Can Toys ‘R’ Us Compete?

We were just wondering about Toys “R” Us the other day, when we randomly came across this article.

The toy chain is apparently in a push to open 70,000-sf superstores around the country to combat the toy departments of Wal-Mart and other discounters. These concepts combine both the Toys and Babies “R” Us concepts.

Analysts and shoppers both quoted in the article seem excited about these locations because making the stores a one-stop destination gives the retailer a competitive edge because of consumer convenience.

There has an endless debate as to whether Vornado Realty Trust, KKR and Bain Capital bought Toys in 2005 simply for its real estate or to operate it as an ongoing business. Most observers we’ve spoken to have said the former, but has this changed recently? Can a retooling of Toys make it a competitor?


7 Responses to “Can Toys ‘R’ Us Compete?”

  1. 1 E August 15, 2008 at 8:47 am

    Something smells — the economy’s tanking, yet these 3 firms have a prescience that tells one and all that 70K sq ft kiddie superstores are the next big thing?

    Vornado-KKR-Bain have to tell us all where they get their opium, because these kind of induced-hallucinations by these experts are priceless.

    Consumers with kids have knives to their throats now — where is the discretionary income going to come from consumers to support this push?

    Are they trying to pull a “Steve and Barry’s,” get sweetheart lease deals from owners, hope they’ll see a turnaround in the next 12-18 months that’ll justify it?

    Or, its it a lot of smoke and mirror talk because the 3-4 year shelf life on this acquisition is coming and they’re looking for a way to dump it, and they need to juice up interest in the company by table-setting a fantasy for prospective buyers to hook-into?

    I can’t believe the best and brightest minds at these 3 firms think this is viable — KKR (especially) is at the stage where they’re traditionally looking to exit the investment, not cement their feet into it.

  2. 2 David Goldman August 15, 2008 at 9:29 am

    These store expansion deals are really just real estate deals. In its leases, the company reserves the right to virtually control the real estate as an owner through general use and assignment / sublet clauses for the entire term of the lease. If the company fails or its assignees / subtenants are undesirable to the center, the only way to terminate the lease and recapture the space is to pay them a formula based on the remaining lease value (including options) which is extremely onerous, especially since the Landlor has already brone the costs of constructing the building originally.

    It’s a smart strategy: get into a market at the Landlord’s expense and then hang around and make money as an operating business or hold the Landlord hostage to get its space back.

  3. 3 Robert Reilly August 15, 2008 at 3:33 pm

    What took them so long?? To combine both stores, they’ve operated them independently for years in two seperate 45,000 sf stores is too simple. Seems like this is a no-brainer strategy to combine and reduce overall occupancy, SG&A costs. It appears they are trying to combine two existing Toys and Babies into one unit, in other words relocations. It won’t take long to figure out whether it’s profitably or not, and if it’s not immediately more productive than their existing approach, they’ll stop the concept.

  4. 4 TeenyTiny August 15, 2008 at 3:58 pm

    I think it will work. The number of pregnancies are near an all time high, and there are plenty of children wanting toys. Children love to go to Toys R Us, it makes them feel very special and really is a treat. Toys R Us isn’t going anywhere, and with all the fuss about Walmart’s Chinese toys, it’s another great reason to avoid that chain. Combining the Baby’s R Us and Toys R Us under one roof reduces their occupancy costs, gets their name back in the papers on a positive note, and gives them and excuse to expand. I think it’s brilliant and perfect timing to take advantage of Landlord’s who are desperate for expanding national Tenants with a solid track record.

  5. 5 Craig Nelson August 15, 2008 at 4:04 pm

    One thing that the article was incorrect on was that the baby business wasn’t seasonal. Q-4 is by far the worst quarter in the Juvenile Products Industry (that’s what they call the baby bidness). The simple fact is that it is the one time of the year when all economic spending & focus is on those folks in here and now, and not the “baby in the belly”. Additionally, the strongest quarter in the industry has always been Q-1. That being said, TRU has experimented with baby in its stores for a long time. The odd thing is that they sometimes even kept merchandise exclusives from each other. I would think that from a SKU management standpoint you could get some great rationalization by finally putting the two brands back together. So, by rationalizing merchandise lines, combining operations and evening out seasonality, one would think that they’d achieve better profitability. If they can do that and control more dirt at the same time, then they are probably in for the long haul. The two operations do require different sales skills and sales forces. I’d love to see the videogame sales kid sell a crib to mom who’s spent 75 hours researching before she ever walked into the store.

  6. 6 Nancy H August 18, 2008 at 12:59 pm

    I think this is obviously a smart move – combine forces. Chances are that mom’s who are expecting a child might already have an older one – so whether it is them shopping for themselves, or Grandma picking up a few things for the new arrival, having the baby stuff and the toys for the older child in one place will definitely encourage more sales (even though times are tough – I am still incapable of buying something for one grandkid without picking up a little something for the other…). I think the quality of products you are going to have available to you at Toys’R’Us/Babies’R’Us are going to be much better than at Walmart, and both Walmart and Target can’t carry the selection of toys and baby items alone that the ‘R’ group will. New mom’s always want the best – I would be embarrassed to take a Walmart gift to a baby shower. More and more moms are registering at Target and Babies’R’Us. This will make the ‘R’ stores more popular to shoppers because they are specialized to kids and babies – greater selection and inventory for those specific products.

  7. 7 Amanda T August 19, 2008 at 8:43 am

    From a “mom’s” opinion, this is a great move. I go to BRU regularly for diapers etc… and have always found it irritating that the TRU is not attached. This way I can knock out several errands in one trip i.e. birthday gifts, diapers, toys for my kids etc…

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