FAO Schwarz’s Toys ‘R’ Us
Toys "R" Us
and FAO Schwarz couldn’t be two more different toy store retailers.
If you believe Jerry Storch, chairman and chief executive officer of Toys
"R" Us, Inc., that will not change now that his company has completed
a deal to purchase the upscale FAO Schwarz business.
"We
have enormous respect for the FAO Schwarz brand and for the special place it holds in the hearts of
children everywhere," said Mr. Storch in
a press release.
"Building upon this storied tradition is a responsibility we take very
seriously. We will work tirelessly to preserve the distinctiveness and integrity
of the FAO Schwarz stores and brand as we grow the business and, indeed,
take the brand to even greater heights."
Chris Byrne, director
of content at TimetoPlayMag.com, was
enthusiastic about the deal. "Financially, I think it’s brilliant," he
told Bloomberg. "You get all of the cachet and the look of
a specialty store and a destination with the operational efficiencies of
a giant like Toys "R" Us."
With
the acquisition, Toys "R" Us intends to operate FAO Schwarz’s
flagship store in New York and a store at the Forum Shops at Caesars Palace
in Las Vegas. It will also continue to operate its website and catalog
business.
One
casualty of the deal will be the FAO Schwarz shops operated within Macy’s.
There are currently 260 of these
around the country that will be closed by the end of November.
According to a Chicago
Sun-Times report, the FAO Schwarz store inside Macy’s State Street
location "had done significantly more business than it had anticipated
since it opened Nov. 1, 2007. The store, on Macy’s fifth floor, attracted
so much traffic that it helped increase sales in surrounding children’s
apparel departments."
Discussion Question:
What is your reaction to the deal made by Toys
"R" Us to acquire FAO Schwarz? Do you have any advice for Jerry
Storch and his management team?
It’s a good move for FAO and TRU. FAO is a brand worth saving and TRU has the resources to save and grow the brand. I just hope they don’t turn them into TRU’s. FAO had a magic to them that you don’t get at Toys. They should bring in more of the higher end educational stuff from Europe to FAO as well. I would love to see it filled with unique stuff from around the world. If I want a Barbie or a Transformer, I can go to Toys or Walmart and get the best deal. If I’m looking for something really special, then I will go to FAO.
Will we ever tire of this script? Company A buys Company B because of their unique qualities and/or position in the marketplace and promises that Company B will stay the same. There might be one or two cases since the beginning of time where that has actually happened but I don’t know what they are. So why doesn’t that work? Honestly I think it gets down to management ego, not to issues in the market. There just are not many who can watch and enjoy someone else’s success.
If FAO Schwarz “holds a special place in the hearts of children everywhere” what does Toys “R” Us hold? Is it just a cold big box toy warehouse where you get cheap toys? Jealousy begins to creep in. Which ‘child’ does Mom and Dad love best? Which one gets the pony at Christmas?
There is no such thing as blending the best of both cultures. You can create a third entity that is different than either of the two but don’t be fooled by this old story.
The casualty of the Toys “R” Us and FAO merger is really Macy’s, which will lose yet another differentiated line of goods. I like the potential of the knowledge Toys “R” Us can gain from understanding the shopper’s journey and experience from FAO, both in stores and online. They could apply a lot of learning to test scenarios in the Toys “R” Us outlets. They could also do a nice outposting business of specialty items to create some excitement and traffic driving events in their stores. sounds like a win-win in the making to me.
New York is New York and Las Vegas is Las Vegas but most toys are purchased elsewhere. Will the twain between Mainstreet TRU and Crystal-setting FAO successfully meet and create happiness without those FAO stores in Macy’s? Will all toy customers and corporate shareholders feel amply rewarded by what the future unfolds? This is a challenge TRU can’t toy around with for long. And only the many strata of toy customers can answer the vital question: Who is Toys “R” Us today?
Does this merger really matter in a world where Wal-Mart and Target are aggressively courting consumer dollars for toys? Years ago TRU was seen as a category killer. Now it’s just another store. I’m not sure that adding the FAO Schwartz name will be a boost for the company.
Misfit! These two companies are approaching the market from opposite perspectives. Toys “R” Us is a mass marketer. FAO is one of the world’s best known destination store. Their best customers are oil-rich sheiks. FAO is closer to a museum than a conventional store.
Historically, FAO has been valuable to Toys “R” Us because families would take their kids to FAO on their way to Toys “R” Us. That way the parents shorten their kids’ shopping list and get the kids to understand value. If Toys “R” Us uses FAO in the same way, it might work.
If Toys plans to roll out FAO on a two banner strategy, they should learn from FAO’s failure to do the same just a few years ago with Zany Brainy.
Another thing that usually happens is that the company that buys the smaller company thinks that the smaller company’s ideas can’t be that good or why would they be buying them? This leads to discounting the smaller company’s special ideas that made them successful. Once that happens, the smaller company is no longer a viable concern and just quietly goes away. All the potential ideas and uniqueness goes away with it.
Given TRU’s inability to create a differentiated shopping experience vs. its competitors, this merger will very likely dilute the FAO brand, placing it on the fast track to irrelevancy. It is unfortunate to see Macy’s lose the boutiques, which have helped revive the FAO name and retain its reputation as a destination.
The value of FAO Schwartz is in its brand. It is not in a multiplicity of stores across the country. That has been tried and failed. It is unique. It is special. It can not be replicated outside of New York and Las Vegas. The brand’s value is greater than TRU paid for the business…depending on how carefully TRU protects the brand.
