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Toys-R-Us (A) in the Online Toy Business*
&
Toys-R-Us (B) Forms an Online Alliance
Alan B. Eisner**
Lubin School of Business, Pace University
Jerome C. Kuperman
Minnesota State University, Moorhead
Robert F. Dennehy
Lubin School of Business, Pace University
John P. Dory
Lubin School of Business, Pace University

ABSTRACT

Objectives and Use

This case conveys a situation that is complex, yet easy for students to relate to in a practical real-world setting.  Toys-R-Us is in an industry that every student can understand and to which all students can easily relate. The company in the case is responding to industry changes occurring as a result of the E-commerce revolution; again, a technological change that students can understand and to which they can relate. Students can find issues within this case that has implications for the broad range of topics covered in a strategy class including: the general environment, the industry environment (Porter, 1980), internal environment resources and capabilities (Barney, 1991; Peteraf, 1993), value chain analysis (Porter, 1985), business level strategy analysis, and corporate level strategy.

The teaching note was written for an undergraduate Strategic Management course and suggests ways to use these cases at two different points during the course.  The case could be used as the initial case to set the stage for an undergraduate business policy and strategy course.  In this setting, the primary learning objective for students is to begin to understand through case discussion some of the central topics and decision points that are part of a business policy and strategy course.  Alternatively, the cases can be more specifically targeted use with the corporate strategy topic; helping students to understand the many issues associated with the decision to horizontally diversify. The learning objective in this application is more targeted to corporate strategy and specifically diversification issues including why firms diversify, how they can do it and how to analyze it in terms of relatedness (Rumelt, 1974) and potential synergies (Sirower, 1999).

Synopsis

In June 1998, Toys-R-Us established a Website, www.toysrus.com, and began selling its products through the Internet. The Internet toy business was $650 million dollars in 1999 and was expected to grow to $1.8 billion by 2003. In

* This case is solely based upon library research.  Special thanks to Margaret Ann de Souza-Lawrence for research assistance on this project.  Previous versions of this case were presented at the 2001 NACRA meeting and 2001 EAM / CASE meeting.

** Please address all correspondence related to this case to the first author.

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addition, management also recognized the threat posed by new online competition that included companies like Etoys.com, Amazon.com, Smarterkids.com, Target.com and Toysmart.com.

At the same time that Toys-R-Us was creating its online business unit, it was also facing competitive pressures in its traditional brick and mortar business. Its market share had dropped from 25% in 1990 to 15.6% in 1999. Wal-Mart had dethroned Toys-R-Us as the number one toy seller after more than a decade on top and Etoys.com was ahead online. CEO John Eyler had been at Toys-R-Us less than a year and he faced strategic dilemmas related to both traditional and online arenas.

Toys-R-Us (A) in the Online Toy Business

“How do I explain to my son that Santa is giving him a gift a week late?” said Michele Read on December 24, 1999 as she worried how to explain to her 4-year old son Tyler that the Leap Frog Learning toy she had ordered from Toysrus.com was not going to be under the Christmas tree the next day.[1]

“This does nothing to appease a child on Christmas morning when he doesn't find his present,” said Kevin Davitt, a customer who was still waiting for an order from Toysrus.com on December 23, 1999.  “A 6-year- old doesn't want a gift certificate, he wants his Nintendo or his Pokemon,” said Davitt, a publicist from Glen Rock, N.J., had ordered two video games for his 6-year-old son on December 13, 1999 and agreed to pay $19.90 for express shipping so that the gift would arrive within five days.

Michael Kinney, a customer from South Pasadena, California who is the manager of a local taxi service ordered a ‘Chickaboom’ game for his son and was promised delivery within two weeks.  After seven weeks, Kinney declared, “I’ll never shop Toysrus.com again.”

During Christmas 1999 Toysrus.com employees faced a real siege.  The company’s “Black Sunday” came on Sunday, November 6, 1999 as 62 million advertising circulars were placed in local newspapers around the U.S. offering free shipping on Christmas toy orders placed over the Internet.  When Toysrus.com was unable to fulfill orders in time for Christmas, the firm received numerous consumer complaints and negative publicity from newspaper and magazine articles and TV news reports about the firm’s problems.  Toys-R-Us had the toys available in its warehouses, but was unable to pick, pack, and ship customer orders in a timely manner.  Many employees worked for 49 straight days to fill orders, with some employees reported to pull sleeping bags out from under their desks to rest during the round-the-clock operation2.  Despite the heroic efforts, customers were still displeased.  “I have never been exposed to fouler language,” explained Joel Anderson, a Toysrus.com vice president, as he described the angry e-mails from unhappy customers.[2] 

In January 2000 John Eyler became the fourth CEO of the 53-year-old Toys-R-Us toy chain and parent of Toysrus.com.  He came from being president of much smaller FAO Schwarz toy chain and entered on the heels of the 18-month tenure of the previous CEO.  He was immediately faced with the aftermath of the Christmas 1999 crisis and less than twelve months to fix things for Christmas 2000.

