Much More in Store

It's been a tumultuous few years for Toys “R” Us, the nation's best known and largest pure-play toy retailer. Competition from discount rivals has steadily eroded its market share since ceding the overall “biggest in the business” crown to Wal-Mart nearly 10 years ago. Sales have fluctuated as consumer spending habits have impacted who's walking through the doors and when. Two years ago, things were looking so bleak that talk turned to whether Toys “R” Us Inc. would be better off selling off its toy stores en masse in favor of a narrower focus on its booming baby business. Instead, the company was sold to private equity investors and, in 2006, a new management team led by CEO Jerry Storch, a former Target exec, and Ron Boire, a Best Buy alum tapped as president of its U.S. toy store division, began to tinker. The effects were immediately noticeable. Toys “R” Us finished 2006 with a 40 percent jump in fourth quarter net profits, on its way to an $85 million net profit for the year overall, a turnaround from the retailer's $384 million loss in 2005.

For 2007, the changes have continued, with a focus on employee engagement, process improvements in areas like store operations and inventory management, and branding efforts. In all, the company will spend nearly $120 million to improve how it does business and how its customers perceive Toys “R” Us.

Playthings spoke with Ron Boire about how those efforts were progressing.

Playthings: How have process or structural changes impacted the way vendors interact with Toys “R” Us?

Boire: There's certainly an attitudinal change [from our vendors]. I met with one of our largest suppliers today who, quite appropriately, had been highly critical of our performance and some things in the organization. I had a great dialog with this supplier who was now dedicating more resources towards providing exclusive products and planning with us in a multi-year fashion. This is a supplier who a year ago wasn't doing that. They weren't putting their best people on our business or their best resources. Some of that, obviously, is about Jerry and myself and our new leadership team going out and engaging these people. Some of it is about producing decent results last year and people starting to think that this thing really is going to turn around, so they're re-engaging, too.

Playthings: What do you say to manufacturers on the fence about TRU?

Boire: Talk to us. We're very direct leaders. If we have an issue, we put it on the table. We have thick skin. We know we have a lot of work to do and if they're still on the fence about something, we'd love to hear what it is. I was at a major vendor last week who we don't do as much business with as we could. Last year they were very concerned about our financial position. I said, 'Listen, we're better than you think we are and why don't you talk to our new CFO about our numbers. We had a good season.' Their treasurer came to our marketing meeting and said we're now much more transparent and that inspires a lot of confidence and that they were happy with their business with us. So, if you have an issue you have to bring it to us and say you have a problem. We're big kids here, we can take it, and if we're wrong, we're wrong—many of the issues we talked to the vendor about were our issues. And there are things where we weren't wrong and we said to a vendor, 'Did you think about this or that?' and the vendor said no, and so we'll work with them on that. It's all about getting the dialog going.

Playthings: What are the external factors impacting your business?

Boire: When you look just at the toy industry overall, innovation is the thing I worry about. The toy industry really had a few rough years, and I'm not sure the level of investing in innovation is there. There are companies that are investing smartly and bringing good products to market but more often than not the new hot product is the next iteration of a Spider-Man or some other property that's been out there before. Spider-Man's a great movie but it's the third iteration of it . . . Hasbro's done a nice job with that, but it's still just another Spider-Man toy. Hasbro's been doing some innovative things, like Butterscotch, and so have others but there's not a lot of innovation out there in what you'd call the 'traditional' toy industry and that worries me a little bit, and I know that worries our major suppliers. [Innovation's] not an easy nut to crack or somebody would be doing it.

Playthings: What does TRU do better or worse than its competitors?

Boire: What we're the best at is being the absolute authority in toys. When mom wants to go somewhere she knows she'll be able to get something specific, she comes to Toys “R” Us. I think our store experience is getting better every day. Our employee engagement is getting better every day. I think the investments we're making in the store are starting to pay off. We certainly see it in the customer satisfaction numbers. We see it in the revenue line and the profit line. We do have some very strong competitors out there—competitors who are the best in the world. Fortunately, they have other things to do. All we do is sell toys and other things that give mom and her kids joy. Consequently, I think focus is a competitive advantage if you have a fully considered business plan and you're executing against it. It's when you get out of focus, when we start thinking that maybe we should start selling tires, that we're going to get in trouble.

Playthings: What are you doing to attract moms to Toys “R” Us instead of them picking up groceries and toys all at once somewhere else?

Boire: Mostly, it's about changing the experience in the store and talking to her differently. In the short term it's about how do we take up parts of the assortment that mom maybe missed. We really de-emphasized the juvenile business a number of years ago and we're starting to re-emphasize that. You can see that in strategies like our side-by-side stores [with both Babies “R” Us and TRU under one roof] where we're making an investment in juvenile and letting mom know you can come here for things for babies. That's very important for us and it's paying off. Investment in the learning area is another . . . enhancing what we're doing in the center of the store where we have construction and puzzles and all that kind of fun stuff. Electronics for mom and tweens is really important to us. We've added categories like navigation devices and easy-to-use digital cameras—solutions like that. And we're telling mom about those in the flier in a much better way.