That is why I question the closing of the Macy’s boutiques. That seemed like a perfect way to use the brand. Hopefully, someone rethinks that decision. Beyond that, other than some operational integration, I fail to see that this makes much sense.
Poor Macy’s. Even if the FAO boutiques weren’t performing (and they were), this is a distraction for Macy’s that it can ill afford. The program may have only been in 200+ stores; however, ironing out the details of the partnership and vendor execution, rejiggering real estate, ramping up the program, staffing, setting product, promoting; all of this drained resources.
It’s one thing for a retailer such as Target to bury a private label or proprietary brand that wasn’t working out, quite another to dissolve a hard won and intricately structured partnership. Macy’s will also be fielding “Where did the toy department go?” questions from shoppers for the next several months. Not such fun times.
I actually like the deal. Look at the great job that Gerald Storch and his team has done reviving TRU. TRU was going under in a good economy, and now they’re thriving in a less than stellar economy. If you look at the background of the TRU team, they have the experience to properly position FAO in the marketplace. I think the TRU management team and their deep pockets is exactly what FAO needs. By the way, back on January 9, 2006 we discussed whether TRU is poised for a comeback. I wrote, “They will need to continue to improve their stores and convince people like me, who quit shopping there because of so many past frustrating shopping trips, to come back and give them another try. You can cut your way to short-term profits but ultimately you need to win customers back, and the only way to do that is through executing the basics very well.” They got myself and a whole lot of other shoppers back as well. I think two years from now we’ll see that TRU was able to properly position and profit from their acquiring of FAO. While only time will tell if this was a smart move for TRU or not, at least with the RetailWire.com archives we’ll be able to see which of us got this one right.
Toys ‘R’ Us buys FAO…. Fiat buys Chrysler…. The juxtaposition is striking….
I can’t help but agree with Ian, above. Most of us have good memories of walking into FAO and playing with toys but they have such a different model and reputation then TRU. I can’t possibly see how, as Ian points out, internal jealousy doesn’t stand in the way of big changes. (To say nothing about the shakeout that accompanies a B2B purchase.) It really is too bad about FAO. Financial issues have driven a retailer with a fun, positive cache to the brink of disaster. And, who hasn’t seen and remembered the scene from the movie, BIG? TRU maybe a bit colder in its displays, but they have survived by staying the course.
The temptation for a larger company to play with its new toy (pun intended) is usually too much to resist. Good case study questions–How did Saks do with Club Libby Lu? How did Scott’s do with Smith & Hawken? Has the relationship with Sears helped Lands’ End? How did GM do with Hummer? Other than volume, has the perception of those brands been elevated or destroyed? Have they been commoditized and shut down, or made more special than they were? The writing’s on the wall.
This seems like almost a “free option” for TRU. After all, how much could they possibly have paid? I bet it’s a tiny fraction of their capital and marketing budgets. If anyone in the world can profitability use the FAO brand, it is TRU. Maybe it’s a store-in-store within TRU or BRU to help differentiate versus Walmart. Maybe it’s an online focused offering advantaged by the scale of TRU’s dom-com presence. They can try a few ideas and see if one sticks. If they can’t figure it out, they can write off the investment and move on.
When I read this story yesterday, my first reaction was, “TRU, are they (even) still around?” then I thought back to the sad spectacle a few years ago of Geoffrey being readied for the glue factory (or wherever old giraffes are sent): however sad the ordeal of businesses, in general, folding up their tent, having a toy store fail seemed even worse; then again, TrU had helped make toy buying a price-driven, commoditized experience, so maybe what goes around….
Anyway, back to the present. I guess we can argue every merger offers a great deal of potential, and–in a nod to Ian and and Greg–it almost always goes unrealized…or worse; so we should view this combo the way we view many things: with high hopes and low expectations.
TRU may dump Macy’s slower than Obama pulls out of Guantanamo Bay. The distribution and awareness that the current arrangement allows isn’t easily duplicated. Let’s not prognosticate the success or failure too early. There is a game plan. If executed properly this can be a substantial success.
I like this acquisition. Individually, TRU and FAO have strong brand recognition. Combined, they’re an overall stronger brand, rather than competing against each other and the industry’s many other toy players. My only issue: Some of the Macy’s stores-within-stores should have been retained. The more profitable of those sites has to make more business sense than the very questionable R Market concept launched recently by TRU.
Why should we be surprised? Since the early 1990s, toy stores have been squeezed continuously by the Monster Marts. First there was Child’s World, Child Palace, and Circus World, then Zany Brainy, and more recently KB Toys. All are gone from the scene. Toys ‘R’ Us CEO Jerry Storch says, “We will work tirelessly to preserve the distinctiveness and integrity of the FAO Schwarz stores and brand as we grow the business and, indeed, take the brand to even greater heights.”
Excuse us? This is the same Toys ‘R’ Us charged with anti-trust violations for trying to muscle out the competition? The same Toys ‘R’ Us that squandered its leadership in the toy industry and has seen its market share fall from 25% to 16%? The same Toys ‘R’ Us that had to be bailed out by a real estate holding company in order to survive?
So now there is basically one major toy retailer which, along with the Big Box giants, Walmart and Target, can dictate even more to toy manufacturers who are already reeling from the soft economy and dramatically increased costs.