Toys "R" Us Bear's Den
by Yi-Hsin Chang ([email protected])

It's quite touching seeing old Rick so excited about Toys "R" Us -- as excited as a young boy on Christmas morning. In fact, I imagine that's why Rick is so worked up about the toy store chain. He's reliving his childhood, wishing that he were still a Toys "R" Us kid, letting the warm memories cloud his judgment. What Rick doesn't see -- what he can't see -- is that Toys "R" Us is no longer the children's paradise it once was, nor does it garner the same loyalty it once did so many years ago.

As part of my "field research," I ventured out to the Toys "R" Us store at Crabtree Valley Mall in Raleigh, N.C., the Friday after Thanksgiving, traditionally the first official day of the Christmas shopping season. I was somewhat surprised to find that the store was kinda busy, but it was hardly crowded or bustling with holiday cheer, as the rest of the mall was. The front of the store was still lined with shopping carts, and there were no lines at the 10 checkout registers! This was a shocking departure from my usual exciting experience at Costco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COST)") else Response.Write("(Nasdaq: COST)") end if %> -- see the November 18 Duel.

I couldn't help but notice that every minute or so a voice came over the P.A. system to announce that "Registers 5, 6, 7, and 9 (etc.) are open with no waiting." While Rick might argue that this indicates a high level of customer service at Toys "R" Us, I couldn't help but conclude that the store was overstaffed -- at the registers not on the sales floor, where service is so clearly lacking -- and that customer turnout was far lower than the store manager had expected. A bearded man in his early 40s, who seemed to notice the same thing, turned to his wife and said, "There's a lot of them with no waiting."

In the video game aisle, there was a poster for the new game based on Rick's favorite movie of late, A Bug's Life, but the game itself -- or rather the pouch for vouchers for the game -- was nowhere to be found. I even hunted down a sales associate for help, and he told me the game wasn't out yet. The catch was that the game's release had been timed to coincide with the movie's debut that week. How did I know this? Well, as part of my research, I went to the 24-hour Wal-Mart less than a mile up the road, and there it was in plain sight. Plus, I later saw the game listed in a Toys "R" Us advertising circular for that weekend. I wonder how many sales the store lost because of that screw-up and others like it.

Driving by later that night, I noticed that the light for the last "S" in the Toys "R" Us sign outside the front of the store had burned out (Toys "R" U?), while the "Y" was flickering nervously. The sign seemed to reflect the state of the company as a whole.

I'm not speaking in hyperbole here. We're talking about a fickle company that is undergoing its second strategic restructuring in as many years and embracing its third store format in that period. First, there was Concept 2000, followed by Concept 2001, that implemented on a limited basis such ideas as new storefront designs, in-store photo studios, and haircutting and snack centers. But now, the company has abandoned that idea in favor of a new C-3 format (as in concept three?) that will change merchandise presentation to include separate departments such as Media World, Kids Apparel, and Deal World -- meaning discount products. This is to create a "more customer-friendly store layout."

While Rick might applaud these vacillating restructuring efforts, it's important to note that it's way too early to predict if this latest trick will work. First of all, even though the concepts Toys "R" Us is throwing together in the new format have been tested individually in different stores, they haven't been tested together in one setting. Plus, the company plans to convert only 200 U.S. toy stores -- less than 30% -- next year and reformat roughly 75% of the stores by October of the following year (that's the year 2000, mind you). Who's to say that this seemingly directionless company won't change its mind again in the next year or so and opt to experiment with yet another new concept? Remember, this company is on its second CEO in four years.

The fact is, the momentum for Toys "R" Us is anything but up. It's rapidly losing sales and market share to discount giants Wal-Mart, Kmart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KM)") else Response.Write("(NYSE: KM)") end if %>, Target, a division of Dayton Hudson's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %>, and Costco. Toys "R" Us has seen its market share drop to about 18% from a peak of 25% in 1990. Meanwhile, its closest competitor, Wal-Mart, is closing the gap with more than 16% of the market, up from just 10% at the beginning of the decade.

In another blow to Toys "R" Us, a federal judge has ruled against the company's practice of keeping toymakers from shipping the season's hottest toys to warehouse clubs such as Costco on antitrust grounds. Not surprisingly, Costco seriously undercuts Toys "R" Us' prices on a regular basis. The wholesale club sells the A Bug's Life Action Flik Deluxe Movin' and Talkin' Ant for $25.99 -- four dollars less than Toys "R" Us does. In fact, at Wal-Mart during Thanksgiving weekend, the toy was marked down to $24.92 from $29.96.

But not only is Toys "R" Us losing out to large discount chains, Disney and Warner Brothers stores are also taking away business, as are small chains with friendlier stores and educational and creative toys. These include Zany Brainy, Store of Knowledge, Learningsmith, Noodle Kidoodle, and Imaginarium, which are collectively nipping at the heels of the toy store giant.

On the Internet, privately held eToys is eating Toys "R" Us for lunch. It beat the company going online more than a year ago and hasn't looked back. A quick search of eToys.com and toysrus.com for "Rugrats" turned up 44 items at eToys but only two at Toys "R" Us. While Toys "R" Us came up with 10 items for "Barbie," eToys sends you to a Barbie page with links to everything from the dolls and "Friends of Barbie" to Barbie accessories and software. Incidentally, the eToys pages load much faster than those of its main competitor.

It's ironic that the original "category killer" that put so many mom and pop stores out of business is now being killed by competitors with lower prices, better products, and better service. From my little field trip to Toys "R" Us, it was obvious why the toy chain is losing its footing as the king of the hill. Despite being a toy store with a whimsical name with a backwards "R" and a cheerful giraffe as its mascot, Toys "R" Us is simply not a fun place to be. True to its roots as "Toy Supermarket," the store feels more like a grocery store than a toy store. While I don't expect it to live up to the standards of a F.A.O Schwarz, I expect it to feel more like a playland, a place where kids of all ages would want to go play, try out new toys, and hang out. In short, a destination for fun and toys.

Why, it's Christmas, the company's most important selling season, and there's no Santa Claus in the stores. The store I went to didn't even have any Christmas decorations. You wouldn't even know there's a holiday coming up. Plus, believe it or not, the store doesn't even carry Beanie Babies, one of the hottest toys this past year.

I imagine that Rick will argue that the stock is cheap. It is. In fact, it's trading at about the same levels it did a decade ago, despite the stock market's bull run for the last four years. But in this case, the stock is justifiably cheap. The company's return on assets and return on equity are about 40% down from what they were in 1989, its margins are falling as it tries to match rival discounters' prices, and its future remains uncertain as it struggles to find the right course in a competitive sea of sharks. Buying Toys "R" Us stock now is like buying a gaudy painting from a roadside vendor. You get what you paid for.

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