461 From Road
Through its growing number of subsidiaries, Toys "R" Us, Inc. seeks to service the children's toy, clothing, and accessory market by stocking virtually everything a child desires under one roof.
With sales near $10 billion, Toys "R" Us, Inc. is the world's leading children's specialty and toy store chain, with over 1,200 outlets in the U.S. and 21 international countries. Comprised of Toys "R" Us, Kids "R" Us, Babies "R" Us, and new superstore formats, Toys "R" Us, Inc. consistently beat both the industry's growth level and its own expectations. Lauded by analysts for decades, Toys "R" Us succeeded by quickly responding to customers' ever-changing demands, initiating a "no questions asked" return policy, and making toy retailing less seasonal. Long a leader in using sophisticated computer systems, Toys "R" Us centralized administrative and buying decisions so, as chairman Charles Lazarus often put it, only the selling was done in the stores.
Toys "R" Us Meets Interstate, 1952-79
Toys "R" Us founder Charles Lazarus was born above a Washington, D.C., shop where his father repaired and sold used bicycles. After a stint in the Army, Lazarus opened the National Baby Shop, a children's furniture store, in 1948, just two years after the beginning of the Baby Boom. Noting that customers often asked if he sold toys, Lazarus began adding rattles and stuffed animals to his stock within a year. In 1952 he opened the Baby Furniture and Toy Supermarket in Washington, D.C.; five years later he opened a discount toy supermarket in Rockville, Maryland, the first to bear the abbreviated Toys "R" Us name (the store's original name wouldn't fit on its sign). By 1965 Lazarus operated four such outlets in the Washington, D.C., area and the next year sold the profitable toy supermarkets to Interstate Stores Inc., but served as president of the company he created.
Founded in 1916, Interstate became publicly owned in 1927. With 46 small department stores in its fold by 1957, sales growth had dwindled to almost nothing, and profit margins were shrinking. The company sought relief for its financial woes in the burgeoning discount store arena by experimenting with a discount store in Allentown, Pennsylvania. By 1960 it had acquired two discount chains: the White Front Stores in southern California and the Topps chain, located mainly in New England.
Interstate undertook an aggressive but ill-fated expansion, overextending itself, and the 1973-74 recession aggravated its problems. In 1974 Interstate declared bankruptcy, its debt at the time the largest accumulation of liabilities in retail history. By that year Interstate had 51 Toys "R" Us stores, and it continued to open new ones during its court-ordered reorganization. Before 1974 Toys "R" Us was still ordering and counting stock manually, but that year the company streamlined its ordering and inventory system by installing its first computer mainframe. In years to come the company would upgrade its computer system many times to keep pace with its ever-growing sales volume and inventory level.
In 1978 Interstate emerged from its reorganization a vastly different company. It had closed or sold all of its discount store operations; only the 63-store toy chain and 10 traditional department stores remained. To reflect its principal business, the company had changed its name to Toys "R" Us, with Lazarus serving as its president and CEO.
Toys "R" Us Takes Off, 1980-85
Lazarus's approach to pricing was vastly different than that of his competitors: he sold the items shoppers wanted most at little or no profit. Customers then automatically assumed most of the store's items were equally well-priced and did the rest of their shopping there. By 1980 Toys "R" Us had earned a solid reputation as a retailer of great efficiency, with 101 stores around the country. Since its reorganization three years earlier, sales had more than doubled to nearly $750 million in fiscal 1981, a year in which many toy sellers suffered, especially during the holiday season.
There seemed to be no serious threat to the company's growing dominance of the retail toy market--with its 120 stores--and executives were often quoted as saying they sought not so much to boost sales as to increase market share, which Toys "R" Us did from 1978's 5 percent to 9 percent in 1981. The following year as rival Lionel Leisure, a chain of 98 toy stores, filed for bankruptcy, Toys "R" Us announced the formation of a new division to sell name-brand children's apparel at discount prices. The company had first-hand experience with the baby boom generation's willingness to spend money on their children and opened two pilot Kids "R" Us stores in the New York metropolitan area during the summer of 1983. The 15,000-square-foot exuberantly decorated stores featured electronic games and clearly marked departments. From the day the first Kids "R" Us stores opened, owners of department and specialty stores recognized them as a major threat to their survival.
