The Fall of Toys R Us: How the ‘Category Killer’ Met Its Demise

By Jim, the Photographer (jcapaldi) (Flickr) [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

A child’s question. A father’s answer. Together they would plant the seed for one of the most influential commercial enterprises of the 20th Century.

When Charles Lazarus was a child working in his father’s Washington D.C. bicycle repair shop, he wondered why they only refurbished and sold used bicycles. “I always wondered why we didn’t sell new bicycles,” he once said. “My father said it was because the big chain stores could sell them so much cheaper than we could.”

Years later, Charles Lazarus decided to sell toys and stuffed animals out of the bike shop which he renamed Children’s Supermart. In time, this would take the name of the empire he created, Toys R Us.

It’s difficult to overstate the importance Toys R Us had on the international toy market in its prime in the 1980’s and 90’s, as was recently noted in a Bloomberg article on Lazarus’ recent passing.

“As much as anyone, he transformed the toy business from Christmas-focused to year-round. Delighted manufacturers ran proposed products by his company before committing to wide-scale production, according to a 1986 article in Atlantic Monthly magazine, which called Lazarus “the person most responsible for loosening Santa’s grip on the toy business.” His strategy created the world’s largest toy-store chain.”

After reaching such heights and being a part of so many childhoods, it must have come as sad news to many when it was reported on March 14 of this year that Toys R Us is closing all 800 of its United States stores, putting more than 30,000 employees out of work. The Washington Post reported, “The news comes six months after the retailer filed for bankruptcy. The company has struggled to pay down nearly $8 billion in debt — much of it dating to a 2005 leveraged buyout — and has had trouble finding a buyer.”

The story of how the company rose to great and then met its ultimate demise can be instructional for entrepreneurs and business owners everywhere. So, what happened and how can others avoid a similar fate?

A Supermarket For Toys

In the transition from Children’s Supermart to larger square foot stores that became Toys R Us, Charles Lazarus had a specific strategy. Growing up he saw how supermarkets were drawing customers with their large aisles and abundant selection. He noticed these were putting many Mom and Pop corner grocers out of business.

So why not do the same in the toy space? Lazarus wanted to offer the widest selection with the lowest prices. He also saw the value in making sure the stock in every store was the same. It was important that people know if they are looking for a particular item, they will be able to find it at any Toys R Us.

Bloomberg wrote, “As his chain expanded, Lazarus emphasized dependability over novelty. The 18,000-plus toys for sale at any given time were the same in each store. Decisions on which items to stock, and how to display them, were made at corporate headquarters.”

In many ways, Lazarus was unique not just in how he set up his stores but also in how he approached business a whole. A company retrospective on Reference For Business writes, “Charles Lazarus believed market share was his company‘s number one priority; to keep increasing market share he was even willing to cut prices–at the expense of earnings. In another bid to further increase its market share, the company surprised the retailing industry in 1987 by announcing that it would pass on the savings it expected from lower tax rates to customers.”

Lazarus was known for other previously unheard-of tactics such as selling diapers at a loss so parents would have more money to spend on toys once in his store.

Together, factors such as selection, deep inventories, and the ability to get new and hot toys in the hands of consumers faster than anyone else led to their designation a ‘category killer’ in the industry. This is what they call companies that dominate the market to the point smaller competitors simply can’t survive.

As a sign of just how dominant they were, the toy market in 1986 and 1987 grew only 2%. During those two years, however, Toys R Us saw a market growth of 27%. By 1988, there were more than 300 Toys R Us in the United States and the company as expanding with their spin-off franchise, Kids R Us which sold clothing and accessories.

The Slide From The Top 

As the year 2000 neared, it was clear the toy giant had more to be concerned about than just Y2K. It turns out 1999 marked a watershed moment when it was reported that for the first time in the company’s existence, they were outpaced in domestic toy sales. In 1998, Walmart accounted for 17.4% of the toy market while Toys R Us took in 16.8%. In a March 1999 AP story, Sean McGowan, a toy analyst at Gerard Klauer Mattison suggested that result was not entirely surprising.

“It was inevitable that Wal-Mart would get to the position that they were ahead of Toys R Us. They are building stores at a faster pace and using toys to build traffic. But I think it happened faster than most people expected.”

Once other retailers such as Target and Costco noticed the success Wal-Mart was enjoying from using toys as a loss leader, they quickly followed suit.

Not only were they under siege from external forces but some of their own decisions came back to haunt them. When other retailers were building their online presence in the early 2000’s, Toys R Us signed a $50 million per year deal with Amazon to be their exclusive online seller of toy and baby products.

What at first seemed like a great win-win partnership turned out to be a win-lose equation with Toys R Us ending up on the wrong side of the deal. Once Amazon saw how to run the online toy-selling business, they started to expand their own product lines, cutting Toys R Us out of the picture.

Strength as Weakness

Ultimately what hurt Toys R Us in the new economy is the very same thing that made them such a success 30 years earlier. Their model of being a large “supermarket” model with low prices was becoming obsolete as consumers started to look for a more interactive shopping experience.

In an article for Wharton, Barbara Kahn, author of The Shopping Revolution: How Successful Retailers Win Customers in an Era of Endless Disruption, observed that Amazon was beating Toys R us on prices and retailers like Best Buy were allowing customers to play with items in the store.

“Toys R Us was trying to win on convenience and price, but it wasn’t convenient and the prices weren’t so great,” she said.

Howard Davidowitz is a retail consultant who would agree with Kahn. In a Washington Post article on the demise of the company, he said, “Toys R Us, which had basically devolved into a warehouse, did not have the vision or the money to give its customers a great experience. For a toy store to survive, they’ve got to create the kind of fun that Amazon can’t.”

Legacy

It would appear that what ultimately did Toys R Us in (along with an unmanageable debt situation) was the insistence to do things the way they had always done them. There were attempts to shake things up and try new approaches but, at their core, they were what they’ve always been – a supermarket for toys. And when the times change, and customer’s shopping habits and expectations change with them, staying the course can be a recipe for bankruptcy.