Toys "R" Us

Fact File:

􀀹
Founder: Charles Lazarus.

􀀹
Distinction: Invented the toy supermarket and "category-killer"

concepts.

􀀹
Primary Products: Toys, games, sporting goods, software, kids'

furniture.

􀀹
Annual Sales: $11.862 billion.

􀀹
Number of Employees: 76,000

􀀹
Major Competitors: eToys, Kmart, Wal-Mart.

􀀹
Chairman: Michael Goldstein; President and CEO: John H.

Eyler Jr.

􀀹
Headquarters: Paramus, N.J.

􀀹
Year founded: 1978

􀀹
Website: www.toysrus.com

In the words of its long-time advertising jingle, it seemed as if

everybody wanted to be a Toys "R" Us kid in the mid-1980s. Barely a halfdozen

years after it had burst onto the scene, the New Jersey-based chain

was operating 250 giants self-service toy stores around the country—the

first of the singularly focused "category killer" big-box outlets now

dominant in many retail categories—and was moving into dozens of new

locations each year. It laid claim to one out of every five toy sales in the

United States. It was expanding its franchise with Kids "R" Us clothing

stores and one of the industry's earliest forays in the computer business.

Annual sales roared into the billions. No competitor even came close.

The heady period continued for about a decade, too, with new toy

stores added outside the United States and additional clothing stores

opened within it. Employees were enthused about the cutting-edge

business approach and the stock options they received. The founder was a

recognized star throughout the world of commerce and industry. And then,

in 1994, he stepped down and the company immediately slid downhill.

His first two replacements proposed remedial measures, although

none did the trick. They announced long-overdue makeovers in store

layout and product mix, for example, but did not fully follow though on

them. They also misjudged far-ranging changes in toy trends and

children's tastes, then made costly merchandising mistakes because of its.

Their competition, from the largest discounter to the smallest boutique,

zeroed in. Soon, the seemingly infallible firm lost its lead. In 1999, it even

reported a net loss.

With nearly $12 billion in annual sales, of course, Toys "R" Us

remains a formidable force in the business. It now operates about 1,150

toy stories—700 in the United States and the remainder in 27 other

countries. It also runs more than 300 sites in its Kids "R" Us and newer

Babies "R" Us units. There has been a leadership overhaul at its

underachieving Web site, the launch of a 40-store educational toy division,

and the appointment of a new chief executive with experience and vision.

And in combination with the company's heritage as a world-altering

operation, such changes have observes bullish about its prospects for the

first time in several years.

Charles Lazarus was just 25 when he opened his first baby furniture

store in Washington, D.C. It was 1948, and Lazarus was one of the

countless post-war entrepreneurs who saw dollar signs in the baby boom.

When his customers asked for toys, he eagerly added them. By 1957,

furniture was a sideline and toys were his primary business.

Lazarus watched and listened carefully as his customers grew and

changed. He followed the business world closely as well. Most toys at the

time were purchased from department stores, he knew, with supermarkets

and drug stores also responsible for significant sales. But these retailers

did nearly all their toy business in just the six weeks prior to Christmas,

Lazarus learned. He suspected that there might be possibilities in a

competing store dedicated solely to toys, which stocked an abundance of

the most popular items and offered them at low prices year-round.

He was right. Discounting was new, specialty retailing was new,

building a company that catered exclusively to a single generation was

new—and together they built Lazarus a devoted following. Business was so

good, in fact, he couldn't expand fast enough. In 1967 he sold his dream

company for $7.5 million plus a management position to a suitor who

promised to take it further. The direction it went certainly was not what

Lazarus envisioned, though, and he watched helplessly as his new partner

sank quickly into bankruptcy.

Fortunately for Lazarus, he had never stopped looking and listening.

He developed a new plan for the company, based upon information

obtained by observing retailers in his and others fields, and it proved

promising enough to convince creditors (and the court) to allow him the

chance to resurrect it. In 1978 Toys "R" Us reemerged, reorganized, and

ready for the future with a slew of even more advanced ideas.

Lazarus' overriding strategy this time was ensuring that each store

dominated its market. To create these so-called category killers, he

refashioned the discount model pioneered by newfangled mass retailers

such as Wal-Mart to fit his single product line. Such "big box" stores—

which today include Home Depot in hardware, Circuit City in electronics,

and Tower Records in music—combined sophisticated logistics systems and

aggregate buying power to stock the most desirable items at the best

possible prices. Lazarus also sought locations where rent would be low

enough to permit huge free-standing buildings designed to function much

like supermarkets. They would offer minimal service, be easily negotiable

with self-service carts, and feature carefully placed impulse items along

with stacks of the day's most popular toys. Rock-bottom prices were

affixed to the hottest items, while better-than-competitors' prices were put

on the other 18,000 the stores carried. Finally, remembering his roots,

Lazarus added related products like infant formula and disposable diapers

at or near cost, hoping to lure parents who might also buy from the

higher-margin choices.

