Toys “R” Us hired two bankruptcy consultants to make them compete against each other

Play nice.
Play nice.
Image: Reuters/Melissa Fares
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After filing for bankruptcy last fall, Toys R Us plans to close a fifth of its US stores to make the business viable again. To guide the store closure process, the company has hired two teams of consultants, Hilco Global-Gordon Brothers and Tiger Capital Group-Great American Group. Their tasks include clearing out store merchandise, overseeing store-level employees and managers, and coming up with ways to transition customers to remaining stores and online shopping, so that Toys R Us doesn’t lose them.

The consultants are splitting the work geographically, but that’s not the real reason why Toys R Us hired two of them. That would be competition. In court documents filed Jan. 23, Toys R Us explains that it engaged the two groups of consultants, neither of which had significant experience in the toy retail space, to “foster competition” in the liquidation process.

“We believed it was important to foster competition between liquidation groups while capitalizing on the most up to date information on the company’s store liquidation performance and lessons learned by [Gordon Brothers] in the previous store closings,” Joseph Malfitano, an advisor to Toys R Us, states in a court declaration dated Jan. 23. He recommended that Hilco-Gordon Brothers be assigned 70% of the store closures, and Tiger-Great American the remaining 30%.

To further motivate the consultants, Toys R Us is linking their compensation to closing store sales. According to compensation terms disclosed in the Jan. 23 filings, consultants will earn a “base fee” worth 1.1% of gross proceeds from stuff sold in the closing stores during a specified time period. They also can earn an “incentive fee” worth up to 0.3% of gross proceeds and “based on overall performance.”