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Toys-R-Us Today

Toys-R-Us stores carried everything from Crazy Bones at $1.99 to Sony PlayStation at $129.99.  Toys-R-Us Inc., headquartered in Paramus NJ, is one of the largest toy store chains in the USA with sales of $11.3 billion reported in the fiscal year 2000.  The merchandise mix included both children's and adult's toys and games, bicycles, sporting goods, small pools, infant and juvenile furniture, infant and toddler apparel and children's books. An electronics section, which featured video games, electronic hand-held toys, videotapes, audio CDs, computer software, along with a smattering of small TVs, shelf-stereos and radios, generated about $2 billion in sales in 1998.[3]  Most Toys-R-Us stores conformed to a traditional big-box format, with stores averaging about 46,000 square feet. Stores in smaller markets ranged between 20,000 and 30,000 square feet. In 1999, the company began converting stores to a new layout named the "C-3"[4] format store intended to make the Toys-R-Us stores easier to shop with wider aisles, more feature opportunities and end-caps, more shops, and logical category layouts.

In addition to the traditional brick-and-mortar locations, Toys-R-Us Direct was organized in 1999 and consolidated both selling via the Internet (www.toysrus.com) and through mail-order catalogs.  In July 1999, Toys-R-Us, with an interest in the educational and learning toy segment, announced the purchase of Imaginarium, the number 37 player ranked by sales.  Existing stand-alone Imaginarium stores continued, and Toys-R-Us incorporated in-store Imaginarium World sections in 10 to 20 of its C-3 format stores in time for Christmas 1999.

By February of 2001 the company had a total of 1581 stores worldwide.  Toys-R-Us strived to be the "Worldwide Authority on Kids, Families and Fun" with 6 divisions: Toys-R-Us USA, Toys-R-Us International, Kids-r-us, Babies-r-us, Toysrus.com, and the newest division, Imaginarium.  See exhibit 1 for store types and see exhibit 2 for company vision.

Exhibit 1
Breakdown of Stores by Divisions by Year

Source: Toys-R-Us , Inc., 10-K report 

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Exhibit 2
Vision, Mission, and Goals

Vision:  Put joy in kids’ hearts and a smile on parents’ faces.

Mission:  A commitment to making each and every customer happy.

Goal:  To be the “Worldwide Authority on Kids, Families and Fun.”

Source: Toys-R-Us, Inc. 2000 Annual Report

Background

Charles Lazarus started Toys-R-Us in 1948 in Washington D.C.  Lazarus started out in business with a baby furniture store.  However, as customers requested toys too, he gradually moved into the toy business.  In 1957, Lazarus opened the first toy supermarket.  Specialty retailing and off-price positioning were revolutionary concepts in those pre-mall, pre-discount store days. With the success of these stores, Toys-R-Us became a public company in the late 1970s.  Lazarus pioneered the toy supermarket concept and led Toys-R-Us to dominate the industry.  The company has evolved into an $11 billion dollar business with over 1,581 stores worldwide.  See exhibit 3 contains company performance data. 

Exhibit 3
Consolidated Statements of Earnings

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The Toy Industry

Brick and mortar

The $29.4 billion traditional toy industry had undergone significant changes during the 1990s (see exhibit 4 for industry growth). General mass merchandise retailers had grown, as had their toy departments. Mall retailers like KB Toys managed to channel a great deal of money into shopping malls with the introduction of their small mall-based toyshops.  Exhibit 5 shows the changing market share among retailer types. The Toys-R-Us chain suffered and saw its market share drop from 25% in 1990 to 18% in 1997 and 16.5% in 1998[5].  Toys-R-Us had been the leader for over a decade, however, in 1998 the scenario changed as Wal-Mart ousted Toys-R-Us and became the top toy retailer in the USA as indicated in exhibit 6.

Exhibit 4
US Toy Industry Sales

Note: Stated in billions of dollars

Sources: Toy Manufacturers of America, Inc., New York and NPD Group, New York.

Exhibit 5
Distribution of Sales by Retailer Type

* New category

Sources: Toy Manufacturers of America, Inc., New York and NPD Group, New York.

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Exhibit 6
Percent of Annual Industry Sales, Top Toy Sellers