With this game plan, Toys "R" Us immediately clicked. Colorful

shopping carts and aisle after aisle of floor-to-ceiling shelves crammed

with Barbie dolls and baseball gloves propelled the shopper from the

entryway to the check out counter. And even if the visits were not

necessarily pleasant, they were undeniably efficient. Parents would eagerly

drive to the nearest Toys "R" Us location each Christmas because they

knew its prices and selection meant virtually painless one-stop shopping.

They'd also head there for a requested toy at other times, because they

also knew these items were likely to be in stock—and discounted—no

matter what the season.

Like Wal-Mart's Sam Walton and a few other trailblazers, Lazarus

also stayed in constant touch with activity across his growing chain.

Monitoring sales by a desktop computer, he could quickly respond to

changing trends as well as product availability across a network now

comprised of 144 stories in 22 states. As annual sales hit $1 billion in

1983, he attempted to smooth out the company's still-cyclical nature by

opening the first of its Kids "R" Us clothing stores. He also tried to

capitalize on the burgeoning home computer market by offering early

models such as the Atari 400 and Commodore Vic 20. Despite their toylike

names, these systems sold for around $3,000 and did not catch on

with shoppers who were more interested in Scrabble and teething toys.

The failed entry into electronics turned out to be a rare misstep for Toys

"R" Us during this golden period; it also left executives wary of the entire

category, which would prove troublesome in years to come.

Toys "R" Us continued to enjoy unparalleled success as the 1980s

wore on. In 1984, it launched its international operation with stores in

Singapore and Canada. By consistently opening in 35 to 40 new sites

across the United States each year, its domestic store total hit 225 in

1985. A few other warehouse-type competitors appeared, but Toys "R" Us

remained the only national chain in the industry. Small niche-type stores

tried luring away its customers, but couldn't match its selection or prices.

Toys "R" Us continued to lead because it had the largest, most efficient

stores, the best distribution network, and a state-of-the-art inventory

control system that sent sales records directly from cash registers to the

computer that the wily Lazarus kept on his desk.

This combination helped the company boost sales by 185 percent,

while overall toy retailing increased by just 37 percent. Its share of all toy

sales accordingly rose from 5 percent to 20 percent. By 1989 it was

recording more than $4.3 billion in sales from 404 stores, while its closest

rival was doing $830 million in 174. It had 20,000-plus employees, which

the company (again like Wal-Mart) called "associates" and offered profitsharing

and stock options. When it was named the eighth-largest

discounter of any type in the nation, it was in the midst of planning new

stores from New York's Herald Square to Luxembourg, Australia, and

Taiwan. According to Financial World Magazine, Lazarus' $73 million worth

of Toys "R" Us shares, when added to his $4.2 million annual

compensation, made him one of the richest executives in the country in

1987.

Despite this performance Toys "R" Us couldn't maintain its

momentum once Lazarus stepped down in 1994 at the age of 69. Part of

the reason was the less unified base of potential customers then seeking a

more diverse variety of toys. Part of the reason was the company's failure

to recognize the increasing importance of electronic gadgets such as video

games, which it initially ignored after its computer debacle. And part of the

reason was a lack of ensuing leaders with vision—although Lazarus was

admittedly a tough act to follow. But the biggest (and most ironic) blow

came when general discounters overtook toy stores as the biggest (and

most ironic) blow came when general discounters overtook toy stores as

the biggest players in the business. By the end of the 1990s, Wal-Mart was

selling more toys than Toys "R" Us.

By most accounts, Toys "R" Us was completely unprepared for the

1999 Christmas season in cyberspace, hosting a clunky and confusing Web

site. They missed shipping many orders on time, angering the few

customers they had (which led to a costly effort to placate them with $100

gift certificates).

With the appointment of John H. Eyler Jr. as chief executive,

however, things instantly began to change. Soon after the former

chairman of rival F.A.O. Schwarz took over in 2000, for instance, Toys "R"

Us began adding clothing and more exclusive products to its stores,

generally broadening its selection, and actively working to ensure that topsellers

were always in stock. Store overhauls were also put on the agenda,

as were plans to improve service. And in August, the company announced

its co-branded e-commerce alliance with Amazon.com that would put Toy

"R" Us into a positive electronic position before Eyler's first Christmas

season. With the alliance, Toys "R" Us's electronic sales tripled during

Christmas 2000. And the alliance was also cited as one of Amazon's few

true profit streams during the fourth quarter of 2000.

Stockholders responded positively to the news, boosting shares 75

percent. The key then became luring old Toys "R" Us kids back to the

fold—this time, of course, to shop for their own children.