The American toy industry skyrocketed from $500 million to $12 billion from 1950 to 1990. This booming growth was in thanks to Toys “R” Us. The retail powerhouse was founded by Charles Lazarus in 1948 and led a wave of consumerism in the baby-boomer generation.
Toys “R” Us was a pioneer of the retail industry. They absolutely dominated the toy market from the 1960s to 1990s and became a publicly traded company on the NYSE in 1978. They even opened up retail subsidiaries Babies “R” Us and Kids ”R” Us to expand into clothing and baby product retail.
The toy chain was wildly popular in an era before iPhones and video games monopolized kids free time. They consistently saw success throughout the year, with huge spikes around the holidays when millions of parents would rush in to buy toys for their kids. At its peak in 1990, Toys “R” Us boasted a 25% market share in the toy industry. They had 1,450 locations globally and sold over 18,000 different toys in their supermarket style megastores.
With a dominant brand image, huge market share, and rising consumerism; Toys “R” Us was showing no signs of slowing down going into the 2000s.
What Went Wrong?
Toys “R” Us to started to feel serious pressure from competing retailers, specifically Walmart and Target. These fellow retail giants had been around for a couple of decades but were now well established with a variety of product categories in their stores, including toys. Now that Walmart and Target had grown into diversified megastores, they were able to undercut Toys “R” Us’ prices, specifically around the holidays with special deals. This price war did not bode well for Toys “R” Us, who could not compete with the super-low prices of Walmart and Target.
The true catalyst of the demise of Toys “R” Us, was when they signed a deal with Amazon to be the exclusive online distributor of their products. By paying Amazon $50 million annually, plus a percentage of sales, to sell their toys; Toys “R” Us essentially signed their own death certificate. The deal was a disaster for the company and was terminated in 2006 after a lawsuit, but the damage had been done. Customers had become accustomed to purchasing their products online through Amazon. Disregarding the potential of e-commerce and outsourcing their online sales to a competitor added to the steep decline of Toys “R” Us.
During the 2000s, the company started piling on massive amounts of debt as it was failing to compete with Walmart and Target during the holidays. Annual debt reached over $5 billion by 2017, and they were forced to file for Chapter 11 bankruptcy. Liquidation of all stores began in early 2018, but after a year of being out of business, they are currently attempting a restructure under the name Tru Kids.
This case study reminds us how vital e-commerce is for businesses to thrive. Toys “R” Us was unable to recover after missing the boat for online retail, leading to bankruptcy. Rival retailers Walmart and Target have continued to thrive during the age of e-commerce by adapting to the market and expanding their product lines to drive in-store visits. They were able to undercut Toys “R” Us with better prices, in addition to offering a variety of other product categories. Customers no longer had any reason to drive to a store that only offered toys. They could go to Walmart or Target for better prices, while also getting other supplies and groceries in the visit.
Amazon continues to put pressure on big retailers, yet companies like Walmart and Target have continued to thrive due to intelligent innovation and successful e-commerce models. Retail businesses look at Toys “R” Us as a reminder to maintain a clear vision of their market and stay adaptive so they do not suffer the same fate.
Toys “R” Us was plagued by a clear lack of vision and complacency while at the top of their industry. They did not recognize the potential of online retail for their business and completely whiffed on the transition to e-commerce by outsourcing to Amazon. Toys “R” Us continued to rely heavily on toy retail as the market evolved and kids no longer wanted to play with toys as much. They failed to capitalize on any sort of innovation like in-store experiences to persuade people to shop in-store rather than online.
The company that stood still while the industry adapted was no match for superior businesses like Walmart and Target. After losing all of their dominant market share in just 18 years; Toys “R” Us serves as a reminder to stay innovative and to be ready for changes in the industry.