Last week we witnessed the spectacular but predictable demise of iconic retailer Toys R Us who announced it would close or sell all of its stores in the U.S. and UK after an unsuccessful attempt to emerge from bankruptcy. With over 2000 stores, a crushing $5B debt load, fierce competition from online retailers like Amazon and traditional retailers like Wal-Mart, righting the ship became a challenge that proved to be too formidable for management who ultimately bowed to creditor pressure. We had the privilege of being a supplier of POP displays to Toys R Us back when the company could pay its bills.
In our experience, Toys R Us had a lot of smart people starting with ex-McKinsey colleague and former CEO Jerry Storch. They were bought in 2005 by Bain Capital, KKR & Co. and Vornado Realty Trust for $7.5B. Loaded with very smart and successful people, Bain Capital and KKR are among the most successful private equity firms in history. Between the 3 investors, they put $1.3B of equity capital at risk and financed the remainder of the buyout with debt. We were in Toys R Us’ offices a few years later, and the place was buzzing with excitement around the news that the company would soon go public. Had things gone according to plan, the investors would have gotten their money out while making a handsome return, management would have hit pay dirt, and the company would have raised enough money to comfortably service the debt.
As a lowly POP display supplier to Toys R Us in the post buyout-era, we viewed the company through a slightly different lens than management or the investors. We started out designing lots of different displays and had an opportunity to offer our creative input in developing new POP displays and merchandising fixtures for both Toys R Us and Babies R Us. Then one day Toys R Us decided to change its sourcing model. The company was one of the first retailers we worked with who began to hold reverse auctions to procure their displays.
If you are not familiar with the concept of a reverse auctions, it’s basically an online auction organized for the purposes of soliciting bids for a product (in this case displays). The company provides a set of drawings, and suppliers bid online for the business. However, unlike most auctions in which the prize goes to the highest bidder, the idea behind a reverse auction is suppliers bid against each other, and the lowest bid wins. We participated in numerous Toys R Us reverse auctions and actually were the winning bidder on the first couple auctions in which we participated.
Using the reverse auction model, Toys R Us probably got some very competitive pricing, but over time the model often breaks down when winning participants come to realize that bidding below cost is unstainable. More importantly, adopting a reverse auction procurement model sucked the creativity out of its merchandising team and its suppliers. In its relentless drive to lower fixturing costs, Toys R Us virtually eliminated all opportunity and incentive for its suppliers to provide fresh merchandising ideas and creative POP display concepts. After a while, people like us just dropped out, chalking up the reverse auctions to a waste of time and resources.
Aside from its debt load and the competitive intensity of the industry, one of the primary factors in Toys R Us’ demise was that its stores were stale and out-of-date, lacked creativity, and suffered from poor, unimaginative merchandising. It was like shopping in a big warehouse that was peppered with parents carting around kids experiencing period melt-downs.
Part of the reason that Toys R Us did not invest in its stores is likely related to the company’s financial pressures, but without a doubt the procurement model it adopted was a contributing factor. Imagine instead, if the company had selected a handful of POP display suppliers, nurtured those relationships, and enlisted the talent and creativity of those firms to design exciting store environments and point of purchase displays that would give consumers a reason to shop in their stores instead of buying online. Would it have saved the company? Who knows, but without a doubt it would have helped.
So, what’s next for the retail toy industry? It’s safe to say that Amazon and Wal-Mart will both continue to be major players in the retail toy market for the foreseeable future. And despite the fact that tablets and electronic toys have surged in recent years, kids will always be kids so there will continue to be a demand for toys that promote learning, capture the wonder and imagination of children, and incorporate the fun factor. There will continue to be a viable role for independent toy retailers, just as independents have survived in the home improvement market among giants like Home Depot and Lowes.
One of the keys to surviving will be for toy retailers to offer consumers an opportunity to get what they can’t get online. That is, an opportunity to experience the product first-hand. When someone orders a toy online, they don’t have an opportunity to evaluate the product in person and observe their child interacting with the product. Successful toy stores will likely have “experiential zones” or places kids can play with toys under the watchful eye of their parents. Creating playtime experiences is something that is difficult, if not impossible, for an online merchant to replicate.
In the future, you might see tables similar to the ones below we designed for a Fat Brain Toys that provide a place for kids to try out toys.
Successful toy retailers will provide displays that not only merchandise product but also incorporate a demo area where kids can play with the toys. We designed the functional but fun fixture shown below to accomplish exactly that.
We also like the idea of enabling kids to build things like race cars and actually race them on a track that is built into the display. The two displays below that we made for Modarri are examples that achieve that purpose.
Enterprising independent toy retailers can continue to survive and even thrive in the same way that independent book stores have in the wake of Amazon’s domination of the book industry. By providing a cozy environment, offering an eclectic product selection, serving patrons a hot cup of coffee, and having a store dog, neighborhood book stores have successfully created an experience that calls the consumer and can’t be duplicated online. Independent toy retailers can do the same.