It’s official. Toys’R’Us filed for a motion this morning with the intent to cease all operations and liquidate inventory in the U.S. I’ve been reading a bunch of articles to find the exact source of the motion, this CNBC article is the closest thing I can find. There are some other tidbits I picked up though that are worth repeating here:

  • Engadget states that a deal to sell the Canadian chain is still in the works, and Toys’R’Us is attempting to include 200 U.S. locations as part of the deal.
  • BBC is reporting that efforts to find a buyer for the UK chain failed and the remaining 100 stores will close within the next 6 weeks.
  • Toys’R’Us blames Amazon and Walmart for their downfall. I’m more inclined to believe what this CNN article spells out as to exactly what started it all. I have another theory in that their move to charge a premium over MSRP, known as the TRU tax, is what turned shoppers off from going there. I’m not entirely sure if the start of the TRU tax coincided with the buyout that CNN describes, but I wouldn’t be surprised if the two were connected. Toys’R’Us took the opposite approach of slashing prices, what Amazon and Walmart typically do, and raised them instead. That was not a smart strategy. Walmart does this to undercut competitors and it unfortunately works. Doing the exact opposite just spells out your own doom. You are basically giving your competitor an edge without them having to work for it.
  • Toys’R’Us is projected to run out of cash by May, which means store closings will happen sooner rather than later.

I was just there on Sunday with my three kids. Spent a solid 60 minutes there browsing the aisles, and looking at all the stuff. The store was packed. You can’t have that kind of experience at a big box store. It’s upsetting on so many levels that a store that sells just toys can’t survive the retail environment due to a Wall Street deal.

2 COMMENTS

  1. The TRU discount definitely predates the leveraged buyout. I remember first running into it when trying to buy Bionicle mask packs. I believe it was the very first Kanohi Pack (#8525), which I may have seen stocked to Meijer _once_, but otherwise never saw for sale anywhere besides TRU (LEGO Stores were a rare and distant beast back in those days, with the closest being about 5-6 hours away). TRU did regularly restock them, but quickly raised the price from $1.99 (MSRP) to $2.99 (a 50% markup). When CMF S1 hit, all TRU stores got two cases (which they generally quickly blew through), and some stores got sent a third case after they’d sold out of the first two. One of our LUG members actually got shown a memo where TRU corporate had sent out a directive to raise the price from $1.99 to $2.99 (just like with the Kanohi packs) and restrict sales to a small number of packs per person per day because they were “hot sellers”.

    And while it doesn’t seem to be common knowledge, that is definitely a defining characteristic of TRU for the last two decades. If it’s nothing special, they just price it and sell it, and nobody pays any attention to it. If it has any sort of noticeably popularity, they’ll bump the price up. If it’s a really fast moving item, they’ll add to the price bump by restricting quantities. But while The LEGO Company seems to do the restricted quantities to make sure they don’t have irate customers who can never find anything without resorting to scalpers, TRU seems to have been trying to use this to lure customers into the store in the hopes that they’d lose all control and just start throwing money around on random stuff. I say this because even if it’s not new, and it’s not a fast mover, [email protected] and LEGO Stores still have a modest restriction on how much of any single SKU you can buy (usually 5 per purchase, with CMF releases usually increased to around the number of minifigs in that wave).

    As for the Walmart angle, Walmart could _afford_ to undercut the market. They use the toy aisle as a loss-leader, sacrificing direct profit to get people to shop there for other stuff with a high profit margin. TRU sells…toys. They can’t really discount “toys” and stay in business (they apparently can’t really _not_ discount toys and make that work either). Other big box department stores could afford to follow suit because they also could use their toy aisles to boost sales in other departments. Barnes & Noble has followed more of the TRU model, with increased prices, but toys are a side business for them. They need to make enough profit for it to be worth doing at all, but the books are what gets people in the doors so there’s no point in giving the toys away. They also tend to favor more affluent markets, so their customer base may not be as price conscious as TRU is used to dealing with (notice that nobody ever really discusses B&N pricing, but hardly a month would go by without seeing someone somewhere moaning about the infamous TRU “discount”).

    • Toys isn’t a loss-leader for Walmart, Electronics is. Toys actually has a healthy margin that props up other departments around them (LEGO, for example, typically runs an average ~30% margin… it varies based on the set price point and bulk, but averages about to that for retail). Electronics, on the other hand, is typically at cost or below, depending on the product (movies, music, and video games are basically a 0-profit game). Food, likewise, while a huge bulk is a very thin profit margin.

      Walmart in earnings reports overall sales growth, but internally, manages based on department classifications. There are bigger divisions within that, but each department has a coordinated set of buyers and merchandising reps who only work in that department, and they don’t prop up one or hold down another. In truth, they rarely coordinate or work together in the corporate planning section. That stuff is all done by planners later after product is bought.

      That’s not the number that they typically track, though, it’s things like attached purchases (you come in to buy LEGO and also buy milk and socks), same-store-sales-growth (more people coming into a store) and things like that. They do scale and change individual departments in order to offer more.

      All of that aside, like I told Ace in our chat… Walmart doesn’t do the whole “price people out” thing, at least not as a direct tactic. For decades, since the days of Sam Walton, they were built on two coordinating philosophies: Everyday Low Price (EDLP) and Everday Low Cost (EDLC). Basically, price the product for the point where you can sell it, sustainably, for the long term where it makes the most sense, and pay the least amount to the supplier that you can and everyone still makes something.

      For the most part, especially on non-grocery items (grocery stuff is more affected by regional prices than national products), pricing is set nationally, or at worst, regionally. While managers of a store or district have some limited control on price, there is a lot of watching and auditing to make sure people aren’t putting things at a loss by themselves, or messing with prices to raise/lower them. It’s a huge no-no in the merchandising and pricing groups to drop, and later raise, a price, unless it was driven by outside forces (increase in cost to get it, which pushes up the price).

      All that being said, I simply do not buy that it was Walmart or Target or big-box in general that damaged TRU. They’ve been hurting for years, and it’s not like any of the big box places out there have seen a sudden growth surge in recent years. Amazon, maybe, but not other retailers… they’ve simply done more to go after consumers and got the business (yet the overall consumer purchase at Walmart has actually dropped pretty consistently for several years in a row).

      Even with Amazon, though, it’s not like it was a new thing that sprung up. They’ve been taking retailers to the woodshed for years now, and the ones that survive are the ones that have learned to compete. I never saw anything from TRU that showed an ability or even a willingness to do that.

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