In the final installment of our retrospective franchising series, we take a look at the toy retail titan that could be making a comeback.
Words by Kieran McLoone, editor of Global Franchise
So far in our ‘Where are they now’ retrospective series, we’ve looked at how Quiznos went from a food and beverage frontrunner to a cautionary tale for restaurant franchisors, as well as how Blockbuster’s reliance on outdated technology and business practices paved the way for competitors to sweep up the media consumption market.
There’s a handful of similarities between these two stories that franchisors can look to and hopefully avoid on their own ascension to international success. For example, both brands saw themselves as ‘too big to fail’. As such, innovation was sidelined in favor of assumed customer loyalty.
This mentality can be tracked along many of franchising’s most high-profile falls from grace and is something that any franchisor – regardless of sector or market – would do well to avoid. Emerging brands and fierce competition are always creeping out of the shadows, and continuing to evolve is the only way that the true players can stay on top.
For this final installment in the ‘Where are they now’ trilogy, we’re taking a look at Toys R Us, the toy retail brand that, at its height, had a presence in 40 countries around the world. With news that it may have a North American relaunch this year, what lessons can we learn from this toy titan’s rocky journey?
The unrivaled category killer?
Toys R Us was initially founded in 1948 as Children’s Supermart; a creation of American entrepreneur Charles Lazarus that sold baby furniture during the post-war baby boom. It rebranded as Toys R Us in June 1957, when the brand’s first dedicated toy store opened in Rockville, Maryland.
The 20th century saw steady growth for the toy retailer, and it embarked on international expansion in September 1984 with the opening of its first wholly-owned store in Canada. It also opened in Singapore around this time through a licensing agreement, and this is a trend that continued in the following years: many of Toys R Us’ domestic locations in North America remained corporate-owned, while it used a combination of franchising and licensing to develop into international markets.
“If part of the reason you were going to Toys R Us was because you thought the assortment was incredible and you could find whatever you want, there’s obviously a bigger and easier assortment online now”
At its height, Toys R Us was known as a “category killer”. This is a term commonly given to industry leaders in the retail space, but in a post-Amazon world, brands like Toys R Us are becoming increasingly sidelined in favor of online-first shopping.
“There used to be lots of department stores like Sears, and then these category killers came up pre-Amazon and they offered an amazing opportunity: huge assortment, at a low price. You could go very deep and buy anything you wanted and you didn’t search around, because you just assumed it was the best price,” says Barbara E. Kahn, Patty and Jay H. Baker professor of marketing at Wharton University of Pennsylvania, and author of The Shopping Revolution: How Successful Retailers Win Customers in an Era of Endless Disruption.
“They were massive stores everywhere you wanted them to be. Toys R Us was the category killer in toys, and there were also examples in segments like electronics and linens. At the time, they made a lot of sense.”
While Amazon isn’t immersed in the franchising world (at least, not yet), it comes up a lot when looking into the decline of many of the biggest category killers. Why? Because these kinds of operations simply can’t exist in a world where consumers have everything they could possibly need at the touch of a button – or, at the very least, they can’t exist on the same scale that we saw throughout the previous century.
“Amazon has a bigger assortment and a cheaper price, so what those stores were supposed to be doing were beat at their own game,” says Kahn. “If part of the reason you were going to Toys R Us was because you thought the assortment was incredible and you could find whatever you want, there’s obviously a bigger and easier assortment online now.”
Problems in disguise
Many of the traits that drew consumers to Toys R Us in its expansion stages were what eventually led to the brand encountering problems down the road. For example, its huge, warehouse-style stores were often positioned outside of major metropolitan areas, and as such could afford to be so vast.
Initially, this meant that a trip to Toys R Us was an all-day family experience. But as time went on and families began valuing convenience over everything else, the less appealing a drive out to a store like Toys R Us began to feel. With the emergence of online shopping for absolutely everything, Toys R Us and its slow embracing of the digital age was inevitably going to be left in the past.
“Toys are a great thing to sell online. If the toy you’re looking for is a gift, and you’re a young, time-starved family, you can get the toys without having to run down to the store,” explains Kahn. “Convenience matters a lot; for families, convenience is a very important factor.”
Embracing the virtual age
All of this isn’t to say that Toys R Us didn’t try to embrace online shopping, however. Rather ironically, the toy retailer signed a 10-year partnership with Amazon in 2000, in which the former paid Amazon $50m a year plus a percentage of sales to become Amazon’s exclusive seller of toys and baby products.
With this deal, Toys R Us could continue offering its vast inventory through one of the world’s most exciting, emerging online retail platforms. It was a win-win – right?
Not quite. Instead, this allowed Amazon to learn all about selling toys, and so the online retail giant broadened its capacity with Toys R Us’ rivals. Amazon could then innovate on its model and become a primary toy supplier to millions of families around the world.
“What I found particularly sad about the Toys R Us story was that they were one of the first stores that signed on to the Amazon platform. They thought that they were being so innovative, and they were trying to do something special and be online. The thing is, Amazon is a ruthless competitor,” says Kahn.
“The truth of the matter is that if you’re Toys R Us and you’re in partnership with Amazon, then Amazon can see and learn the toy business by being partnered with you. And then they can undercut you.”
Things appear even more dire when you pair this fiasco with the incredible seasonality of the toy business. More than 40 per cent of Toys R Us’ sales came during the fourth quarter of the year, so when you have millions of consumers turning exclusively to Amazon instead, a slight hiccup becomes a potentially catastrophic challenge.
Ongoing highs and lows
In September 2017, Toys R Us filed for Chapter 11 bankruptcy protection and in March 2018, the brand announced that it would close all of its U.S. and British stores. The Toys R Us and Babies R Us brands still have over 900 branded stores in over 25 countries, but many of these operate as independent entities irrespective of the North American market.
But a new beginning for this legacy retail operation may be in sight. This wouldn’t be the first time that Toys R Us has planned a comeback – in January 2019, for instance, it re-launched under the Tru Kids banner with two U.S. locations, but these closed in 2021 due to the COVID-19 pandemic and its financial consequences.
This year, however, more interest has emerged in bringing Toys R Us back to the North American market. WHP Global acquired a controlling interest in Tru Kids in March 2021, which now owns both the Toys R Us and Babies R Us brands.
“Convenience matters a lot; for families, convenience is a very important factor”
“We’re in the brand business, and Toys R Us is the single most credible, trusted and beloved toy brand in the world,” said Yehuda Shmidman, chairman and chief executive officer of WHP, in an interview with CNBC at the time of the acquisition. “We’re coming off a year where toys are just on fire. And for Toys R Us, the U.S. is really a blank canvas.”
Shmidman confirmed that Toys R Us will ideally open a handful of North American stores this holiday season, which could be in a number of formats: flagships, pop-ups, airport locations, or mini-stores inside of other retailers’ units. The exact number of locations that WHP plans to open hasn’t been confirmed, but new management could be exactly what the brand needs to appeal to a new generation of parents buying toys for their children.
“Nowadays, you’re seeing the kind of shopping that isn’t a big day-long investment. It’s closer, and there are fewer stores you go to,” says Kahn. “I am not a believer in the end of physical retail. Physical retail isn’t dead; you just need to change it by paying attention. And if Toys R Us creates a reason to go into a toy store, then a re-launch could work.”
