Fighting for first

Jerry Storch, Toys “R” Us Inc.'s 49-year-old chairman and CEO, has been busy the last eight months—busy transforming the company, particularly its namesake U.S. toy store division, into something that looks a lot more like a winning organization than the company he joined in February fresh from five years at fast-rising rival Target Corp.

Since taking the helm of the world's best-known toy retailer, Storch has hammered the point home that Toys “R” Us, to be successful, must “play to win” at everything it does, whether at its domestic or international toy stores, online at Toysrus.com, or at star sibling Babies “R” Us.

At this year's ToyCon conference, Storch told a banquet hall-full of the industry's biggest manufacturers that the retailer had only itself to blame for its tenuous status as America's number two toy seller.

“We are not victims,” he said. “We did it to ourselves,” he explained, by failing to “grow and evolve,” and announced that he would enact a plan to revive his toy stores' ailing performance, a plan that included stocking more unique and on-trend product; creating stores that were cleaner, less cluttered and easier to navigate; tweaking the supply chain to improve inventory management; demanding more contemporary marketing efforts; and inspiring the “culture of winning” that's a touchstone for his vision of success.

“There's a lot of change going on,” Storch tells Playthings, “so much going on—it's wonderful. We have a great deal of success in parts of our business, and now other parts are in the middle of a turn around, which is exhilarating.”

Storch sat down with Playthings last month in his office in Wayne, N.J., to discuss how his efforts were progressing.

What have been the milestones, so far, that would let people measure the changes you're pushing for?

The journey of a thousand miles begins with a single step and I think we've made quite a few steps in the right direction, but we still have more to do. Physically we've done a lot to clean up the stores. We've taken some of the clutter out of the stores. When I go into the stores I see stores that are cleaner and clearer to me. There's not as much [visual] confusion as there might have been in the past. When I first visited a few Toys “R” Us stores when I was thinking about coming to work here, there was just so much going on it was hard to figure out what you were supposed to focus on. When you walked through the aisles there was so much noise and so much clutter that the dominance of the assortment wasn't coming through. We definitely have cleaner stores today. We definitely have clearer messages in the stores today.

Are we done? By no means are we done: the physical maintenance and capital investment of the stores was inadequate for many years so it'll take us some time to restore the stores to a stellar physical condition. I think we're in fighting shape, but I want them to be in stellar shape. We're working on improvements in way-finding in the stores so that messages come through more clearly— we still don't have all that in place. We still have a lot of work ahead of us, but we've clearly made progress. The most important thing is that we've clearly communicated the standards for what we expect when people come into the store. That alone will help us to improve the guest experience.

In merchandising, that's something that's always changing and improving. I believe we've clearly articulated that to be the “toy authority,” we must have differentiated product—sometimes we do and sometimes we don't today. What does differentiate mean? It means product that other people don't carry. In a lot of cases, that means being first with trends. Sometimes it means having an exclusive product where we've worked with manufacturers to come up with something that they don't have in other outlets. In other cases it means being first in the market and fastest with a new product. We're also putting in more discipline, like plan-o-gramming, and that will come to bear in the fall.

Some people will say, “Jerry, what you're saying is nothing new, that's always been the strategy.” My answer to that is, “You're right.” If you go back to some of these advertisements on the wall [of my office] that go back 20 years, that was the strategy then too, but along the way we lost our rigorous focus on that strategy. It's something I've seen in other retail segments where buyers get lulled into a sense of being immune to market forces and will act like they're placing orders off a menu, just picking vendors' product lines instead of working with vendors to innovate on what's being offered. I believe a big part of our role in the industry is to partner with our vendors to accelerate innovation. That's a more aggressive and more forward-looking approach than ordering off a menu.

Doesn't “less cluttered” mean less merchandise?

To some degree, but not that much less. We have been going through a SKU rationalization program—I'm sure our vendors are aware of it—but it's not that drastic. It's still important that we carry more product than our competitors; the focus is really on eliminating product that's clearly unproductive so we have more facings of product that sells. The de-cluttering I'm talking about is more odds and ends: cardboard fixtures in the aisles, J-strips, that kind of a thing. I'm not talking about most of the product lines provided by our primary vendors, although the SKU rationalization would apply to them, too—if their 99th SKU doesn't sell, then why should either one of us carry it? We're still going to have, by far, the broadest assortment available anywhere.

