Specialty Operations Boost Toys "R" Us but Rivals, History May Chop It Down
Toys "R" Us (TOY) plans to return to the world of publicly traded retailers with a stronger and more diverse organization, but it must keep learning from the success and mistakes of others â€"- and of its own past â€"- if it is going to have any chance of growing in the face of fearsome rivals.
Walmart (WMT), Target (TGT) and Amazon (AMZN) have proven they can take sales away from Toys "R" Us. So it has been developing low-sales-volume specialty businesses in sectors where big-volume retailers don't generally like to play, with much of the effort online.
But operating specialty business can be tricky. In the past, Toys "R" Us had to shutter Kids "R" Us and Imaginarium. Although it is expanding in apparel, furnishings and learning toys again, the past failures suggests that specialty operations may not be the retailer's strong suit. Add to that the fact that selling toys online is a new and potentially tough game. Low operations costs and an ability to offer broad assortments provide Toys "R" Us advantages in its specialty operations. However, the Internet also affords Walmart, Target and Amazon the ability to jump into hot sectors and pull business away wherever Toys "R" Us appears to be enjoying some success.
With its IPO, Toys "R" Us has chosen to cope with not only the competition, but also Wall Street hounding it for ever-improving results. Ironically perhaps, what success the retailer has enjoyed recently derives largely from its appropriation of experience from other retailers, including rivals.
With the Holiday Express outlets it opened late last year. Toys "R" Us took advantage of KB Toys' demise, opening up mall-based "temporary" stores to sell a captive audience in gift acquisition mode. Of course, KB went broke trying to sell toys in malls, but that doesn't mean all its stores lost money. Toys "R" Us employed a low-risk strategy, taking a page from Target, which operates "pop-up stores" when and where it sees an opportunity to generate sales and boost its profile. Of course, Jerry Storch, Toys "R" Us CEO was Target vice chairman. After the holidays, Toys "R" Us kept some of those Express units operating, having learned through experience just where those KB-style operations could make money.
Also in plenty of time for last holiday season, Toys "R" Us plucked FAO Schwarz from Macy's (M). The department store operator never actually owned the iconic toy retailer. However, it did have 260 FAO Schwarz boutiques in its department stores that were successful enough to convince it to plan for 500 more. Those boutique operations transferred to Toys "R" Us stores in its FAO acquisition. Although the online business was considered the plum part of FAO Schwarz operations, the boutiques provided a way to bring a legendary brand down to Earth. Consumers who might have considered it beyond their comfort zone could look it over on their own terms encouraged by Toys "R" Us in stores and online.
The retailer has entered and expanded specialty operations through online operations where it can showcase a wide range of products without the burden of costly stores. In acquiring FAO and eToys, which focuses on learning products from puzzles to crafts, Toys "R" Us didn't just adopt established business practices but established businesses that operate in sectors where Walmart, Target and Amazon don't play much.
In purchasing eToys, FAO also got BabyUniverse. The online provider of baby gear gave it another angle on the infant products business it has been ramping up by pairing Babies "R" Us with its toy locations.
Baby apparel and furnishings give Toys "R" Us the ability to generate additional sales from established locations. They also can cross-sell customers toys and more practical goods simultaneously. In that way, Toys "R" Us demonstrates that it's a destination for baby needs that offers a broader selection of kids stuff than multi-department retailers can stuff between shoes and microwaves. That selection now includes Tommy Tippee a baby feeding line recently imported with pomp from the United Kingdom, in a move reminiscent of Target's incorporation of beauty care from Britain's Boots pharmacy chain.
Toys "R" Us has put it itself in a position to play in specialized niches outside the hypercompetitive mainstream toy and games business, markets where it can breath a little easier and perhaps grow. However, addressing those niches requires the expertise of a specialized retailer. Toys "R" Us may have acquired that but succeeding in those niches is no sure thing, as its own experience demonstrates.
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