All was not easy for Kids "R" Us, however. In the 1980s traditional department stores and small children's shops complained that name-brand apparel makers were selling their goods to discounters; new competition from Kids "R" Us further raised the stakes. Just a few months after Kids "R" Us opened its first two stores, Toys "R" Us filed suit in September 1983 against Federated Department Stores Inc. and General Mills Inc., charging the companies with price-fixing. The following month, the company brought a similar suit against Absorba, which had agreed to supply the new stores, but later allegedly refused to fill the orders. Toys "R" Us later dropped the suits, noting only that circumstances had made it prudent to terminate litigation.
The Kids "R" Us concept successfully implemented many of the policies Toys "R" Us had, such as discount pricing, tight inventory control, purchasing in large volume, and opening stores in low-rent strip malls along major thoroughfares. In 1983 the company surpassed the $1 billion milestone, with sales of $1.3 billion. The following year was full of firsts for Toys "R" Us, beginning with its first foray outside the U.S. in 1984, with four Toys "R" Us stores in Canada and one in Singapore; two more Kids "R" Us stores (with an additional 5,000 square feet) in New Jersey; and a generous stock option plan open to all full-time employees. Lazarus later told Dun's Business Month that salaries alone were no longer enough to make people feel they had a stake in a company's success.
By the spring of 1985 there were 10 Kids "R" Us units in New York and New Jersey with an additional 15 to be opened by year's end, while five Toys "R" Us stores opened in the U.K. By the end of the year Toys "R" Us decided to try a different tack to expand its market share with the launch of Toys "R" Us Magazine, sold in its stores for 79¢ each. Aimed at slightly older children, the well-received magazine contained feature stories on animals, celebrities, adventure, and travel, while including ads for television shows, clothes, and toys. A second issue was offered during the summer of 1986, but the magazine was eventually phased out. At the same time the magazine was hitting stores, Dun's Business Month cited Toys "R" Us as one of the nation's best-managed companies and credited Lazarus with developing an extraordinary management team (most of whom were promoted from within). Between 1980 and 1985 the toy retailing industry grew 37 percent, while sales at Toys "R" Us surged by 185 percent, leading the company to estimate that it had 14 percent of all U.S. retail toy sales, an increase of 9 percent from the its share just seven years earlier when the company had emerged from its reorganization.
A Burgeoning Empire, 1986-91
Charles Lazarus believed market share was his company's number one priority; to keep increasing market share he was even willing to cut prices--at the expense of earnings. Yet perhaps earnings needn't suffer, because Toys "R" Us had the "ultimate marketing research tool," the company's highly computerized merchandising system. By January 1986 Toys "R" Us had 233 toy stores in the U.S., 13 international stores, 23 Kids "R" Us outlets, and 4 traditional department stores. And as it grew into a national chain, the company aggressively fought others using an "R" in their name--Tots "R" Us, Lamps "R" Us, and Films "R" Us were among the companies successfully sued by Toys "R" Us for name infringement, a practice the company maintained for years to come.
During the summer of 1986 Toys "R" Us and Montgomery Ward announced a joint venture to begin in Gaithersburg, Maryland, that fall. Each store would operate independently, but would share an entrance and exterior sign. The arrangement was a boon to Ward, which had restructured its business and had surplus floor space in many of its locations. Toys "R" Us found the arrangement beneficial, too, since many of the Ward stores were in excellent locations and rental rates were often quite reasonable. During the 1986 Christmas season, the company's sales far exceeded many analysts' grim forecasts. Its success was attributed to its ability to consistently offer the toys shoppers were most interested in buying. By 1987 the company had 37 additional domestic Toys "R" Us stores, 11 new overseas outlets, and 14 new Kids "R" Us stores; its market share now stood at 15 percent of the $12 billion toy industry.
Even when toy sales were sluggish, Toys "R" Us managed to perform well. In another bid to further increase its market share, the company surprised the retailing industry in 1987 by announcing that it would pass on the savings it expected from lower tax rates to customers. Two additional retailers, Wal-Mart and Target, quickly followed the company's lead. This was also the year the Toys "R" Us international division moved into the black, and the company opened four stores in as many German cities. Although there were plans to open even more stores during the year, it proved difficult to secure the required permits for a retail outlet larger than 18,000 square feet. Competing German retailers had good reason for concern; in the U.K. Toys "R" Us had captured 9 percent of the $1.8 billion toy market in just three years. The products of two prestigious German toy manufacturers, Steiff and Maerklin, were not sold in the new German Toys "R" Us stores. Steiff, maker of high-quality stuffed animals and dolls, chose not to do business with the toy giant out of loyalty to smaller-scale German retailers while Maerklin's electric trains, sold without packaging, could not be offered in a toy supermarket setting.
