New CEO Looks to Storch TRU’s Competition
By George Anderson
Gerald Storch has a new job. The former vice chairman of Target is the new chairman and chief executive officer of Toys R Us.
Mr. Storch, who has a reputation for saying exactly what is on his mind (he once called Wal-Mart a company of “vicious predators”) joined Target in 1993 as senior vice president of strategic planning and helped the company become a major force in retailing. Before he left the company last year, it was widely assumed he was the CEO-in-waiting at Target.
In his new role, Mr. Storch will be charged with taking back some of the business lost to the previously described “vicious predator,” but also his former employer.
Sean McGowan, a toy analyst at Harris Nesbit, said that while Wal-Mart Stores Inc. has the biggest market share, Target is probably more of a direct competitor to Toys R Us.
“I don’t know Storch, but I think Target has done an excellent job in toys,” he told The Associated Press.
Toys R Us has continued to lose sales and market share in recent years. According to a Dow Jones report, the toy chain saw sales go from $7 billion in 2000 to $6.3 billion in 2003. It was bought out last year and taken private by an ownership group consisting of Kohlberg Kravis Roberts & Co., Bain Capital and Vornado Realty Trust.
“You’ve got mass merchants who are expanding their toy space and using it to drive total store volume,” said Michael Appel, managing director at Quest Turnaround Advisors. “These discounters are not worried about the margins they make on toys. How can you compete against that?”
Moderator’s Comment: What internal and external challenges does Gerald Storch face as he takes over the leadership reigns at Toys R Us? What will he
need to do if the company is to achieve a turnaround? –
George Anderson – Moderator
The ownership of Toy “R” Us have likely told Gerald Storch, “You are no longer a CEO-In-Waiting, so don’t toy with us.”
Now the “well-Targeted” Mr. Storch will have to make joy out of toys by serving toy customers better than anyone else could serve them. A good start will be to listen carefully to the vibes from kids … plus following the sage advice recorded above.
Much has been said about the price wars in toys and Wal-Mart’s unforeseen domination of the category…little to nothing has been noted regarding Toys ‘R Us’ antiquated systems, incoherent brand and product strategy, lack of turnover below the executive level, and often adversarial vendor relations. “Toys” and “Babies” operate quite differently yet both entities have been inextricably linked (in this case, I’m talking mostly about TRU). On the other hand, BRU was one of the first retailers to successfully execute a “good, better, best” private label strategy in apparel and accessories…brands that are highly-regarded by consumers and that compete right along side their thoughtfully-chosen national brands and licenses. BRU also enjoys tremendous productivity and it is still the “go-to” store for new moms and dads and showcase account for juvenile products vendors. The few vendors that do business with both are always baffled by the contrasts between the two!
There may be some opportunities made visible by looking again at the basics.
First off, let me beat my familiar drum: Wal-Mart does NOT have the lowest prices, including on toys. DOES NOT. Again and again, consumers, including we on this discussion board, have bought the myth. What is my assertion based on? Almost half a million price comparisons. So this means that TRU may want to frame its strategy in light of this over-arching issue. There are several options that could be quite valuable, but let me move on.
Second: our report on retailing, due out in a few days, shows that industry-wide, retailing meets shoppers’ expectations very poorly — 90%-plus of retailers meet customer expectations at a rate of 70% or less. Seventy percent is not a high number. This means that progressive retailers, TRU included, have a huge opportunity to capture much more traffic, more revenues, and higher margins than they currently do. This is not easy to do, or else we would see overall industry customer expectations numbers around 85% or more. Not having succeeded at meeting shoppers’ needs better, the industry has gradually given up on trying, and now focuses on an amazing number of labyrinthine distractions. Details are in our report out soon. My point: focus on the basics, because no one is doing the basics all that well; if you do them well, you will stand out like a lighthouse in a storm, customers will flock to you, and your margins can be “whatever you want them to be.” I’m painting a simple picture here, but I hope you see my point.
Customer expectations in retail all boil down to a few basics, as our studies have shown over and over. But expectations must be carefully and earnestly measured, and analyzed with a blazing light always shining on the organization’s prior assumptions. Most organizations will not do this — or more accurately stated according to our numbers: virtually NO organization has done this.
In my view, the issues are a great deal simpler. Not easier, but simpler. If they were easy, we would see a retail industry that wows us all — shoppers and consultants alike. But just because so few retailers (any?) have been able to really get the basics right doesn’t mean it can’t be done. Saying it CAN’T be done IS THE WHOLE PROBLEM.
One further comment…an open entreaty to Mr. Storch:
Be Bold! Don’t tinker, “phase things in,” or otherwise attempt slow incremental change. Your business model is flawed in almost all areas. Accept that. And radically change it. All at once. You are a privately held company. You don’t have to worry about monthly or quarterly results. So don’t.
