Episode III: Toys ‘R’ Us Strikes Back

Discussion
Sep 13, 2012

In a keynote address at the Shop.org summit in Denver this week, Jerry Storch, chairman and CEO of Toys "R" Us, passionately debunked the "myths" that the internet is causing the downfall of "big box" retailing, customers prefer online, and that the future belongs to online-only companies.

Entitling his presentation, "Episode III: The Stores Strike Back," Mr. Storch tackled the "misconceptions" one by one.

He disagreed with headlines such as "Store chains need to shrink massively and rapidly," according to multichannelmerchant.com. While Toys "R" Us’ e-commerce sales are over $1 billion, "the reality is that the vast majority of sales still occur in physical stores" and most stores are more than sufficiently profitable. Said Mr. Storch, "Stores make money and they make a lot of money."

Also on the bottom line side, he discounted the vaunted advantages of e-commerce that feed the assumption that online delivers lower prices. The cost of pick & pack for the "direct-to-home model" — his term for online selling — is 1.5 to 2 percent higher than shipping inventory to stores, freight-to-home is 30 to 40 percent more expensive than fulfillment at stores, and the overall direct-to-home supply chain cost is three-times greater, Mr. Storch argued.

"Free shipping," he said, "somehow, somewhere and someday" winds up as an e-commerce cost.

On the revenue generating side, being able to touch, feel and test products; provide a sense of immediacy; and being "local" provides most physical stores an edge over online.

Moreover, also having physical stores provides the ability to allow consumers to shop wherever, whenever and however they choose. Said Mr. Storch said, "The future belongs to brands that build best the consumer-facing network, incorporating stores, Internet, mobile, social and local components."

This fall, Toys "R" Us is rolling out "Ship to Store," enabling customers to ship select online purchases to their local Toys "R" Us or Babies "R" Us store free of charge. Its popular "Buy Online, Pick Up In Store" program will be enhanced this fall by the addition of in-store pick up kiosks. Additional help is being added to stores to handle omnichannel orders.

He also told EcommerceBytes that physical stores will particularly help the expectation of same-day online delivery in the years ahead.

The following day Mr. Storch held a media event in New York City heralding how Toys "R" Us’ wide selection, exclusive offerings and its first-ever Hot Toy Reservation program is helping Toys "R" Us differentiate from other physical stores.

But he ended his keynote talk by referencing his Star Wars "Episode 3 – The Stores Strike Back" theme, according to EcommerceBytes. He asked the audience, "Remember, how many episodes were there?" They replied, "Six!"

"The world will change, we will win," Mr. Storch concluded.

Do you agree with Mr. Storch’s view that online selling’s advantages over brick & mortar’s are being over-estimated? Which of his points do you support and which do you question?

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21 Comments on "Episode III: Toys ‘R’ Us Strikes Back"

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Peter Fader
BrainTrust

I agree. The “downfall” is more associated with some retailers’ inability to change with the times — much more so than their physical/virtual presence.

Look at the success of Apple’s retail stores and — more importantly — the lame me-too strategies that many other electronics brands/retailers are now trying.

There are still many benefits that big box retailers (and mom-and-pop stores) can offer relative to online merchants, but they’re not very good at establishing and leveraging them.

It’s survival of the fittest out there, and there will continue to be some very fit retailers for many years to come. And, unfortunately, some really un-fit ones as well….

Max Goldberg
BrainTrust

As Mr. Storch said, “The future belongs to brands that build best the consumer-facing network, incorporating stores, Internet, mobile, social and local components.”

We live in a multi-channel world. Consumers expect seamless shopping between all devices, platforms and physical stores. In that world, certain advantages exist for each platform. Successful retailers blend them into that seamless experience.

Bob Phibbs
BrainTrust

It feels a bit like a certain department store CEO touting store-within-a-store without addressing the “why” customers would want to go into a brick and mortar store when it seems there are just piles of merch and little interaction between employees and customers.

Paul R. Schottmiller
Guest
Paul R. Schottmiller
4 years 11 months ago

For the sake of a conference session and generating some press it is fun to make this about “star wars.”

However, the reality is that it is not about stores retailing vs. online retailing. There is no channel war. It is about the same thing it has always been about — delivering value to the consumer when, where, and how they want it.

I suspect we could find near unanimous agreement on his statement: “The future belongs to brands that build best the consumer-facing network, incorporating stores, Internet, mobile, social and local components.”

