Going, Going, Sold for $5.7 Billion
By George Anderson
The New York Times is reporting that a group including Kohlberg Kravis Roberts, Bain Capital Partners and Vornado Realty Trust have agreed on a deal to buy Toys ‘R’ Us for $5.7 billion.
Immediately, speculation turned to what the new owners – two private equity firms and the real estate developer – would do with the business.
According to the Times’ report, “executives close to the negotiations said that at least for the foreseeable future, the Kohlberg Kravis, Bain and Vornado team would keep Toys ‘R’ Us as an operating toy business, while seeking to make it leaner and meaner.”
“Leaner and meaner” could very well include the closure and sale of current real estate holdings. An unnamed executive told the Times that up to 200 stores could be sold initially.
John Barbour, president of Toys ‘R’ Us’ stores in the U.S. is expected to stay on to manage the business.
Moderator’s Comment: If you were the new owner of Toys ‘R’ Us, what would you do with the respective businesses (TRU, Babies ‘R’ Us, online operations)
to make the company the strongest retailing entity possible? –
George Anderson – Moderator
I don’t know a lot about their business, but I have often wondered how they got as much business as they did with the store entries they use. In the stores I have been in, this is a narrow entryway, not into a spacious and welcoming shopping area, but into a cramped and circuitous pathway to get to the main shopping area. It doesn’t say “welcome” to me.
You asked, George, “If you were the new owners of Toys ‘R’ Us … what would you do to make them the strongest entity possible?” This presumes that is the No. 1 objective of the new non-retailer owners. If their real objective is to make the “strongest” financial killing on the deal, I’d confer with Eddie Lempert. But if it is to make the company the best possible ‘meaner and leaner’ retailer, I’d be inclined to hire an innovative CEO with a proven track record of blending innovation with ‘meaner and leaner,’ rather than retaining the current top person who is being kept on for whatever reason.
Toys has been fighting a losing battle for many years. Two internal factors really come to mind as to why:
1. Toys spent WAY too much time trying to develop centralized systems they thought would solve their problems, and…
2. They spent big bucks developing their “2000” store layout that proved to be (in my opinion) worse than their original store configuration.
Externally, the “W” word eroded their market share year after year and now, here they are, on the cusp of extinction. It is really a sad day to see a once proud all-American type company limping to the finish line.
I would over-promise and over-deliver on the brand promise. If they do not have one, I would develop one ASAP.
I would make the stores more welcoming. This means more open at the entrances, less cramped, with bold signs that point customers to where the key products are that drive traffic.
I would focus on the employees with the goal of building loyalty and restoring confidence.
KKR, precursor to KKB, has a good track record in purchasing supermarket chains, getting them back on their feet, and selling or continuing to operate them. Traditionally when they take over, rugged times are ahead for the existing management. There’s lots of fiscal oversight, and KKB knows what to look for.
However, toys and baby stuff are much more dependent on the whims of fad and fashion than are groceries, and toys are not necessities. The new owners’ learning curve must be steep, and they’d better get some sharp, experienced management.
In the heyday of TRU, sales of disposable diapers and baby/children’s clothing drove a great deal of their traffic. Now they’ve spun off BRU, which in many ways competes with the original TRU format. I’d combine the two formats in order to take advantage of the traffic created by both.
TRU got heavily involved in electronic gaming in the early days, but allowed several competing formats to take leadership in this area. They must regain dominance in the video game category at any cost, especially on-line.
TV-oriented toys and paraphernalia represent a huge business, especially those emanating from Japanese-based shows. Forming stronger relationships with those marketers, particularly now when the dollar is weaker against the yen, is essential.
Heavy, professional, and prescient participation in annual toy fairs is absolutely critical. This is crystal-ball stuff in many ways, and TRU should hire the best in the business to represent them. Call them gunslingers or consultants, some individuals are consistently successful in predicting the success of new toys up to a year in advance (Hello, Elmo!).
These are initial steps I’d recommend, which still leaves a great deal of work to be done.
If I were the new owner of Toys R Us, I’d be doing everything I could to protect my personal finances because I would have just made the worst financial mistake of my life.
I like Dr. Banks’ suggestion of combining the two entities. There is an obvious similarity – even an overlap – in the demographics they are trying to reach. There’s no reason to cannibalize sales from each other. Maybe an “All Things Kids R Us” store is in order?
If you’re not going to combine the two entities, I’m inclined to leave BRU alone as much as possible since it seems to be the stronger of the two businesses. Why mess with success? They’ve obviously latched on to a niche that even Wal-Mart can only compete with on a limited basis because the in-store department size limits their ability to offer the breadth of products and innovations that are available at a BRU.
TRU is a different story. I don’t believe they can eliminate toy commodities (i.e. Barbie, board games, Playstations, etc…) from their mix, but I think they need to expand their focus. Wal-Mart carries all the key commodities and has obviously hurt TRU’s business and captured a major portion of that market, but toy commodities are basically ALL that Wal-Mart carries. Far from abandoning these items, I think TRU needs to seek out, find, carry and promote unique and innovative offerings that Wal-Mart wouldn’t consider carrying because they aren’t “mainstream” enough. Become a destination for the parent, grand-parent, etc… who wants to get something “different” for their child or grandchild (in addition to all the normal, popular stuff). We read all the time about how people enjoy the hunt. They want to find a treasure. Become that “treasure island” in the ocean of toy commodities.