“Exclusives” typically means collectibles, which tend to be more for adults, is that the sort of merchandise you're looking for?

No, that's not how I see it. Our customers are kids—especially younger ones—and their parents. There is a vast array of products that appeal to kids and their parents and that's what we're focused on. We aren't focused on trying to appeal to people who don't like us. It's non-sensical. I don't know of any retailer successfully changing their target audience and we aren't about to try to be the first. We're proud of the fact that kids love us.

Will your private label business grow?

That business is very important to us and will probably grow somewhat. Private label has an advantage in that it enables us to build trends that are reflective of what we think is important. If we can't find clear vendor sources for those trends then we'll need to develop our own product and build it. There are products where it might be more efficient to source the product through private label. It's going to be an important part of our business, and it will grow, but we're not going to become a private label company. I value our relationship with our vendors, and we know that in the toy industry innovation is the most important element in our success, and innovation can come from almost anywhere. If our vendors are making unique, differentiated product, then they have absolutely nothing to fear from private label.

What has the reaction from your vendors been to the changes you're enacting?

It's clearly in our vendors' best interest to have a strong specialty player. Many times in other markets products are first introduced in the specialty player then, once they're proven or successful, they might be carried into the mass channels. As a specialty player, we're a great place for vendors to showcase entire lines. We're a great place to test ideas and we'd like to work with our vendors on product that's new and exciting.

What are your feelings on the fourth quarter this year?

I try not to live from quarter to quarter. One of the benefits of private equity is that it's not quite as critical how we do in a given month versus the prior year or the prior month.

I don't have any unique crystal ball to forecast the overall industry or market performance in the fourth quarter. I do know that we are on top of our game and we're going to do everything we can to make sure that we have a successful and profitable fourth quarter. We know it will be competitive, but it's competitive every year. So, at the end of the day we'll have to see when it's all done. You don't really learn about how the holidays went until the reports come out in January about what really happened. And even then you have to analyze “was the business profitable” because we're in business to be profitable, not just to sell things. The holiday results aren't available until much later so we certainly won't know how it goes until we're done with it.

In the meantime, we're managing the business as any business should be managed—for profit.

Are there lessons that the toy stores can learn from Babies “R” Us?

In terms of learning, the primary lesson I'd take from the Babies “R” Us' experience is that having a clear strategy, being focused, not deviating from that strategy and focusing on the execution of that strategy will lead to good results. That's the lesson we're bringing to Toys “R” Us.

There's a tremendous amount of interplay between the two. The merchants from Babies “R” Us, for example, are responsible for the juvenile products and apparel that's in Toys “R” Us—that's a pretty high degree of integration. Additionally, we've been experimenting with side-by-side stores where the baby store and the toy store are really one store. We have several of those stores up and running in the U.S. and around the world.

What did you learn from your time at Target?

One thing that Target does very well, and many other successful retailers do very well, is execute on their strategy. I believe the focus on execution is the common thread at all top retailers.

General merchants like Wal-Mart have a much wider product focus than Toys “R” Us. Does that give them an advantage when it comes to perceived convenience?

There are many types of convenience. One type is one-stop shopping. It's obvious that a multi-category department store covers more categories, so Wal-Mart has one-stop shopping convenience. But if you want to make a focused purchase, Toys “R” Us has the advantage. We have people who live and breathe toys to help you make the right selection and then get you on your way. That's a great convenience. As any mom knows, if you buy the wrong toy you're going to have to go back to the store for the right one, so I think it's a lot more convenient to get the right toy than it is to toss one into the basket on top of your steak.

Are you a toy consumer?

I have five kids and we're actively engaged in the toy market. They range [in age] from 10 to 18. The last toy I bought, I think, was a Nerf gun for my 10-year-old, which I immediately regretted buying as he said he wouldn't shoot anybody with it—but immediately what does he do but start shooting everybody with it.

Some of my older kids bought some video games, too.

Where did you buy them?

At Toys R Us, of course!