From the very start Toys "R" Us overseas stores were strikingly similar to those in the United States. Most were freestanding buildings, and all bulged with many of the 18,000 items for which Toys "R" Us is famous. Approximately 80 percent of the items offered were the same as those found in U.S. stores, with the remaining 20 percent chosen to reflect local interests. Sales for fiscal 1987, the first year in which Kids "R" Us earned a profit, surpassed the $3 billion mark. The company attributed part of its success to its upgraded universal product code (UPC) scanning system, which had been installed in all the Toys "R" Us stores shortly before Thanksgiving.
By January 1988 the company had 313 U.S. toy stores, 74 Kids "R" Us outlets, and 37 international toy stores. Plans to open stores in Italy and France were also in the offing. In August, Lazarus told the Wall Street Journal his goal was to sell half of all toys sold in the United States. While this may have sounded overly ambitious, signs abounded that Lazarus was well on the way to meeting his goal. Even though toy sales in 1986 and 1987 grew an average of 2 percent, sales at Toys "R" Us grew 27 percent during each of those years. The toy chain consistently proved itself capable of turning away all pretenders to the throne of top toy retailer. Its two nearest rivals, Child World Inc., with 152 stores and Lionel, with 78, offered similarly large toy selections in equally cavernous structures, but neither had been able to equal the success of the originator of the toy supermarket concept.
Something else Toys "R" Us had was a healthy sense of humor about itself and the industry, as when a Florida newspaper published a cartoon during the 1987 holiday season showing a couple burdened with many gifts leaving a Toys "R" Us store. The caption beneath the cartoon read "Broke 'R' Us." Company executives thought it was so funny that copies were posted throughout their offices.
The company's success was attributed to many factors, including its buying clout, great selection, deep inventories, and ability to identify the latest hot items and get them on the sales floor fast. When some companies' stores were finding it difficult to get sufficient quantities of Nintendo games in early 1988, for instance, Toys "R" Us was able to get the number of Nintendo games it wanted. It was reported in the Wall Street Journal that Toys "R" Us sold $330.80 worth of merchandise per square foot annually, with Child World selling only $221.70, and Lionel just $193.10. Average sales for a Toys "R" Us store were $8.4 million; Child World, $4.9 million; and for Lionel, $4.4 million.
In the fall of '88 Toys "R" Us shed the last reminder of its connection to Interstate Stores by selling the remaining department stores in Albany and Schenectady, New York, and Flint, Michigan, to that division's management. Company sales hit the $4 billion mark in fiscal year 1988, and by the fall of the following year Toys "R" Us joined McDonald's Company (Japan) Ltd. to open several toy stores in Japan. Toys "R" Us would have an 80 percent interest in the venture to McDonald's 20 percent with an option to open restaurants at the store sites. During the holiday season in 1989, Toys "R" Us launched Geoffrey's Fun Club as a low-key, noncommercial club sending quarterly mailings featuring items such as an activity booklet with a family member's name or a storybook that presented a family child as the main character, with his or her name repeated throughout the book. The club, designed to boost the company's profile in members' homes, more than doubled original membership projections. Total sales for the year were more than $4.7 billion, with a 25 percent market share of the $13 billion U.S. retail toy market.
Lazarus told Forbes there would always be "room in this tightly controlled company for innovations to further decrease operating costs." An instance of this came in 1989 when Toys "R" Us completed installation of gravity-feed-flow racks in most of its U.S. toy stores for restocking fast-moving items like diapers and formula. Yet as every rose has its thorns, Toys "R" Us ran into some trouble in the early part of the 1990s. First came difficulties with the Consumer Product Safety Commission for importing toys it deemed dangerous. In the spring of 1990 the company recalled 38,000 "Press N Roll" toy boats with small parts that, if broken off, could choke a child. A few months later, Toys "R" Us was named as one of seven distributors sued by the Justice Department on charges of selling hazardous toys (including a xylophone painted with lead-based paint, and the aforementioned toys with unsafe, small parts). Yet Toys "R" Us successfully defended itself on the grounds that its safety record was excellent, and a federal judge dismissed the charges.
