay), a development that is hurting the entire industry, even the mighty Lego.

The market that Toys R’ Us once dominated has changed radically and the real problem faced by this particular business is that it lacks the financial flexibility to respond.

Toys R’ Us boasts a welter burden of debt, acquired through its $6.6bn (£4.9bn) leveraged buyout by a trio of private equity firms when it had started to struggle just over a decade ago.

Like Bob the Builder we can fix it, they declared. Outside of the Wall Street bubble, where the quarterly earnings statement rules all, the business can be re-engineered and re-launched and the kids, and more to the point, their parents will be back.

Unfortunately their tools proved to be rusty and the business is still seeking a solution.

Competition, from the internet and elsewhere, combined and the changing tastes of children delivered have cut into sales and margins. But it is that debt that has finally delivered the killer blow, a familiar story.

So what now? Toys ‘R’ Us is a category killer no longer, and it’s going to have to work very hard to persuade its suppliers to ship the goods it needs for the crucial Christmas shopping period on favourable terms.

In its favour is the fact that it still serves as a showroom for their goods, just about the only one still around, and is less inclined to demand the sort of discounts they have to accept for getting into Wal Mart. At a time when toy makers are under pressure themselves, they may feel it’s worth rolling the dice.

The company’s bosses need them to.

One upon a time Woody and his Toy Story pals got uncomfortably close to an incinerator (what, you mean you never saw TS3?), that is until the little green aliens and their claw came to the rescue.

But they’re not being sold any more, and the business that sold so many of them now desperately need to find someone to operate a crane for it.