Toys 'R' Us Struggles For Survival

NY TIMES: No Playtime at Toy Chain on Its Road to Recovery
By MICHAEL BARBARO Published: November 19, 2006

LOCATED on the edge of a tired and dated strip mall here, Toys “R” Us store No. 6344 was built 14 years ago. There are weather-beaten wooden shingles over the entrance, unflattering fluorescent lights hovering above the aisles and pock-marked linoleum tiles on the floor.

But the floors are clean and shiny.

In one of his first moves at what is perhaps the best-known and most ubiquitous toy vendor in the country, the new chief executive of Toys “R” Us, Gerald L. Storch, ordered overnight cleaning crews to wax the floors of every store precisely twice as often as they did before he took over.

Mr. Storch, 50, marches briskly down the aisles, plucking toys from the shelves. “This is so cool, so cool,” he says, slipping his hand into the plastic display for a Blue Man Group Percussion Tube ($70) — a disc jockey system for 8-year-olds that, after weeks of intense deliberations, Toys “R” Us named as a top toy pick for the coming holiday season.

While Mr. Storch cast a vote during those meetings, he is clearly more comfortable crunching numbers and fine-tuning store operations than he is around toys. Discussing the future of the business in his office recently, he leapt out of his chair and enthusiastically began punching population projections into a computer spreadsheet.

As cold and detached as that may seem in an industry known for warm and fuzzy dolls, such analytical steeliness may be just the medicine that Toys “R” Us needs to survive.

Decades ago, Toys “R” Us was the very embodiment of the big-box retailer, and its huge stores redefined how toys were sold. Yet today, two of its stepchildren, the discount retailing giants Wal-Mart and Target, have pushed the company to the edge of a competitive cliff. Mr. Storch’s challenge is to reorient and resurrect Toys “R” Us before time runs out, a task that analysts say is not child’s play.

“The biggest problem, and I do not see a cure to this, is that the average consumer goes into Toys “R” Us once every nine months,” said Sean McGowan, a toy industry analyst at Wedbush Morgan Securities. “If they are not coming in the store more than once a year, there is only so much you can do.”

It is not only the future of Toys “R” Us that is at stake here. Major toy makers say that their profitability depends on its survival. If Toys “R” Us fails, everyone from industry conglomerates like Hasbro and Mattel to scrappy innovative upstarts like Wild Planet and Zizzle say they will be at the mercy of the penny-pinching merchants at Wal-Mart and Target.

“The reality,” said Neil B. Friedman, the president of Mattel Brands, “is that it’s not healthy for this industry to not have a healthy Toys ‘R’ Us.”

Founded in 1957, Toys “R” Us spent nearly 50 years assembling a three-pronged retailing empire — in toys, children’s clothes and baby supplies. But during the last decade it has tumbled from its perch as the No. 1 toy retailer in the country. It has also shut down its children’s clothing business and contemplated both a spinoff of its baby division and putting itself up for sale.

Last March, three private equity firms bought the retailer, then publicly traded, for nearly $7 billion, privatized it and then handed it over to Mr. Storch. As the former vice chairman of Target, where he oversaw the retailer’s supply chain, technology and financial services divisions, he was a surprise choice, given his lack of experience in the toy industry.

When Mr. Storch arrived at Toys “R” Us, he found an undisciplined company that he believed blamed others for its problems rather than facing its own mistakes. He also found a corporate culture wedded to impulsive strategic forays rather than hard data, a reactive business strategy that he believed would never allow Toys “R” Us to beat its competitors and reinvigorate employees who had given up on the toy industry.

“Toys ‘R’ Us had fallen into the pattern of being a follower, not a leader,” he said, before veering into vintage Target-speak. “Instead of buying product that is hot, we need to make products hot. We need to be like a fashion house.”

DURING the last several months, he has replaced more than half of his senior executives, begun testing a wide range of new store concepts and overhauled the company’s marketing efforts — with a decidedly Target approach.

For example, its newspaper circulars, the bread and butter of the chain’s advertising, now use thicker, glossier paper and kinetic images of children playing, rather than photographs of toys sitting idle on a table. Toys “R” Us is also using more engaging television advertising and more sophisticated marketing techniques intended to project an image as the biggest and best toy vendor.