By the end of 1990 the company had a new $40 million distribution center in Rialto, California, that held 45 percent more merchandise than the company's other warehouses, but took up one-third less land. The company finished the year with sales topping $5.5 billion and net earnings reaching $326 million. An industry analyst, impressed by the company's solid sales and consistency, remarked to the Wall Street Transcript, "I can look at a slowing economy and still feel comfortable that Toys "R" Us is going to grow." And grow it did, especially overseas. Although difficulties in finding store sites and circumventing the large-scale retail law still loomed before Toys "R" Us and McDonald's, the Japanese joint venture moved ahead with plans for up to 100 stores by the end of the decade. For other U.S. retailers interested in opening outlets in Japan, Toys "R" Us became a test case in how to overcome local retailers' resistance. Japanese retailers had already felt the pinch of a declining birth rate since 1973 and didn't relish a further erosion of their market share. U.S. officials, however, persuaded Japanese officials to speed up their approval process on applications for large retail stores, and the first Toys "R" Us opened in Ami Town on the outskirts of Tokyo in 1991.
Superstores and Beyond, 1992 to 2000
Over the next few years, Toys "R" Us continued to expand in high gear, especially overseas. Once operating in a handful of countries worldwide, company stores now popped up all over the globe, in Hong Kong, Israel, the Netherlands, Portugal, Scandinavia, Sweden, and Turkey, while the heaviest concentrations were in Australia, Canada, France, Germany, Japan, Spain, and the U.K. Consequently, Toys "R" Us's annual figures reflected this steady growth: fiscal 1992 sales reached $7.2 billion; 1993, $7.9 billion; and a big leap in 1994 to $8.7 billion. Similarly, earnings climbed from 1992's $438 million to 1994's $532 million. In early 1994, there was also a changing of the guard: Charles Lazarus, the company's longtime chairman and CEO, turned the duties of the latter over to Michael Goldstein, vice chairman; and Robert Nakasone, formerly president of worldwide stores, was appointed president and COO.
In 1995 the company's sales once again soared to $9.4 billion (helped in part by the introduction of educational and entertaining computer software), yet earnings were heavily slashed ($148 million) due to restructuring costs and grand plans for the near future. As Toys "R" Us looked to the turn of the century, the company was determined to become the ultimate "one-stop kid's shop." To further this plan, the company adopted several ambitious programs to take Toys "R" Us to the end of the 1990s and beyond. First and foremost was restructuring, which included streamlining merchandise by up to 20 percent, closure of 25 underperforming stores, and the consolidation of several distribution centers and administrative facilities domestically and overseas. In addition, there would be new Kids "R" Us stores, the debut of Babies "R" Us and superstores, and the introduction of "Concept 2000," for new and renovated Toys "R" Us stores--all to provide "the ultimate kids shopping experience."
The first three Babies "R" Us stores, each measuring about 45,000 square feet, opened in 1996 with an additional seven planned before the end of the year. Like its siblings, Babies "R" Us stores were filled to the brim--with clothes, juvenile furniture, carseats, and feeding and infant care supplies. And like better department stores, Babies "R" Us also offered a computerized national gift registry. At the same time, the first Concept 2000 toy store, one of 12 announced for the year, debuted in July. The Concept 2000 facility was a megastore of 96,000 square feet, replacing the formerly successful supermarket set up with an oval format with color-coordinated departments, lower shelving, a Bike Shop, learning centers, and special sections for Barbies, Legos, and video games.
Moreover, the company also introduced experimental superstores (the first one, Toys "R" Us Kids World, opened in November 1996 near company headquarters in New Jersey) combining the inventories of Kids "R" Us and Babies "R" Us with a multitude of top-of-the-line toys. Superstores were slated to carry fast food (similar to Wal-Mart's deal with McDonald's), candy shops, hair salons, photo studios, party rooms, possibly even rides like carousels and Ferris wheels. Two other superstores, one in Nyack, New York, and another in Fairfax, Virginia, were scheduled to open before the end of the year. With dozens of Toys "R" Us-inspired stores opening in the U.S. and around the world, the company's domination of the marketplace seemed assured. Yet with upstart chains like Zany Brainy and Imaginarium staking their claim, the future of toy-related merchandise rested firmly in the smallest of hands and most fickle of minds--children.
Principal Subsidiaries: Toys "R" Us; Toys "R" Us International; Toys "R" Us Kids World; Kids "R" Us; Babies "R" Us.
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