Your competitive positioning lacks a defensible and profitable advantage. Your customer service is the worst in the business, and culturally entrenched. Your merchandise strategy is unfocused and executed unevenly across categories. You have bad merchants in key roles and good merchants in unimportant roles. Your systems are not state of the art, and your technology doesn’t deliver the efficiencies you need. Your processes are antiquated and your supply chain cumbersome.
Yet you are the only pure play toy retailer left standing. Sheer existence is a huge plus going for you. Despite the many and manifest deficiencies, the American shopper continues to give you an opportunity to improve. They are in your store. Maybe not in the numbers and with the average check you’d like, but they are there.
So be bold. Create a vision. Clean house. Take a huge chance. What do you have to lose?
Toys ‘R Us has had a number of challenges and issues in recent years. When Toys ‘R Us first opened, the stores had the biggest and best selection of toys of any other store. Wal-Mart and Target have created a great selection of toys that their consumers want to buy. Rather than just the best selection of toys, the challenge for Toys ‘R Us now is to provide a selection of toys and shopping experience for a group of loyal consumers. Determining who those consumers are, what selection of toys is important to them, and what kind of shopping experience they want is necessary for determining a competitive advantage.
Mr. Storch faces fundamental industry dynamics that have mitigated against a successful pure play toy retailer. These are not new, but bear remembering:
1. Twin peaks: Easter and Christmas represent twin surges in sales which have very real implications around assortment depth, breadth, and plan-o-gram turnover. In between and around those twin peaks are very low troughs of intermittent demand. And without going outside the pure play toy environment (hint, hint), this will not change. Birthday’s and shut-me-ups won’t cover the operating costs.
2. Competitive differentiation for a pure play toy operator is almost entirely limited to breadth of assortment and store environment (distinct from customer service, which is simply a subset of the store environment). WM and TGT have limited square footage for toys. Period. This means they do not and cannot compete with the assortment offered at a big box TRU.
3. Pricing in toys is very elastic. Information is becoming more and more readily available, particularly on key or traffic driving items. All retailers have the ability to capture margin on secondary or fringe SKUs. However, the TV driven or trend oriented merchandise becomes comparably priced during the Twin Peaks.
Implications of these truths are that the staffing, and the assortment depth and breadth needed during the Twin Peaks cannot be profitably supported during the troughs. Further, the expanded assortment creating the differentiation is composed primarily of lower value SKUs (one assumes some skill on the part of TG and WM merchants) which turn slower, have more obsolescence risk, and greater impact on GMROI. Add to this the expense of creating a differentiated in store environment (talk to FAO) when prices are for the most part a competitive issue.
One prediction is that TRU’s private label business will constitute a larger part of the overall mix. I am not a huge fan of the precedent established by Cool Toys at Target, but the temptation to increase overall margin by capturing supply chain margins on commodities will be impossible for a Storch-led management team to avoid.
The American toy business is largely based on a few low-margin best sellers. Toys “R” Us won’t be reasonably profitable if it continues to operate in that space. Babies “R” Us is profitable because private label clothing creates decent margins. Toys “R” Us must rescue its margins by increasing private label, getting exclusives, and increasing higher-margin categories. There may be a few pennies gained by supply-chain and other technology work, but the big dollars have to be in the merchandising gross margin strategy. Commodity sellers can’t compete against Wal-Mart and Target. Low-margin best sellers have commodity margins.
Toys “R” Us has many problems, all of which are fixable, albeit not necessarily easily or quickly. The first one that must be addressed, however, is the stores. Nine out of 10 people I talk with say, “I hate shopping in those stores.” Obviously rebuilding the business has to begin there.
This will come from “left field” but what the heck. Mr. Storch needs to make TRU a profitable place for vendors to sell toys. A couple of years ago our firm did a complete go-to-market field strip of a juvenile products business. Their largest customer by far? TRU.
A standard part of the upfront analysis is to pare to customer and product line profitability — smugly predicting the “80/20” rule in advance as proof of our vast experience and all-seeing expertise.
Whoops! This company was literally “upside down” — losing money on their largest customer — and we later found this was not an isolated incidence in the industry.
For TRU to get the vendor support it needs to become the premiere toy outlet again, it is also going to have to be the most profitable place for those vendors to invest their resources and innovation.
Toys R Us has failed because they CHOSE to play in the same sandbox as Wal-Mart. Maybe they should look toward FAO Schwartz as a model and go upscale. Wal-Mart isn’t afraid of higher priced items and may follow TRU upscale but UPSCALE clientele won’t go into Wal-Mart. I, however, bet our friend here can’t keep his mouth shut long enough to execute anything. The key here is to whisper in the ear of your suppliers and customers. Screaming and throwing tantrums will only drive all away and advise competition of your intentions.