Mr. Storch has also begun a campaign to restore the confidence of a work force badly shaken by its misfortunes. He calls his internal public relations effort “playing to win” — a slogan he has slapped on signs across the company’s headquarters, glued to employee ID badges and even adopted as the greeting on his personal cellphone.

He approaches his work force with the acuity of a headmaster, correcting employees’ grammar and taking them to task for missing meetings. He rejected the first draft of a recent internal newsletter when he noticed that a sentence ended in a preposition.

Such obsessiveness may bolster Mr. Storch’s plans to return Toys “R” Us, which has annual sales of $13 billion, into what it once was, a kingpin in the toy business. And he plans to do that by mimicking retailers like Best Buy and Home Depot that have thrived in their niches of electronics and home improvement — while plucking executives from both companies to make it happen.

Easier said than done, however. To pull it off, the company will have to juggle a number of balls: it must persuade manufacturers to provide it with even more exclusive toy lines, it must design more toys on its own and it must renovate or relocate hundreds of stores that unfortunately resemble No. 6344.

“In every segment of retail, there are dedicated specialty retailers that are succeeding against Wal-Mart and Target,” he said. “The model is out there. Best Buy is clearly thriving. Walgreen’s is the leader in pharmacy. Bed Bath & Beyond does very well in the home segment. What they all do is become the authority.”

Which, of course, is exactly what Toys “R” Us is not.

When the retailer revolutionized the toy industry, it borrowed a page from Kmart, the nation’s first major discount retailer. Charles Lazarus, the founder of Toys “R” Us, piled merchandise high and drastically underpriced his competitors, betting that sales volume would compensate for thin profit margins. And it did.

The company, which began with a baby furniture store in Washington, became the dominant force in the toy industry, wiping out hundreds of independent toy stores and earning veto power over what toys manufacturers produced.

Circuit City, Office Depot, Home Depot and Lowe’s would soon mimic the idea. But Toys “R” Us was the first of what the retail industry would eventually call “category killers” — stores whose strategy of swallowing an entire category of merchandise, like office supplies or hardware, disrupted entire industries.

What Toys “R” Us and its later peers did not foresee was the rise of giant discount chains like Wal-Mart that could sell even cheaper products from dozens of categories in one convenient location.

By 1998, Wal-Mart had dethroned Toys “R” Us as the nation’s largest toy seller, a shock from which it has never quite recovered. For the people at Toys “R” Us, that outcome simply made no sense: Wal-Mart’s toy department was roughly 5,000 square feet. Toys “R” Us, as its ads boasted, was the biggest toy store in the world, selling 40,000 square feet or more of dolls, board games, bicycles and crayons.

How could it lose?

The answer, as it always is in mass-market retailing, was price. Wal-Mart could never match the broad selection of toys sold at Toys “R” Us, but it did not have to. Instead, it sold 500 toys at significant discounts.

During the 2003 holiday season, widely regarded as a bloodbath for toy retailers, Wal-Mart proved just how devastating this strategy could be. It reduced prices on dozens of popular toys, undercutting Toys “R” Us by 12 percent on average for the most popular toys. By the start of 2004, two toy rivals, F. A. O. Schwarz and K B Toys, had filed for bankruptcy. Profits at Toys “R” Us plunged by more than 50 percent.

Everyone at the chain, from the highest ranks to lower-level sales clerks, sang the same refrain when discussing the company’s woes: blame the competition. Mr. Storch would have none of that. When he arrived, he pointedly addressed what he saw as the real problem in slide shows he presented to executives and employees: “We did it to ourselves.”

Toys “R” Us, he argued, had made several obvious blunders. One of the biggest came in 1996, when executives separated the toy and child products businesses. The new Babies “R” Us stores proved popular with shoppers, but at Toys “R” Us the sudden absence of items like pacifiers and bibs caused a sharp drop in customer traffic. This was rooted in shopping patterns: most consumers buy toys once or twice a year, while new mothers tend to buy baby clothing once a month.

In addition, the company’s original store locations, typically on roads leading to and from regional malls, had become outdated as consumers began favoring smaller suburban shopping centers lined with retailers like Best Buy, Kohl’s and Target.

