Number
37
Toys “R” Us
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In the words of its long-time advertising jingle, it seemed as if everybody wanted to be a Toys “R” Us kid in the mid-1980s. Barely a half-dozen years after it had burst onto the scene, the New Jersey-based chain was operating 250 giant self-service toy stores around the country—the first of the singularly focused “category killer” big-box outlets now dominant in many retail categories—and was moving into dozens of new locations each year. It laid claim to one out of every five toy sales in the United States. It was expanding its franchise with Kids “R” Us clothing stores and one of the industry’s earliest forays in the computer business. Annual sales roared into the billions. No competitor even came close.
The heady period continued for about a decade, too, with new toy stores added outside the United States and additional clothing stores opened within it. Employees were enthused about the cutting-edge business approach and the stock options they received. The founder was a recognized star throughout the world of commerce and industry. And then, in 1994, he stepped down and the company immediately slid downhill.
His first two replacements proposed remedial measures, although none did the trick. They announced long-overdue makeovers in store layout and product mix, for example, but did not fully follow through on them. They also misjudged far-ranging changes in toy trends and children’s tastes, then made costly merchandising mistakes because of it. Their competition, from the largest discounter to the smallest boutique, zeroed in. Soon, the seemingly infallible firm lost its lead. In 1999, it even reported a net loss.
With nearly $12 billion in annual sales, of course, Toys “R” Us remains a formidable force in the business. It now operates about 1,150 toy stores—700 in the United States and the remainder in 27 other countries. It also runs more than 300 sites in its Kids “R” Us and newer Babies “R” Us units. There has been a leadership overhaul at its underachieving Web site, the launch of a 40-store educational toy division, and the appointment of a new chief executive with experience and vision. And in combination with the company’s heritage as a world-altering operation, such changes have observers bullish about its prospects for the first time in several years.
Charles Lazarus was just 25 when he opened his first baby furniture store in Washington, D.C. It was 1948, and Lazarus was one of the countless post-war entrepreneurs who saw dollar signs in the baby boom. When his customers asked for toys, he eagerly added them. By 1957, furniture was a sideline and toys were his primary business.
Lazarus watched and listened carefully as his customers grew and changed. He followed the business world closely as well. Most toys at the time were purchased from department stores, he knew, with supermarkets and drug stores also responsible for significant sales. But these retailers did nearly all their toy business in just the six weeks prior to Christmas, Lazarus learned. He suspected that there might be possibilities in a competing store dedicated solely to toys, which stocked an abundance of the most popular items and offered them at low prices year-round.
He was right. Discounting was new, specialty retailing was new, building a company that catered exclusively to a single generation was new—and together they built Lazarus a devoted following. Business was so good, in fact, he couldn’t expand fast enough. In 1967 he sold his dream company for $7.5 million plus a management position to a suitor who promised to take it further. The direction it went certainly was not what Lazarus envisioned, though, and he watched helplessly as his new partner sank quickly into bankruptcy.
Fortunately for Lazarus, he had never stopped looking and listening. He developed a new plan for the company, based upon information obtained by observing retailers in his and others fields, and it proved promising enough to convince creditors (and the court) to allow him the chance to resurrect it. In 1978 Toys “R” Us reemerged, reorganized, and ready for the future with a slew of even more advanced ideas.
Lazarus’ overriding strategy this time was ensuring that each store dominated its market. To create these so-called category killers, he refashioned the discount model pioneered by newfangled mass retailers such as Wal-Mart to fit his single product line. Such “big box” stores—which today include Home Depot in hardware, Circuit City in electronics, and Tower Records in music—combined sophisticated logistics systems and aggregate buying power to stock the most desirable items at the best possible prices. Lazarus also sought locations where rent would be low enough to permit huge free-standing buildings designed to function much like supermarkets. They would offer minimal service, be easily negotiable with self-service carts, and feature carefully placed impulse items along with stacks of the day’s most popular toys. Rock-bottom prices were affixed to the hottest items, while better-than-competitors’ prices were put on the other 18,000 the stores carried. Finally, remembering his roots, Lazarus added related products like infant formula and disposable diapers at or near cost, hoping to lure parents who might also buy from the higher-margin choices.
