Two Interesting examples of how the internet is destroying business both big and small are the Chapter 11 Petitions filed by Toys R Us and Kabbalah Taxi Inc. The provisions of the Automatic Stay of the Bankruptcy Code, 11 U.S. § 362 et. seq, will allow them prevent their creditors from proceeding while attempting to reorganize their business. But given the reason for the financial distress they are experiencing, their prospects do not appear bright.
The Toys R Us Bankruptcy, like that of many former retailing titans, was caused by the increasingly efficient markets the internet has created. Once such specialty superstores devastated mom and pop retailers which could neither afford the advertising nor stock the inventory which drove consumers to Toys R Us. The internet created the ultimate big box and one day delivery eliminated even last minute shoppers. Survival of Toys R U would have been difficult under any circumstances A leverage buyout which saddled it with debt made it impossible.
“Lousy in-store customer service, a second-rate website and prices that are often higher than at many of its big-box competitors. Add to that piles of mounting debt — much of it dating to a 2005 leveraged buyout — and it was clear, many said, that the 60-year-old brand was in trouble.” Washington Post, Sept 10, 2017.
Toys R Us will linger on in Chapter 11 but it is difficult to imagine that it will ultimately survive. Given its size, it is almost quite literally a dinosaur whose world has changed and who lacks the ability to adapt to a new environment.
Kabbalah Taxi Inc. which, on August 30, 2017, filed a voluntary petition for relief under Chapter 11 in the District of New Jersey is a very different story; however, it can be expected that it will have the same ending.
Kabbalah’s President is Evgeny A. Freidman, a man known as the Taxi King for the large fleet of New York City taxis he controls has been charged with the theft of funds he collected that were payable to the State of New York.
“ Friedman and a business partner stole over $5 million dollars that should have been paid to New York State. The authorities said the money was taken from a 50-cent state surcharge on taxi rides in the New York metropolitan area.”
But his alleged criminal activity is not the cause of the Chapter 11 filed by Kabbalah Taxi-it is the internet. The price of a NYC taxi medallion, which enables taxi drivers to pick up passengers while cruising the streets, rose for decades because their number has been virtually fixed since the 1930’s. Four years ago, their price exceeded one million dollars. Because of ride-share companies, such as Uber and Lyft, their price has collapsed and the loans which funded their purchase are in default. “A New York City taxi medallion sold for $241,000 last week — less than one-fifth of what the cab-ownership tags were going for just four years ago.”
Thus, a business which destroyed small mom and pop competitors and another which survived the Great Depression and then prospered for seven decades are disintegrating and will soon vanish because of the instantaneous access to information the internet makes possible.