Why a Turnaround at Toys R Us Will Tank
Big box toy retailer, Toys R Us, recently filed for Chapter 11 bankruptcy protection. As to the reason for the filing in advance of the all-important holiday season, the company pointed to a looming deadline to pay back $400 million of the $5 billion in long-term debt on its balance sheet.
The timing couldn't be worse. The toy business is incredibly seasonal, with more than 40 percent of the company's sales come in during the fourth quarter of the year. Even though the company announced that it is not immediately closing any of its 1,600 stores, the bankruptcy filing signals instability to skittish toy suppliers and certainly puts shoppers "in play" to consider Walmart, Target and Amazon for their holiday purchases.
Bankruptcy experts assert that Toys R Us is just running into the same headwinds that forced other big box retailers to file for Chapter 11: too much under-utilized real estate. While excessive debt and real estate overhang are contributing to the demise of the company, quite frankly, its real problem is far more severe. Here are the three key reasons why Toys R Us is going bankrupt and why its proposed turnaround actions may be futile:
Its brand story has lost its relevance.
Toys R Us is failing because the brand story is no longer relevant -- not because people have stopped buying toys. According to the National Retail Federation, U.S. holiday sales grew 4 percent to $658.3 billion last year and they are forecast to grow 6 percent more this coming year. The fact is, people are still buying toys, they're just not buying them at Toys R Us.
With more than 65 years in the toy business, the Toys R Us brand story has always centered on being the "toy authority" for parents and children alike. Do you remember Beanie Babies, Tickle Me Elmo, Furbies and Pokémon -- the most sought-after holiday toys? The toys that your mom was willing to wrestle out of the hands of a complete stranger in the store? Let's face it: Toys R Us was the place to get the hottest new toys and it had knowledgeable sales staff who would point you in the right direction during the holiday season. The brand story was about quality, value, selection and an in-store shopping experience focused on making the shopper the "hero."
Today, however, no one wants to be in a Toys R Us store during the holidays -- not even the desperate, last-minute shoppers! Of course, shoppers still want to be the hero and score that hot new toy, but they don't want to wait in long lines and risk getting into a fistfight with a distraught parent in the process. With detailed online reviews to inform purchase decisions and same day delivery service from Amazon, Dad was a superhero last year when that Minecraft Lego Kit showed up at the front door the day before Christmas.
Its strategy is still misaligned.
Back in early 2014, Toys R Us announced its "TRU Transformation" strategy to address shopper experience challenges and position the company for growth. The broad strategy included inventory management improvements, decluttering of stores, a clearer pricing strategy and simpler promotional offers for shoppers. The company also promised to integrate its in-store and online businesses more fully. And this is where it has failed.
Most people today are "hybrid" shoppers -- using both online and physical retail locations as part of their buying journey. For example, they may do their browsing and research online and then make a "targeted strike" to a brick-and-mortar store to buy the toy they want. Although shoppers won't ever ditch physical stores entirely, they are shifting most of their holiday toy shopping online because cluttered stores and slow-moving checkout lines deter them. Moreover, Amazon has conditioned shoppers to expect instant gratification. To make that happen, eretailers have shifted from having a few massive, centralized distribution centers to many smaller, quick-response hubs close to large population centers. Toys R Us is still stuck with these massive centers, which makes it difficult for it to truly integrate its online and offline businesses and respond with the speed and nimbleness that shoppers demand.
Its recent moves to upgrade systems are too little and too late.
While Toys R Us has been minding the store, it admits that it fell behind on its ecommerce systems. Now the company is making some big bets to try to close the gaps in its systems. Their revamp is part of a nearly $100 million investment over the last three years that is geared toward jump-starting an online experience that it acknowledges lagged some of its retail peers.
It also recently announced that it will be offering an innovative augmented reality (AR) in-store experience for parents and their children. Geoffrey the Giraffe, the iconic Toys R Us mascot, will greet shoppers on their smartphones when they enter a store. Guided by flashing icons in the aisles, shoppers will point their mobile devices at toys on shelves activating a personalized experience on their screen. For instance, in the Barbie section of the store, a virtual version of a doll on the shelf comes to life, tells her story and engages with the young shopper.
Will kids convince their parents to take them into their local Toy "R" Us so they can have fun and experience AR? Absolutely. And then, the parents will still go online to buy toys for the holidays. Quite frankly, AR seems more like a win for the manufacturer rather than the retailer in this case. Janie is still going to get her Barbie -- but Amazon is going to get the sale. AR sounds like a great way to deliver a remarkable shopper experience in-store, but for Toys R Us, it's like putting a Band-Aid on a clogged artery and expecting it to heal.
Rest peacefully, Toys R Us, and take comfort in knowing you're not alone. You're on a well-worn path that's included many former retail category killers like Blockbuster, Circuit City, Payless ShoeSource and Sports Authority. Turnaround at this scale requires commitment to a transformative approach that delivers a compelling story where the shopper is the hero, a strategy to deliver a remarkable shopper experience and the systems to execute with ruthless consistency.