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TOYS ‘R’ US ATTEMPTS COMEBACK WITH REDESIGN

By Edmund Mander

Toys ‘R’ Us will trumpet its turnaround effort this fall with the opening of a flagship in New York City’s Times Square.

The trouble with the name Toys “R” Us is that it really hasn’t been true for some time now: Wal-Mart has been the primary destination for toys for the past three years, and other major discount stores have also whittled away its dominance.

But things have been looking up at Toys “R” Us lately, and with the company rolling out dramatically redesigned stores and a New York City flagship, executives hope they’ll get better still. The company, with FAO Schwarz’s former chief executive John H. Eyler at the helm for the last year-and-a-half, will trumpet its turnaround effort this fall with the opening of a flagship in New York City’s Times Square, featuring a huge lighted billboard covering its facade and a world of entertainment inside.

“It’s looking very very good,” said analyst Margaret Gilliam, reflecting on the various changes taking place at Toys “R” Us. Gilliam is president at New York City-based Gilliam & Co., a research and advisory firm that specializes in retailing.

To be sure, things could hardly have gotten worse. Two years ago sales at Toys “R” Us were abysmal, and the company lost $132 million. Its dowdy warehouse-style stores were staffed by unfriendly sales clerks, packed with toys children didn’t want and devoid of the ones they did want. When it expanded overseas, Toys “R” Us became a poster child for the perils awaiting retailers venturing outside the United States. And the Web site it launched turned into a fiasco during the 1999 holiday season, creating the ultimate toy store publicity nightmare by failing to deliver toys in time for Christmas.

How the mighty had fallen. Founded by Charles Lazarus, Toys “R” Us got off to a strong start, promising manufacturers a year-round showcase for their hottest toys — something department stores could only do three months out of the year — and a preholiday testing ground for their new products, Gilliam observed.

To parents, Toys “R” Us touted itself as a source not only of toys at lower prices, but of kids accessories, too, from infant formula to car seats. The chain grew at an impressive 26% annual rate during the 1980s, becoming the No. 1 toy seller in the United States, and even began to throw its weight around: Toys “R” Us was found to have violated antitrust laws by threatening manufacturers not to sell through wholesalers. “They were guilty as hell,” Gilliam said.

Then suddenly, some other, even larger, players came on to the toy retailing field.

“What happened to Toys “R” Us is best expressed in three words: Wal-Mart, Target and Kmart,” noted Kurt Barnard, the retail analyst and president of Barnard’s Retail Trend Report, Montclair, N.J.

By paying manufacturers every month, Wal-Mart was able to extract concessions of its own, Gilliam said. Moreover, with Kmart and Target also getting into the toy business, Toys “R” Us — which retail specialists observe never was that competitive on prices anyway — was even less so, and it was bumped by Wal-Mart from its perch as the nation’s No. 1 toy seller.

The ground underneath Toys “R” Us was shifting in other ways, too. The toy industry was changing, and the big money was suddenly in the licensing of products, rather than the sale of whatever toy manufacturers were advertising on Saturday morning television, Gilliam said. By the end of last year, Toys “R” Us had missed fourth-quarter projections in 14 out of the last 15 years. “They didn’t understand what hit them, and they didn’t change much,” she said.

The stores looked shabby and so was customer service. While stores all around were encouraging customers to stay awhile, handle the product and have a bit of fun, Toys “R” Us would have none of it.

“It was very kid-unfriendly; they didn’t encourage kids to play in the stores at all,” she said. Attempts to tinker with the format, such as the introduction of a book section, made no impact on the company’s health or the customer, she added, and the executives behind these ideas — Eyler is the third CEO hired since the retirement of Lazarus in 1994 — were let go.

Eyler, who was also named chairman in June, comes from a very different school of toy retailing than the Toys “R” Us model; in taking over the chain, he has, it seems, exchanged a Jaguar for a mass market Chevy — and a battered one at that. FAO’s spacious, bright stores are everything Toys “R” Us hasn’t been, offering well-designed displays that children can touch, product demonstrations and eager, friendly employees.

Eyler was long sought by Toys “R” Us, and FAO Schwarz was not eager to let him go — it filed a lawsuit that was ultimately settled privately. But getting him was the best thing the ailing chain could do, experts say.

“They’ve got a real good guy running the company now,” Gilliam said. “It’s the first time they’ve had a real merchant running the company.”

Eyler has made store redesign a centerpiece of the company’s comeback. Gone — or at least, going — are the long, supermarket-style aisles, the ceiling-high metal shelves and the concrete floors. Toys now are grouped according to gender and age, making it much easier for customers to navigate the stores. There is a zone for electronic gadgets, one for educational toys and areas are set aside for demonstrations. The new format also includes Kids “R” Us and Babies “R” Us merchandise.

“What they’re doing is taking advantage of a luxury they have — space,” Gilliam said. “John has made the place really kid-friendly and a lot of fun. It’s a much more exciting store.”

Store design is not the sole element of the company’s turnaround. Eyler has shaken up inventory control to ensure stores don’t run out of evergreen toys such as Tonka trucks, Barbie dolls and Monopoly. The new stores — dubbed the C3 format — have more staff, and they are better trained. And the company has scrapped its Web site, opting instead to sell its products through Amazon.

Toys “R” Us, which declined to comment for this story, will have converted 415 stores to the new format as it goes into the 2001 holiday season, according to a recent quarterly report, representing 60% of the division. It also plans a major marketing campaign in the fall, stressing its new incarnation.

Retail professionals are upbeat about the changes at Toys “R” Us, if cautious about its long-term future.

“It seems like the C3 concept was one of the better things implemented in the past 18 months,” said Colin McGranahan, a research analyst at Sanford C. Bernstein & Co., a New York City-based investment firm. “From what we’ve heard its been very well received.”

They are equally excited about the flagship store in Manhattan, which they say will give the hitherto drab chain a little pizzazz.

“That’s going to be a wonderful thing for them,” said Jim Bieri, CLS, president and CEO of Bieri Co., a Detroit-based firm that procures real estate for retailers.

But the experts say they are just not certain about the extent these changes will enable the company to recoup its past glory.

“Now they have a very beautiful store,” Barnard said. “But is that enough? Will that alone be able to help them stand up to the discounters? The jury is still out.”

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