Playthings: How does having more juvenile product or electronics impact your merchandise mix?

Boire: One of the things we're doing is optimizing. If you look at our stores, for about 10 and a half months out of the year they're about twice the size they need to be, and for the other five or six weeks a year they're only 25 percent the size they need to be. So we can flex the store, whether it's for seasonal or other things, throughout the year if we plan for it and think about how we want to use the front of the store.

The side-by-side strategy really puts an incredible brand, Babies “R” Us, right next to the parent brand and tells mom there's something special here and it's something she's responding to. It's an expansion of our juvenile space but it's not as dramatic as you might think—about 50 percent more of it [to 12,000 to 15,000 square feet]. What we found in these stores is that we're growing the juvenile business with a little less square footage devoted to core toys, but we're still comping up in core toy so a more focused core toy assortment is still one that moms are responding to.

Playthings: At ToyCon this year you spoke about getting rid of product that doesn't appeal to mom. What are you doing to make sure she notices?

Boire: We're not publicly bragging about that yet, but as we get crisper on that you'll hear us talk more about a 'family friendly environment.' I'm very cautious to not over-promise. I'd rather have mom come in and be pleasantly surprised that to have her come in thinking that she's coming into Cinderella's castle and find something that she might not like. We have taken all of our M-rated video games off the floor—they're all behind glass now so you have to actually talk to somebody to get close to one. There are no M-rated demos on the floor today. There are no R-rated DVDs in any Toys “R” Us either. We don't sell things that are just patently offensive. We do still sell collectibles and we do quite well with them, but I'm not at all afraid to take something out of the store because our strategy is unequivocally about what you don't do. You chose not to be something and therefore you are something else. There are plenty of places to get those products we're choosing not to carry. We've made a decision that it's the right thing for us and for our customer. She wants to know that she can walk into a store that's totally safe. It's one of the things that I'm convinced is the right decision for this company.

Playthings: Any other changes to the stores' mix?

Boire: We're doing a lot of things with systems and processes to get better with pricing, inventory management and assortment optimization. There are a lot of things in the store that don't quite perform the way you want them to and we're trying to determine if those are pricing or placement issues, or just product we shouldn't sell. It isn't that we're saying we're getting out of this or that. It's really just an optimization program for the core toy business. We want to be better with the stuff that matters. I'll use Lego as an example. We have to have Lego in stock, period. We have to have the Star Wars sets and Bionicles in stock, and we have to get better at that. On the other hand, there may be other things that are more seasonal in nature that we can be more transactional with. So I think we're more focused on what's the right stuff that mom's going to want to make her kids happy—what are the milk and eggs and bread of our business that we should never be out of? Making sure we're right on that is a lot more important to me than making sure we have the 15,406th toy SKU. What mom wants to know is that if her kid wants Star Wars Lego, she knows Toys “R” Us has it.

Playthings: Are you also being more aggressive with markdowns and inventory management?

Boire: Absolutely. Any time a company is struggling, there are good habits and bad habits that develop and I think one that developed was turning a blind eye to inventory problems. One of the things that we immediately tried to get a handle on was that there was x or y amount of bad inventory. If you ever heard the old retail axiom 'your first markdown is your best markdown,' that's not a lie. Mark it down fast and get it out because everything is bananas. We kind of shocked the system; we said 'bring out your dead' and just got on the store managers and the merchants about taking the markdown and moving forward on cleaning up the space for things that are really profitable. Step two was put the discipline in place. We have very rigorous reviews on inventory. If something's a dog, call it a dog and take care of it, don't let it develop into a whole litter. Fix it and move on. That was one of the best things we did operationally last year.

Playthings: Are you tilting towards experimentation with new product or do you lean more towards making as big a killing as possible on something you think will be hot—like a movie?

Boire: Both. We're doing much more experimentation than we've ever done in the past. We have to. We have to increase our bandwidth on test and measurement and being an analytically driven company. On the other hand, if you walk in to the stores today you'll see a massive Spider-Man display. There's no other retailer on the planet that has more Spider-Man merchandise and dedicated real estate for it. By the time your readers read this we'll have transformed that space to a Transformers display. Who knows if any of those are going to be a hit, but those are the kinds of things we have to be involved in. We have to be there and partner with Hasbro or whomever to really feature these movies because we have to be about that 'theater in the store.' We have to make those bets. But at the same time, we're testing hundreds of different things, everything from youth sports to candy to music.

Playthings: Is it easier or harder to sell a product onto Toys “R” Us' shelves these days?

Boire: I think it's easier because the team and the energy is more focused on what matters—the core smiles business and does the product fit in the learning circle. If you understand our strategy and speak our language (who's the customer, what's the value proposition, how are you going to make money on it) then I think it's easier. If you can't speak that language, you're going to be frustrated. If you're trying to sell us left-handed widgets and we're not in the left-handed widgets business anymore, I think it's going to be a problem.