Toys “R” Us stores, meanwhile, remained cluttered, poorly lit and dreary, and renovations fell behind schedule, giving the entire chain a dated appearance that put off customers. Despite fierce price wars, Toys “R” Us continued to sell the same brand-name toys as its lower-priced competitors, failing to find a way to distinguish itself from Wal-Mart and Target.

In meetings with employees, Mr. Storch has repeatedly sketched out this version of events as he crusades against what he calls the company’s “victim culture.” He may literally stop people in midsentence when they begin shifting the blame away from themselves.

He has kept a list of the excuses. “Wal-Mart and Target are growing faster; kids are growing up faster,” he recalled hearing. “That’s all victim thinking — and it’s ludicrous.”

YET it still pervades the company, according to Mr. Storch. Several weeks ago, when he was visiting West Coast stores, he said, a regional manager attributed poor sales to difficulties in distributing enough circulars in his district. When Mr. Storch asked the manager how he handled the problem, the response was a blank stare. “That was somebody in New Jersey’s fault, so we are going to sit here and complain,” is how Mr. Storch characterized the manager’s complaint.

At Mr. Storch’s request, the manager flew to the company’s headquarters in New Jersey, met with marketing executives and quickly resolved the problem with the circulars. “When you learn how to lose and put the blame elsewhere,” Mr. Storch said, “the whole team loses.”

Ultimately, accountability will get Toys “R” Us only so far. The toy industry is shrinking, with sales falling at least 2 percent annually since 2003, according to the NPD Group, a market research firm.

To revive the company, Mr. Storch will have to do what few companies have ever done: steal back business from Wal-Mart and Target. That will require undoing the damage Toys “R” Us inflicted on itself by separating the toy and baby businesses.

Mr. Storch has a simple solution: reunite them. In a test he calls “side by side,” he has fused a Toys “R” Us and Babies “R” Us in several locations, a format he plans to expand rapidly if the results are positive. He also plans to emphasize seasonal products (a practice his predecessors had discontinued) in order to entice shoppers into his stores even when there is no impending birthday or holiday. This year, Toys “R” Us advertised a back-to-school sale, and it plans a similar sale for Halloween next year.

To position toys in the same way as the hottest of fashion items, Mr. Storch has created a senior position, director of trends, whose responsibilities will include scouring the showrooms of toy makers for the next big thing. At Mr. Storch’s direction, the chief merchants from Toys “R” Us divisions around the world — the company operates in 33 countries — now participate in monthly conference calls focused on which toys are generating buzz. (The calls invariably start with Japan, whose consumers set trends worldwide.) Managers who miss the calls face a stern lecture.

“This is the most important competitive thing we can do,” Mr. Storch said, recalling how upset he was when an executive skipped the call two weeks ago. “We have global trend power with one phone call.”

After an aggressive courtship of toy makers, Mr. Storch has gained at least 70 exclusive products for this holiday season, like the 160-piece Thomas Ultimate Train Set ($89.99), Lego Star Wars X-Wing Fighter ($49.99) and the Bratz Girlfriendz line ($14.99 for each doll).

Finally, Mr. Storch has begun fixing up his worn-down stores. A plan to renovate the shabbiest in the chain is under way. He has deployed scores of signs — at the front of stores, at the end of aisles and from the ceiling — that tell busy shoppers exactly where to find dolls, preschool toys and video games. And employees are under strict orders to approach every customer and ask if they need help finding a toy — a cost-free sales technique that Mr. Storch said had already improved sales.

WHETHER Mr. Storch revives Toys “R” Us, however, will require more than just these diligent efforts.

It will depend on whether toy makers meet his needs by giving the chain one-of-a-kind merchandise; whether Target and Wal-Mart keep a lid on their ambitions in toy retailing; and whether there is enough residual good will among consumers who have come to associate Toys “R” Us with gloomy stores, unattractive prices and run-of-the-mill products.

Though private equity firms are known to buy and quickly flip companies they pick off, Mr. Storch says he is at Toys “R” Us to revivify the business and not simply make a quick financial hit.

“I’m at a place in my life where I have the independence to do nothing or to do something,” Mr. Storch said, emphasizing that his job is a professional challenge, not a necessity. “The first choice is to make a lot of money by turning around the company. I am not a liquidator.”