With this game plan, Toys “R” Us immediately clicked. Colorful shopping carts and aisle after aisle of floor-to-ceiling shelves crammed with Barbie dolls and baseball gloves propelled the shopper from the entryway to the checkout counter. And even if the visits were not necessarily pleasant, they were undeniably efficient. Parents would eagerly drive to the nearest Toys “R” Us location each Christmas because they knew its prices and selection meant virtually painless one-stop shopping. They’d also head there for a requested toy at other times, because they also knew these items were likely to be in stock—and discounted—no matter what the season.
Like Wal-Mart’s Sam Walton and a few other trailblazers, Lazarus also stayed in constant touch with activity across his growing chain. Monitoring sales by a desktop computer, he could quickly respond to changing trends as well as product availability across a network now comprised of 144 stores in 22 states. As annual sales hit $1 billion in 1983, he attempted to smooth out the company’s still-cyclical nature by opening the first of its Kids “R” Us clothing stores. He also tried to capitalize on the burgeoning home computer market by offering early models such as the Atari 400 and Commodore Vic 20. Despite their toy-like names, these systems sold for around $3,000 and did not catch on with shoppers who were more interested in Scrabble and teething toys. The failed entry into electronics turned out to be a rare misstep for Toys “R” Us during this golden period; it also left executives wary of the entire category, which would prove troublesome in years to come.
Toys “R” Us continued to enjoy unparalleled success as the 1980s wore on. In 1984, it launched its international operation with stores in Singapore and Canada. By consistently opening in 35 to 40 new sites across the United States each year, its domestic store total hit 225 in 1985. A few other warehouse-type competitors appeared, but Toys “R” Us remained the only national chain in the industry. Small niche-type stores tried luring away its customers, but couldn’t match its selection or prices. Toys “R” Us continued to lead because it had the largest, most efficient stores, the best distribution network, and a state-of-the-art inventory control system that sent sales records directly from cash registers to the computer that the wily Lazarus kept on his desk.
This combination helped the company boost sales by 185 percent, while overall toy retailing increased by just 37 percent. Its share of all toy sales accordingly rose from 5 percent to 20 percent. By 1989 it was recording more than $4.3 billion in sales from 404 stores, while its closest rival was doing $830 million in 174. It had 20,000-plus employees, which the company (again like Wal-Mart) called “associates” and offered profit-sharing and stock options. When it was named the eighth-largest discounter of any type in the nation, it was in the midst of planning new stores from New York’s Herald Square to Luxembourg, Australia, and Taiwan. According to Financial World magazine, Lazarus’ $73 million worth of Toys “R” Us shares, when added to his $4.2 million annual compensation, made him one of the richest executives in the country in 1987.
Despite this performance, Toys “R” Us couldn’t maintain its momentum once Lazarus stepped down in 1994 at the age of 69. Part of the reason was the less unified base of potential customers then seeking a more diverse variety of toys. Part of the reason was the company’s failure to recognize the increasing importance of electronic gadgets such as video games, which it initially ignored after its computer debacle. And part of the reason was a lack of ensuing leaders with vision—although Lazarus was admittedly a tough act to follow. But the biggest (and most ironic) blow came when general discounters overtook toy stores as the biggest players in the business. By the end of the 1990s, Wal-Mart was selling more toys than Toys “R” Us.
By most accounts, Toys “R” Us was completely unprepared for the 1999 Christmas season in cyberspace, hosting a clunky and confusing Web site. They missed shipping many orders on time, angering the few customers they had (which led to a costly effort to placate them with $100 gift certificates).
With the appointment of John H. Eyler Jr. as chief executive, however, things instantly began to change. Soon after the former chairman of rival F.A.O. Schwarz took over in 2000, for instance, Toys “R” Us began adding clothing and more exclusive products to its stores, generally broadening its selection, and actively working to ensure that top-sellers were always in stock. Store overhauls were also put on the agenda, as were plans to improve service. And in August, the company announced its co-branded e-commerce alliance with Amazon.com that would put Toys “R” Us into a positive electronic position before Eyler’s first Christmas season. With the alliance, Toys “R” Us’s electronic sales tripled during Christmas 2000. And the alliance was also cited as one of Amazon’s few true profit streams during the fourth quarter of 2000.
Stockholders responded positively to the news, boosting shares 75 percent. The key then became luring old Toys “R” Us kids back to the fold—this time, of course, to shop for their own children.