Toys Will Not Be Us at 73 Stores
By George Anderson
Some are wondering what took so long but Toys R Us has announced it will begin downsizing when it closes 73 stores this spring.
The owners of the company, including Kohlberg Kravis Roberts & Co., Bain Capital and Vornado Realty Trust, bought the retailer last July and many expected that store closings
would begin almost immediately so that the group could begin recouping its investment through real estate sales.
Now, some including Bruce Kaplan, president of Northern Realty Group Ltd., think the owners are less interesting in selling off properties and more interested in making a go
of the toy business.
To the decision to close the 73 stores, Mr. Kaplan told the Chicago Tribune, “This doesn’t smell like a real estate play. It sounds like they’re jettisoning underperforming
stores.”
“They’re slowly upgrading the level of their stores, adding more educational toys and exclusive toys. They’re redefining who they are,” he said.
George Whalin, president of Retail Management Consultants, agrees. “I think [the investment group] bought it for the long term. Certainly, real estate was an important part of
the venture, but I don’t think they bought it solely for the real estate,” he said.
Moderator’s Comment: Is Toys R Us poised for a comeback under its new owners? What will it take for the company to be successful? –
George Anderson – Moderator
Closing 73 stores is not, by itself, a real estate liquidation play. Every chain has a set of location mistakes, and well-run companies jettison those locations. The essential issues for Toys R Us: (1) A few national best sellers dominate sales and (2) Wal-Mart and internet sites can discount the best sellers due to their lower overhead. Toys R Us needs margin enhancing assortments and the lowest possible overhead. Private label is the traditional solution to margin problems, and it’s much harder in the toy business than the clothing business. If the new owners want to operate retail stores, they may need to consider a major commitment to clothing.
KKR, who bought restructured Beatrice, Esmark, and one of themajor tobacco companies, knows the value it buys, and the strategic direction to take.
I worked for food companies KKR bought, and reshaped five times over. And then, it smartly sold these entities, whether to Con Agra, or others.
The new owners of this defeated retailer by Wal-Mart, Target, and others know there is little financial opportunity to resurrect such a business. Secondly, there isn’t any other retailer that would consider a single category business that has proven it has no value to shoppers!!!
KKR is known to get their money out quickly; and only then would KKR think of a possible other direction. Hmmmmmmm
Who knows what good or evil lurks in the hearts of investors who might – or might not – want to be long-term toy retailers?
I have no cast-in-concrete opinion. But I’m inclined to think another retailer would have stepped ahead of KKR et al and bought Toys R Us if it were really a more valuable asset as a toy retailer than as a real estate investment play. But we should be cautious that we don’t ignore the “possibility” of investors today longing to be the next Sam Walton.
I think it made sense to keep the stores open through the holidays, then regroup. With Wal-Mart wobbling, now is a good time to reestablish their stores. I know that the stores that closed here in the Boston area were older and not as popular as those left open.
Now, with all that being said, I have two young children and didn’t step foot in their stores this past holiday. 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.
I don’t want to disappoint anyone, so I must take the technical perspective of this topic. But first, we see a deal comprised of the combination of two investment organizations and a real estate developer, does anyone really think that their goals are to “get into retail”?
Having said that, I believe that Toys R Us, and many of the “category killers,” must make the integration of their physical presence with the virtual world of the internet as seamless as possible, and even better yet make them complementary. I didn’t try it and I don’t know how successful it was, but the Circuit City Holiday ads featuring “20 minute pick-up” between internet ordering and store pick-up made all the sense in the world to me. It really emphasized the on-line convenience of searching for a gift combined with the “instant gratification” of walking out the door with the product in-hand. The smart retailer will also use the stores to implement a simplified returns policy that includes the ability to sell other merchandise to the customer. The store really becomes the “personal promotion” for the retailer’s internet presence. The store gives the shopper the confidence to continue using the internet, understanding that if they do have a problem there is someone they can go to locally for resolution. Sure beats spending 30 minutes on the phone to India.
The same behavior continues to play out across retailing, i.e., a large chain expands to a point where they have a significant number of under-performing stores, and there is compelling financial reason to dispose of them. The main constraint to doing this frequently is Wall Street, so it makes sense to go private.
The strategy will result — at least short term — in a profitable retailer.
Longer term, Toys R Us needs to create their own unique reason why shoppers visit the Toys R Us stores versus just buying what they need from the more general purpose big-box operators.
It is possible to do this, but only time will tell if Toys R Us will be able to figure it out this time around.
I believe we may be on the cusp of a paradigm shift with category retailers like Toys R Us, etc. We have seen an extension of their brand equity into the boutique environment at Albertsons; a move that may well be a successful model as the grocery chains seek innovative ways to compete with Wal-Mart and Target.
Isn’t it a question of whether adding Toy R Us boutiques in thousands of grocery stores will adequately replace the revenue created by the 73 stores they are closing?