Bill Emerson
Guest
Bill Emerson
4 years 11 months ago

Mr. Storch is right. Big box is not dead. He’s still making money and many stores are still “sufficiently profitable” (whatever that means). No doubt there will always be 4-wall retail for a host of reasons covered in this space many times. To paraphrase, the winners will be the ones to figure out how best to interface with the customer.

All that said, it’s interesting hearing this from a company that is built on the second version of one of the earliest big box stores (you do remember the bankruptcy, don’t you?). More importantly, I’m unaware of any big box operation that is growing rapidly. Ask Best Buy. Meanwhile, e-commerce was up 14% in Q4 and is forecast to grow over 60% by 2016.

The industry is in a state of re-balancing as consumer needs and preferences change.

Ben Ball
BrainTrust

The first thing that struck me as I read this discussion is, of course, an analogy. Mr. Storch seems to be arguing the retailing equivalent of an “all of the above” energy strategy with brick & mortar stores playing the role of oil. And I think he’s right.

“Online” is the new toy on the retailing block. And as Brad Paisley so pointedly put it in his song mocking social media “we’re so much cooler online.”

Mr. Storch’s closing comments may have been a paraphrase of cliche’ — but they are also spot on. There will be more episodes. The world of retail will continue to evolve. And as long as we strive to have the latest light sabre in our arsenal, we will win.

Gene Hoffman
Guest
Gene Hoffman
4 years 11 months ago

The brick and mortar store was presumed to be dying yet it said, “Cheerio! I’ll be seeing you soon.” And then it sent Jerry Storch to remind us.

Gene Detroyer
BrainTrust

“There is no reason anyone would want a computer in their home.” Ken Olsen, founder of Digital Equipment Corporation, 1977. In 1977 it was a stupid statement and one that today is used as an example of corporate myopia.

“Moreover, also having physical stores provides the ability to allow consumers to shop wherever, whenever and however they choose” could rival Mr. Olsen’s insular thinking. Isn’t the “wherever, whenever and however” the definition of the internet?

We used to buy birthday and Christmas presents for our kids, and later our grandkids almost exclusively at TRU. Since Amazon started carrying toys, we haven’t been to a TRU. And, I assure you, now with 4 grandchildren, we are buying more toys than ever. Exclusively online and almost exclusively from Amazon. In particular, with toys, there is no purpose to going to a store. Everything is in a box. You can’t touch and feel. And, do you really want to make a decision, or just get the toy the kid wants?

David Livingston
Guest
4 years 11 months ago

Just the fact that he took the time to debunk it and also have a media event shows he feels he is seriously threatened. He knows those headlines are true, otherwise he would not waste valuable CEO time going to summits and having media events.

John Boccuzzi, Jr.
Guest
John Boccuzzi, Jr.
4 years 11 months ago

I like the message Mr. Storch is delivering to the market. He is not looking at his brick & mortar assets as deficits, but as advantages against online-only retailers. Although a tough task, I believe Mr. Storch and his team are on the correct path. He is focused on a few key benefits:
Private Label items
Exclusive toy deals
Tabeo their new tablet that provides a direct connection with customers
OmniChannel – shop when where and how you like to shop

Toys “R” Us needs to prove to shoppers that they are the retailer of choice for their category, whether they like to shop online (phone, web, tablet), in-store or a combination. Mr. Storch understands the importance of the omnichannel and providing access to his stores through whatever means the shoppers are most interested in using. I look forward to the holiday season, a true test of his team’s efforts.

May the force be with you, Mr. Storch.

Paula Rosenblum
BrainTrust

We are talking about two different things here:
1) The demise of stores and
2) The death of big-box retailing.

I think stores will always be around. No doubt about that. But big-box retail, otherwise known as “category killers” really is a dying breed. Mass Merchants have had as much of an impact there as online sellers.

Kudos to Storch for weathering the Walmart storm.

Tom Redd
Guest
One’s perspective can’t be separated from who you are. Storch is CEO of Toys “R” Us, a former Target executive, and a McKinsey partner, so physical stores and rigorous economic analysis form his worldview. He’s also smart and passionate about retail, and his business sense (he connected well with the crowd at Shop.org). The whole Star Wars Episode III was more than theatrics, he does see retail today in a third phase of evolution (I: Stores Ascendant, II: Rise of Internet, III: Stores Strike Back) with more phases to come (and he makes no certain predictions on those outcomes — yet we know who he’s rooting for). Storch clearly understated the growth power of online retailing, the significance of the digital in retail overall’s growth, and uncritically stated that physical stores are profitable in questioning those retailers closing physical stores (closing stores just sends your shoppers to Walmart and Target). The cost advantages he stated for physical stores over “direct” online only retailers were overly simplistic and broad to offer more than a direction in supply chain costs yet these serve as powerful rallying cry for brick and mortar retailers to not throw in the towel and “strike back.” Where… Read more »
Doug Garnett
BrainTrust

He is absolutely right. And I think it’s critical to consider his cost model discussion. Somehow, internet-only theorists have this tremendous ability to ignore reality — and act on the mere premise that everything becomes free with the internet. It really isn’t so.

