Toys R Us redux

Toys R Us (TOYS (not a ticker symbol today)) has been an iconic name in retailing over the past forty years.

–In the 1970s urban department stores came under attack by upstart specialty retailers who extracted the most profitable “departments” from the older merchant conglomerates and opened stand-alone locations focused on a single line of goods in direct competition with their older rivals.  More nimble, with a wider selection, often lower-priced, more willing/able to follow customers to the suburbs, specialty retailers ate the department stores’ lunch for years.  Many still do.

Toys were at the top of the extraction list.

TOYS was the first of the three contenders (the others were Child World and Lionels Kiddie City) to complete a nationwide retail network yielding the economies of scale that eventually won out against the other two.  As such, TOYS is a textbook case of the successful 1980s retailer.

It took market share both from department stores and mom-and-pop toy retailers.

–The 1990s saw the rise of Wal-Mart (WMT) and Target (TGT), who, more modern versions of the department store, used their floor space in a flexible way than their predecessors.  Their toy departments were relatively small for most of the year, but expanded dramatically during the holiday season–meaning, in contrast to TOY, they had toy overhead expenses for only a small part of the year.  Because they had other lines of merchandise to sell, they could (and did) use the hottest toys as loss leaders, as well.

For the first half of the decade, TOYS steadily lost market share to WMT and TGT but made it up by taking share from mom and pops.  Then there were no more m&ps   …and TOYS’ underlying competitive issues became more evident (there are a lot more wrinkles to the story–like store locations–but I think WMT and TGT were the main plot line).

–In 2005, TOYS was taken private in the first of a series of attempts to reorganize or restructure the firm to restore its past glory.


today TOYS is back in the news as markets worry about the firm’s ability to refinance its substantial junk bond borrowings.  It’s now being looked at as a possible canary in the coal mine for future troubles in sub-prime debt.

More tomorrow.



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