Interestingly, just yesterday I released a blog post about showrooming — noting that the data indicates it’s not the big problem we’re told it is. And, what about the threats to Amazon? To justify the wait for product, their prices need to be dramatically low. And if big boxes are threatened by Amazon, Amazon should worry about reverse showrooming. Like this weekend when I picked the printer I wanted based on Amazon reviews. Then went and bought it at Best Buy.

Truth is, I don’t think Amazon needs to be worried. At the same time, the threat to big box from the internet is massively overstated. Not that everything is easy for big box — but the problems have different sources.

Here’s a link to that post.

Ron Perry
Guest
Ron Perry
4 years 11 months ago

I absolutely agree. Even with all of the advancements in technologies, online businesses still have a difficult time replicating the in-store experience. On the whole, the online experience cannot match the sounds, the smells, the feel of garments, or the vibrancy of the colors that you can experience in a physical location (if done well).

Bill Hanifin
BrainTrust

If I were in Mr. Storch’s shoes, I would probably go on the offense as well. I would also be working furiously on making changes within my own business to ensure that the advantages cited for physical stores are in fact delivered by the Toys “R” Us store chain.

As a consumer, I find many advantages for shopping in physical stores, but the magnitude of that advantage varies widely by the category of retail. Each retailer has to be honest in self assessment as to the extent of the advantage it can press, based on its category.

Lee Kent
BrainTrust

Brick and mortar is long from dead. It is simply time for each retailer to rethink what they need to deliver, and how.

Ken Lonyai
BrainTrust

Paul R. Schottmiller is right when he says “I suspect we could find near unanimous agreement on his statement….” and Gene Detroyer makes a very astute point when he says “Isn’t the “wherever, whenever and however” the definition of the internet?” I don’t think anyone expected Mr. Storch to state that he concedes to online only retail and that he was closing stores.

There are definitely valid points in the keynote, yet I would like to know why, if for example, Toys “R” Us has such a handle on customer experience and accommodating shoppers needs, it has taken them 15 years to come up with the obvious ship to store scenario that others have implemented a long time ago?

Retailers are in flux right now — both online and offline — and that’s a great thing. There’s going to be a lot of shake-ups and shake-outs as the winning model for each category and brand comes to fruition. When the winners emerge, consumers will get the benefit and merchandising will be stronger for it.

David Slavick
Guest
David Slavick
4 years 11 months ago

I was there at shop.org this week and attended Mr. Storch’s talk. There was nothing new shared. The key theme I heard at the show was that the customer is in control and those retailers who anticipate sales under traditional marketing, advertising, and fulfillment practices will fail. Mr. Storch shared how flexible their fulfillment model is and it is well designed. This is in response to the myriad of ways that an order can be placed, picked/packed and delivered.

What was missing is how they will achieve a competitive advantage anytime in the near future. The power isn’t in offering choice as to how you can shop for toys, video games and clothing — but rather how you satisfy the individual — on a 1:1 basis. TRU has had a long standing commitment to direct marketing, analytics and careful segmentation. Time to leverage what they know and/or can predict the customer wants and gain greater share of wallet. In addition, find ways to acquire or re-acquire customers lost to Walmart, Target and Amazon.

Larry Negrich
BrainTrust

There are advantages that the retailer needs to exploit in the store. And there are advantages that the retailer needs to exploit via other channels. The key is taking all of the channels into account when working out a business strategy. The battle is for the share of wallet vs. competitors’ share of wallet, and not just vs. online competitors.

Ed Dunn
Guest
4 years 11 months ago

A toy store driven by child demand is a different retail animal than an electronic retailer or a book store or record shop where online is a serious threat.

I believe if TRU drills down the numbers to their electronics department, it would not carry the same sentiment….

Jeff Weidauer
Guest
Jeff Weidauer
4 years 11 months ago

The best news here is that a retailer is saying that e-commerce has its challenges and pitfalls, and it’s far from the end of retail as we know it. It’s great to see someone do something besides wring his hands and look for more ways to cut costs and lower prices while waiting for the end to come.

Brick & mortar retail has the opportunity to offer the best of both worlds, but retailers need to invest in those stores, starting with the people.

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